AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 17, 1996
REGISTRATION NO. 333-___
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
UOL PUBLISHING, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 8299 54-1290319
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
----------------------
105 W. Broad Street, Suite 301
Falls Church, Virginia 22046
(703) 533-7500
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
-------------------------
Narasimhan P. Kannan, Chief Executive Officer
UOL Publishing, Inc.
105 W. Broad Street, Suite 301
Falls Church, Virginia 22046
(703) 533-7500
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
Copies to:
Larry E. Robbins, Esq. Eric A. Stern, Esq.
Donald R. Reynolds, Esq. Latham & Watkins
Wyrick, Robbins, Yates & Ponton L.L.P. 1001 Pennsylvania Avenue, N.W.
4101 Lake Boone Trail, Suite 300 Suite 1300
Raleigh, North Carolina 27607 Washington, D.C. 20004
(919) 781-4000 (202) 637-2200
-------------------------
Approximate date of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
----------------------------
CALCULATION OF REGISTRATION FEE
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<CAPTION>
================================================================================================================
Proposed maximum Proposed maximum
Title of each class of Amount to be offering price per agregate offering Amount of
securities to be registered registered(1) share(2) price(2) registration fee
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value
per share..................... 1,534,100 shares $16.00 $24,545,600 $8,464
=================================================================================================================
</TABLE>
(1) Includes 200,100 shares issuable upon exercise of an option granted to the
Underwriters solely to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee.
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.
================================================================================
<PAGE>
SUBJECT TO COMPLETION
DATED SEPTEMBER 17, 1996
1,334,000 SHARES
[LOGO]
COMMON STOCK
All of the 1,334,000 shares of Common Stock offered hereby are being sold by
UOL Publishing, Inc., a Delaware corporation (the "Company"). Prior to this
offering, there has been no public market for the Common Stock of the Company.
It is currently anticipated that the initial public offering price will be
between $14.00 and $16.00 per share. See "Underwriting" for a discussion of the
factors considered in determining the initial public offering price.
The Company has applied to have the Common Stock approved for quotation and
trading on the Nasdaq National Market under the symbol "UOLP."
The Common Stock offered hereby involves a high degree of risk.
See "Risk Factors" beginning on page 6.
-----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
Price to Underwriting Proceeds to
Public Discount(1) Company(2)
- --------------------------------------------------------------------------------
Per Share............... $ $ $
Total(3) ............... $ $ $
================================================================================
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses of the offering payable by the Company estimated
at $850,000.
(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to 200,100 additional shares of
Common Stock for the purpose of covering over-allotments, if any. If the
Underwriters exercise such option in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, subject to
their right to withdraw, cancel or reject orders in whole or in part and subject
to certain other conditions. It is expected that delivery of the certificates
representing the shares will be made against payment on or about , 1996 at the
office of Friedman, Billings, Ramsey & Co., Inc. at 1001 19th Street North, 10th
Floor, Arlington, Virginia 22209.
----------------------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
The date of this Prospectus is , 1996
<PAGE>
[GRAPHIC DEPICTION AND DESCRIPTION OF PRODUCTS
AND LISTING OF STRATEGIC PARTNERS]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BEEFFECTED IN THE OVER-THE-COUNTER MARKET
(INCLUDING THE NASDAQ NATIONAL MARKET) OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Except as otherwise noted herein, all information
in this Prospectus: (i) gives effect to a 1-for-11.68159232 reverse stock split
of the Company's outstanding Common Stock, Series A Preferred Stock and Series B
Preferred Stock (collectively the "Preferred Stock") to be effected prior to the
consummation of this offering; (ii) reflects the conversion of the Company's
outstanding Preferred Stock into an aggregate of 836,828 shares of Common Stock
upon the consummation of this offering; (iii) reflects the mandatory exercise of
warrants to purchase 68,481 shares of Common Stock at an exercise price of $8.76
per share, the issuance of warrants to purchase an aggregate of 15,801 shares of
Common Stock at an exercise price per share equal to the initial public offering
price per share and repayment by the Company of convertible debt in the
aggregate principal amount of $300,000 upon consummation of this offering (the
"Furst Transactions;" see "Certain Transactions"); (iv) reflects conversion of
additional convertible debt in the aggregate principal amount of $130,000 upon
consummation of this offering (the "Jones Transactions;" see "Certain
Transactions"); and (v) assumes that the Underwriters' over-allotment option is
not exercised. Investors should carefully consider the information set forth
under the heading "Risk Factors."
THE COMPANY
UOL Publishing, Inc. ("UOL" or the "Company") is a leading publisher of
high quality, interactive and on-demand educational courseware for the online
education and training market through the World Wide Web ("Web"). The Company is
building its courseware library, which includes approximately 50 courses and 150
course modules ("modules") in business, finance, management, technology, and
basic technical and development skills, through a combination of strategic
acquisitions and partnering with academic institutions and business partners.
The Company converts proven and popular courses in these diverse subject matter
areas to the Company's interactive, online format. The Company offers its
courseware primarily to part-time students and working adults in partnerships
with academic institutions and business partners. The Company plans to develop
and expand its network of academic and business partners, its portfolio of
courseware and related products, and its distribution system as rapidly as
possible, to take advantage of its position as a leading publisher of Web-based
courseware for the education and training market.
The Company's courseware benefits from the structural changes in the way
content can be managed, delivered and consumed that were caused by the advent of
the Web and online technologies. The Company believes that its online courseware
combines convenience, affordability, self-pacing, standardized curricula,
individualized tailoring of courses, immediate performance measurement and a
high degree of student-teacher interaction. These characteristics are designed
to address the educational needs of part-time students and working adults, which
constitute a rapidly growing segment of the academic market, primarily as a
result of rising tuition for full-time programs and the demand for increasing
skills required by employers.
The Company's strategy involves the following key elements: building the
Company's content library of high quality, high demand courseware; leveraging
strategic partnerships; expanding through acquisitions; developing brand
recognition and proprietary technology; and capitalizing on cross-marketing
opportunities. The Company plans to expand its existing courseware library with
market-tested, high quality products focused on subject areas of high demand by
part-time students and working adults. The Company believes that by developing
strategic partnerships with a network of academic institutions, such as Park
College, California State University Institute, The George Washington
University, George Mason University and University of Toledo, and business
partners, such as Autodesk, Inc. ("Autodesk"), it will be able to leverage its
partners' strengths and accelerate awareness and acceptance of its online
educational content. In addition to the Company's
3
<PAGE>
acquisitions of the CYBIS division of Control Data Systems, Inc., formerly
Control Data Corporation ("Control Data"), and Cognitive Training Associates,
Inc. ("CTA"), the Company plans to make similar acquisitions which management
believes will provide critical additions to the Company's courseware library and
user base. The Company believes that establishing and maintaining brand
recognition is critical to its strategy and plans to achieve brand recognition
through marketing efforts and the creation of a proprietary user interface,
which incorporates audio, animation, graphics and text as appropriate to create
a stimulating learning experience. The Company's approach of developing
education and training based web-sites for institutions and businesses provides
it with cross-marketing opportunities.
During Fall (August through December) 1996, through its five existing
academic partners, UOL plans to offer approximately 10 Web-based accredited or
certified courses. During 1997, the Company plans to introduce approximately
40-50 additional courses through its current and approximately five new academic
partners. During the first eight months of 1996, CTA modules have been made
available on intranets, or private networks, through CTA's strategic partners to
a potential audience of approximately 25,000 students. An average of
approximately 2,000 students complete CTA modules each month. The Company
anticipates that the number of modules offered by CTA and the number of business
partners of CTA will increase in 1997.
The Company has entered into an agreement with Autodesk, a personal computer
("PC") software company with more than three million users and total sales of
software and related products for the fiscal year ended January 31, 1996 in
excess of $546,000,000, to build a "virtual campus" system. The virtual campus
is expected to consist of a "bookstore" which will offer products, services and
online courseware developed by Autodesk-authorized training centers, authorized
educational resellers and developers (sometimes with the assistance of the
Company). In addition, the virtual campus will provide users access to new
software product demonstrations, new software product releases and an
opportunity to participate in software certificate and assessment programs. In
1995, one million students took Autodesk courses through various institutions,
including 50,000 Autodesk users who attended courses at authorized training
centers. In 1997, the Company anticipates that a portion of these courses will
be taken by Autodesk users online, and other Autodesk software and related
products will be purchased through the virtual campus.
UOL Publishing, Inc. was incorporated in Virginia in July 1984 and
reincorporated in Delaware in March 1985. The Company's principal executive
offices are located at 105 W. Broad Street, Suite 301, Falls Church, Virginia
22046, and its telephone number at that address is (703) 533-7500. The Company's
web-site is located at http://www.uol.com. Unless the context otherwise
requires, "UOL" and the "Company," as used in this Prospectus, refer to UOL
Publishing, Inc. and its wholly owned subsidiary, Cognitive Training Associates,
Inc., a Texas corporation.
University Online, UOL, Courseware Construction Set, Registrar Architect,
Test Architect and the Company logo are trademarks of the Company, and
Chalkboard, the Virtual Workforce and the slogan "What you think...is our
business" are registered trademarks of the Company. The Company intends to apply
for registration of UOL Publishing. This Prospectus may also include trade names
and trademarks of other companies.
4
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock offered by the Company................ 1,334,000 shares
Common Stock to be outstanding after this
offering........................................... 3,091,132 shares(1)
Use of Net Proceeds................................ Repayment of debt, working capital and
other general corporate purposes.
See "Use of Proceeds."
Proposed Nasdaq National Market symbol............. "UOLP."
</TABLE>
(1) Assumes no exercise of stock options or warrants or conversion of
convertible debt after September 16, 1996, except with respect to the Furst
Transactions and the Jones Transactions. As of September 16, 1996, there
were: (i) outstanding options to purchase an aggregate of 380,840 shares of
Common Stock under the Company's stock plans at a weighted average exercise
price of $9.46 per share; and (ii) warrants to purchase an aggregate of
479,893 shares of Common Stock, at a weighted average exercise price of
$10.08 per share. See "Capitalization," "Management--Stock Plans," "Certain
Transactions," and "Description of Capital Stock."
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
------------------------ ----------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Net revenues .................... $ 288 $ 806 $ 548 $ 289 $ 232
Loss from operations ............ (265) (1,030) (2,291) (764) (1,316)
Net loss......................... (414) (687) (2,240) (682) (1,144)
Pro forma net loss per share(1) . (1.80) (0.87)
Pro forma weighted average shares
outstanding(1)................. 1,343 1,469
</TABLE>
<TABLE>
<CAPTION>
At June 30, 1996
---------------------------------------------
Actual Pro Forma
As Pro As
Actual Adjusted(2) Forma(3) Adjusted(4)
------ ----------- --------- ------------
Balance Sheet Data:
<S> <C> <C> <C> <C>
Working capital (deficit)............ $(2,002) $ 995 $1,725 $19,585
Total assets......................... 679 4,720 5,020 21,746
Total liabilities.................... 2,563 2,722 2,292 1,159
Redeemable convertible Preferred
Stock................................ -- 3,332 -- --
Accumulated deficit.................. (7,886) (8,036) (8,041) (7,941)
Total stockholders' equity (deficit) (1,883) (1,334) 2,728 20,587
</TABLE>
- ------------
(1) See Note 2 of Notes to UOL Financial Statements.
(2) Gives effect to (i) the issuance of 188,353 shares of Preferred Stock in
July 1996 and (ii) the issuance of 42,802 shares of Common Stock in
connection with the acquisition of CTA in August 1996. See Note 13 of Notes
to UOL Financial Statements.
(3) Gives effect to (i) the conversion of all shares of Preferred Stock into
Common Stock upon completion of this offering, (ii) the declaration,
issuance and conversion of Preferred Stock dividends, (iii) the Furst
Transactions, and (iv) the Jones Transactions.
(4) Adjusted to give effect to the sale by the Company of the 1,334,000 shares
of Common Stock offered hereby at an assumed initial public offering price
of $15.00 per share, and the application of the net proceeds therefrom. See
"Use of Proceeds."
5
<PAGE>
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ materially from those
discussed in the forward-looking statements as a result of various factors,
including without limitation the risk factors set forth below and the matters
set forth in this Prospectus generally.
RISK FACTORS
An investment in the Common Stock offered hereby is speculative in nature and
involves a high degree of risk. In addition to the other information contained
in this Prospectus, the following factors should be considered carefully in
evaluating the Company and its business before purchasing the Common Stock
offered hereby.
Limited Operating History in Targeted Market; Anticipation of Continued
Losses. The Company has achieved only limited revenues to date, and its ability
to generate significant revenues is subject to substantial uncertainty. Although
the Company has been in existence since 1984, it changed its business focus in
1993 in response to, among other things, perceived market opportunities for
online education as a result of recent technological developments relating to
the Internet. The Company has incurred significant net losses since inception
and expects to continue to incur significant losses on a quarterly and annual
basis at least through 1997. As of June 30, 1996, the Company had an accumulated
deficit of $7,886,374 and a working capital deficiency of $2,001,917. There can
be no assurance that the Company will achieve revenue growth or profitability.
See "Selected Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Dependence on Third Party Relationships. The Company is substantially
dependent on relationships with its partners with respect to acquisition of
content and distribution of the Company's products and services. To date,
various content providers, including academic institutions and business
partners, have entered into agreements with the Company. Certain of these
agreements contain limits on the use of the courseware, do not address future
content and may be terminated by either party upon breach of any material
obligation or upon a bankruptcy, insolvency or similar filing. In addition, the
Company believes that it will be necessary in the future to license additional
courseware. There can be no assurance that the Company will be able to maintain
and modify, if necessary, its existing agreements or enter into agreements with
prospective content providers, or that the content providers will be satisfied
with the revenues received through arrangements with the Company. In particular
the Company's planned introduction of additional courses depends upon its
relationships with current and anticipated future strategic partners. Moreover,
if the Company is required to pay increased fees to its content providers, such
increased payments will have an adverse effect on the Company's results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Strategic Partners."
Distribution and positioning of the Company's products and services is
dependent upon their compatibility with web browsers provided by Netscape
Communications Corporation ("Netscape") and Microsoft Corporation ("Microsoft"),
and access to online networks through arrangements with Internet service
providers such as NETCOM On-Line Communications Services, Inc., PSI Net Inc. and
UUNET Technologies, Inc. The Company is also dependent on web-site operators
that provide links to the Company's web-sites. Although the Company views these
relationships as important direct and indirect factors in the generation of
revenues, most of the Company's arrangements do not require future commitments
to use the Company's services or to provide access or links to the Company's
products or services, are not exclusive and may be terminated at the convenience
of the other party. Moreover, the Company does not have agreements with web-site
operators who provide links to the Company's sites, and such web-site operators
may terminate such links at any time without notice to the Company. In addition,
there can be no assurance that the Company's partners regard their relationship
with the Company as important to their own respective businesses and operations,
that they will not reassess their commitment to the Company's products or
services at any time in the future or that they will not develop their own
competitive products or services, that the products or services of those
companies that provide access or links to the Company's products or services
will achieve market acceptance or commercial success or that the Company's
existing relationships will result in successful product or service offerings
6
<PAGE>
or the generation of significant revenues for the Company. Failure of one or
more of these entities to achieve or maintain market acceptance or commercial
success or the termination of one or more successful relationships could have a
material adverse effect on the Company. In addition, the termination of the
Company's position on a web browser or the grant to a competitor of an exclusive
arrangement with respect to positioning on a web browser would significantly
reduce traffic on the Company's web-sites which would have a material adverse
effect on the Company.
The Company's distribution strategy is to develop multiple distribution
channels. The Company sells its products through direct sales, the Internet and
its strategic partners. There can be no assurance that the Company will be able
to attract resellers and partners that will be able to market the Company's
products effectively and will be qualified to provide timely and cost-effective
customer support and service or that the Company will be able to manage
conflicts among its resellers and partners. For example, certain of UOL's
partners have required UOL to refrain from linking its products with competing
products. Consequently, the Company may be adversely affected should any
reseller or partner fail to adequately penetrate its market segment. The
inability to recruit, manage or retain important resellers or partners, or their
inability to penetrate their respective market segments, would materially
adversely affect the Company.
Risks Associated with Acquisitions; Integration of Acquired Operations. As a
key component of its business strategy, the Company expects to make acquisitions
of, or significant investments in, complementary companies, products or
technologies, although no such acquisitions or investments are currently
pending. The Company, for example, recently acquired CTA. See
"Business--Acquisitions" and "Certain Transactions." Any acquisition is
accompanied by such risks as, among other things, the difficulties in
assimilating the operations and personnel of acquired companies, potential
disruption to the Company's ongoing business, difficulties of incorporating
acquired technology into the Company's products, additional expense associated
with amortization of acquired intangible assets, potential dilution to the value
of the Company's Common Stock and the adverse effect on the Company's liquidity
caused by such acquisitions. In pursuing this strategy, there can be no
assurance that the Company will be able to identify attractive targets and make
successful acquisitions in the future on commercially reasonable terms, or that
it will be successful in overcoming these risks or any other problems
encountered in connection with acquisitions. See "Business--Growth Strategy" and
"Business--Acquisitions."
Competition. The market for the Company's products and services is highly
competitive and the Company expects that competition will continue to intensify.
There are no substantial barriers to entry in the online education and training
market. A number of the Company's existing competitors, as well as a number of
potential new competitors (including the Company's partners), have significantly
greater financial, technical and/or marketing resources than the Company. There
can be no assurance that the Company's competitors will not develop products and
services that are superior to those of the Company or that achieve greater
market acceptance than the Company's products and services. Moreover, there can
be no assurance that the Company will be able to compete successfully against
its current or future competitors or that competition will not have a material
adverse effect on the Company. See "Business-- Competition."
Difficulties in Managing Rapid Growth; Dependence on Key Personnel. The
Company has experienced rapid growth and expansion which has placed a
significant strain on its administrative, operational and financial resources.
The Company's performance is substantially dependent on the performance of its
executive officers and key employees, some of whom have worked together for only
a short period of time. The loss of the services of any of its executive
officers or other key employees could have a material adverse effect on the
Company. The Company anticipates that future growth, if any, will require it to
identify, recruit, hire, train and retain a substantial number of new technical,
managerial, sales and marketing personnel. Competition for such personnel is
intense, and there can be no assurance that the Company will be able to attract,
assimilate and retain such personnel. The Company's ability to manage its growth
successfully will also require the Company to expand its administrative,
operational, management and financial systems and controls. Such expansion is
expected to result in significantly increased operating expenses. To the extent
that such expenses precede any increase in revenues, the Company will be
materially adversely affected. There can be no assurance that
7
<PAGE>
such expansion will be successfully completed or that the cost of such expansion
will not exceed the revenues, if any, generated. See "Business--Employees" and
"Management."
Fluctuations in Quarterly Results; Economic Conditions. The Company's expense
levels are based in part on its expectations as to future revenues. Quarterly
sales and operating results generally depend on the licensing and support
revenues, online revenues and development and other revenues recognized, which
are difficult to forecast. The Company may not be able to adjust spending in a
timely manner to compensate for any unexpected revenue shortfall. Accordingly,
any significant shortfall in relation to the Company's expectations would have
an immediate adverse impact on the Company.
The Company's operating results may fluctuate significantly in the future as
a result of a variety of factors, some of which are outside of the Company's
control. These factors include general economic conditions, demand for online
education, acceptance and usage of the Internet, the budgeting cycles of
customers, capital expenditures and other costs relating to the expansion of
operations, the introduction of new products or services by the Company or its
competitors, the mix of the products and services sold and the channels through
which those products and services are sold, and pricing changes. As a strategic
response to a changing competitive environment, the Company may elect from time
to time to make certain pricing, service or marketing decisions that could have
a material adverse effect on the Company. The Company believes that
period-to-period comparisons of its operating results should not be relied upon
for an indication of future performance. Due to all of the foregoing factors, it
is possible that in some future quarter, the Company's operating results will be
below the expectations of public market analysts and investors. In such event,
the price of the Company's Common Stock would likely be materially adversely
affected. See "Risk Factors--No Prior Public Market; Possible Volatility of
Stock Price" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Current Dependence on a Limited Number of Customers. A significant portion of
the Company's revenues to date have been derived from sales to a limited number
of customers, and the Company currently anticipates that future operating
results will continue to reflect this trend. Accordingly, the cancellation or
deferral of a small number of contracts or license agreements would have a
material adverse effect on the Company. See "Business--Customers."
Current Dependence on Online Distribution. The use of the Company's products
and services will depend in large part upon the development of an infrastructure
for providing online access and services. Because global commerce and online
exchange of information on the Internet and other similar open wide area
networks are new and evolving, it is difficult to predict with any assurance
whether such networks will prove to be viable commercial marketplaces. Such
networks have experienced, and are expected to continue to experience,
significant growth in the number of users and amount of traffic. There can be no
assurance that the infrastructures of such networks will continue to be able to
support the demands placed on them by this continued growth. In addition, such
networks could lose their viability due to delays in the development or adoption
of new standards and protocols (for example, the next-generation Internet
Protocol) to handle increased levels of activity, increased governmental
regulation or other factors. There can be no assurance that the infrastructure
or complementary services necessary to make such networks viable commercial
marketplaces will be developed, or that if developed, such networks will become
viable commercial marketplaces for products and services such as those offered
by the Company. In particular, such networks are an unproven medium for
education. In the event such networks fail to become a viable education medium,
there can be no assurance the Company will be able to overcome the costs and
difficulties associated with adapting to alternative media, if and when they
become available. If such networks do not become viable commercial marketplaces
or do not develop as a viable medium for education, the Company would be
materially adversely affected. See "Business--Industry Background."
Capacity Constraints and System Failure. A key element of the Company's
strategy is to generate a high volume of online traffic to its products and
services. Accordingly, the performance of the Company's products and services is
critical to the Company's reputation, its ability to attract customers and
market acceptance of these products and services. Any system failure that causes
interruptions in the availability or increases response time of the Company's
products and services would result in less traffic
8
<PAGE>
to the Company's web-sites and, if sustained or repeated, would reduce the
attractiveness of the Company's products and services. An increase in the volume
of use of the Company's products and services could strain the capacity of the
software or hardware deployed by the Company or the capacity of the Company's
network infrastructure, which could lead to slower response time. Any failure to
expand the capacity of the Company's hardware or network infrastructure on a
timely basis or on commercially reasonably terms would have a material adverse
effect on the Company. The Company is also dependent upon web browsers and
Internet and online service providers for access to its products and services
and users may experience difficulties due to system failures unrelated to the
Company's systems, products and services.
Security Risks. The Company has included in its products certain security
protocols which operate in conjunction with encryption and authentication
technology. Despite the existence of these technologies, the Company's products
may be vulnerable to break-ins and similar disruptive problems caused by online
users. Such computer break-ins and other disruptions would jeopardize the
security of information stored in and transmitted through the Company's computer
systems and the computer systems of end-users, which may result in significant
liability to the Company and may also deter potential customers. Persistent
security problems continue to plague public and private data networks.
Alleviating problems caused by third parties may require significant
expenditures of capital and resources by the Company and may cause
interruptions, delays or cessation of service to the Company and its customers.
Moreover, the security and privacy concerns of the Company and of existing and
potential customers, as well as concerns related to computer viruses, may
inhibit the growth of the online marketplace generally, and the Company's
customer base and revenues in particular. The Company attempts to limit its
liability to customers, including liability arising from a failure of the
security features contained in the Company's products, through contractual
provisions. However, there can be no assurance that such limitations will be
enforceable. The Company currently does not have product liability insurance to
protect against these risks and there can be no assurance that such insurance
will be available to the Company on commercially reasonable terms or at all. See
"Business--Products and Services."
Developing Market; Technological Changes and New Products. The market for the
Company's products and services is rapidly evolving in response to recent
developments relating to online technology and is characterized by evolving
industry standards and customer demands and an increasing number of market
entrants who have introduced or developed online products and services. It is
difficult to predict the size and growth rate, if any, of this market. As is
typical in the case of a rapidly evolving industry, demand and market acceptance
for recently introduced products and services are subject to a high level of
uncertainty. Moreover, critical issues concerning the commercial use of online
networks (including reliability, cost, ease of use and access, quality of
service and market acceptance) remain unresolved and may impact potential future
growth. The Company's future success will depend in significant part on its
ability to continue to improve the performance, features and reliability of its
products and services in response to both evolving demands of the marketplace
and competitive product offerings, and there can be no assurance that the
Company will be successful in developing, integrating or marketing such products
or services. In addition, new product releases by the Company may contain
undetected errors that require significant design modifications, resulting in a
loss of customer confidence and adversely affecting the Company.
Limited Marketing Experience. The Company changed its business focus in 1993,
and therefore has limited marketing experience in its current industry. The
Company's direct marketing and sales staff consists of only eight full-time and
two part-time employees, none of whom have significant experience marketing in
the Company's developing industry. There can be no assurance that the Company
will be able to recruit or retain skilled marketing and sales personnel. In
addition to direct sales, the Company markets its products and services through
a variety of means, including the Internet, strategic marketing partners,
resellers and other arrangements. As such, the Company's marketing will be
dependent in part upon the efforts of third parties. There can be no assurance
that such efforts will be successful or that such parties will not reassess
their commitment to the Company. See "Business--Sales and Marketing."
Trademarks and Proprietary Rights. The Company regards its copyrights,
trademarks, trade dress, trade secrets and similar intellectual property as
critical to its success, and the Company relies upon trademark and copyright
law, trade secret protection and confidentiality and/or license agreements with
9
<PAGE>
its employees, customers, partners and others to protect its proprietary rights.
The Company has obtained registered trademarks in the United States for
Chalkboard, the Virtual Workforce and the slogan "What you think...is our
business" and has applied for the registration of certain of its other
trademarks, including University Online, UOL, Courseware Construction Set,
Registrar Architect, Test Architect and the UOL logo. The Company intends to
apply for registration of UOL Publishing. The Company will continue to evaluate
the registration of additional service marks and trademarks as appropriate.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of the Company's products or services or to
obtain and use information that the Company regards as proprietary. In addition,
the laws of some foreign countries do not protect proprietary rights to as great
an extent as do the laws of the United States. Litigation may be necessary to
protect the Company's proprietary technology. Any such litigation may be
time-consuming and costly, cause product release delays, require the Company to
redesign its products or services or require the Company to enter into royalty
or licensing agreements, any of which could have a material adverse effect upon
the Company. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company or at all. There can be no
assurance that the Company's means of protecting its proprietary rights will be
adequate or that the Company's competitors will not independently develop
similar technology or duplicate the Company's products or services or design
around patents or other intellectual property rights of the Company. In
addition, distributing the Company's products through online networks makes the
Company's software more susceptible than other software to unauthorized copying
and use. The Company plans to allow users to download electronically certain of
its courseware content, which could adversely affect the Company's ability to
collect payment from users that obtain copies from the Company's existing or
past customers. If, as a result of changing legal interpretations of liability
for unauthorized use of the Company's software or otherwise, users were to
become less sensitive to avoiding copyright infringement, the Company would be
materially adversely affected. See "Risk Factors--Government Regulation and
Legal Uncertainties," and "Business--Trademarks and Proprietary Rights."
Future Capital Needs; Uncertainty of Additional Funding. The Company has
financed its operating cash flow needs primarily through private placements of
equity securities and, to a lesser extent, borrowings from stockholders. Through
September 16, 1996, net proceeds from the sale of the Company's equity
securities aggregated approximately $8,870,945. The Company may require
substantial additional capital to finance its future growth and fund its ongoing
operations beyond the next 12 months. The Company's capital requirements will
depend on many factors, including, but not limited to, acceptance of and demand
for the Company's products and services, the types of arrangements that the
Company may enter into with its partners and customers, and the extent to which
the Company engages in acquisitions or invests in new technology and research
and development projects. To the extent that the Company's existing sources of
liquidity and cash flow from operations are insufficient to fund the Company's
activities, the Company may need to raise additional funds. If additional funds
are raised through the issuance of equity securities, which can be done without
stockholder approval, the percentage ownership of the Company's stockholders
would be reduced. No assurance can be given that additional financing will be
available or that, if available, it will be available on terms favorable to the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Government Regulation and Legal Uncertainties. The Company is not currently
subject to direct regulation by any government agency, other than regulations
applicable to businesses generally, and there are currently few laws or
regulations directly applicable to access to or commerce on online networks. Due
to the increasing popularity and use of online networks, it is possible that a
number of laws and regulations may be adopted with respect to online networks,
covering issues such as user privacy, pricing, and the characteristics and
quality of products and services. The adoption of any such laws or regulations
may decrease the growth of online networks, which could in turn decrease the
demand for the Company's products and increase the Company's cost of doing
business or otherwise have an adverse effect on the Company. Moreover, the
applicability to online networks of existing laws governing issues such as
property ownership, sales taxes, libel and personal privacy is uncertain.
Furthermore, as a publisher of educational materials, the Company could be
subject to accreditation or other governmental regulations. Any new legislation
or regulation applicable to online networks, the Company or its products or
services could have a material adverse effect on the Company.
10
<PAGE>
Because materials may be downloaded by the online or Internet services
operated or facilitated by the Company or the Internet access providers with
which it has a relationship and be subsequently distributed to others, there is
a potential that claims will be made against the Company for copyright or
trademark infringement or other legal theories. Such claims have been brought
against online services in the past. Although the Company carries general
liability insurance, the Company's insurance may not cover claims of this type,
or may not be adequate to cover all liability that may be imposed. Any
imposition of liability that is not covered by insurance or is in excess of
insurance coverage could have a material adverse effect on the Company. See
"Business--Governmental Regulation and Legal Uncertainties."
Dilution. At an assumed initial public offering price of $15.00 per share,
investors participating in this offering will incur immediate, substantial
dilution in pro forma net tangible book value of $8.58 per share. To the extent
options and warrants to purchase the Company's Common Stock are exercised, there
may be further dilution to the new public investors. See "Dilution."
Shares Eligible for Future Sale. The 1,334,000 shares of Common Stock offered
hereby will be freely tradeable without restriction in the public market. Taking
into account restrictions imposed by the Securities Act of 1933, as amended (the
"Securities Act"), rules promulgated by the Securities and Exchange Commission
thereunder and "lock-up" agreements by which certain stockholders are bound, (i)
approximately 47,520 additional shares will be eligible for immediate sale as of
the date of the final prospectus relating to this offering, (ii) approximately
3,252 additional shares will be eligible for sale beginning 90 days after the
date of the final prospectus relating to this offering, (iii) approximately
27,284 shares will be eligible for sale beginning as early as March and May 1997
pursuant to Rule 144 under the Securities Act; and (iv) approximately 1,001,329
additional shares will be eligible for sale beginning one year after the date of
the final prospectus relating to this offering. Approximately 677,747 remaining
shares will not be eligible for sale pursuant to Rule 144 until the expiration
of their applicable two-year holding periods, which will expire at various times
through September 1998.
As of September 16, 1996, an additional 860,733 shares of Common Stock were
subject to outstanding options and warrants. Taking into account the lock-up
agreements, the number of shares that will be available for sale in the public
market upon exercise of these warrants or options, subject in some cases to the
volume and other restrictions of Rule 144, will be as follows: (i) approximately
249,713 additional shares will be eligible for sale beginning one year after the
date of the final prospectus relating to this offering; (ii) approximately
479,893 remaining shares issuable upon exercise of warrants will not be eligible
for sale pursuant to Rule 144 until the expiration of their applicable holding
periods, which will expire two years from their exercise dates; and (iii)
approximately 131,127 remaining shares issuable upon exercise of options will be
eligible for sale pursuant to Rule 701 upon the ratable vesting of such shares
at various times through August 1999. Friedman, Billings, Ramsey & Co., Inc.
may, in its sole discretion and at any time without notice, release all or any
portion of the shares subject to such lock-up agreements. The Company intends to
file a registration statement on Form S-8 under the Securities Act approximately
one year after the date of the final prospectus relating to this offering to
register an aggregate of up to 496,507 shares of Common Stock issued or reserved
for issuance to employees and consultants. Sales of substantial amounts of the
Company's Common Stock in the public market after this offering could adversely
affect prevailing market prices for the Common Stock. See "Shares Eligible for
Future Sale."
Potential Issuance of Preferred Stock; Anti-Takeover Provisions. The
Company's Board of Directors has the authority, without further action by the
stockholders, to issue up to 10,000,000 shares of Preferred Stock and to fix the
rights, preferences, privileges and restrictions, including voting rights, of
such shares. The rights of the holders of the Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of the Preferred Stock
could have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company, thereby delaying,
deferring or preventing a change in control of the Company. Furthermore, such
Preferred Stock may have other rights, including economic rights, senior to the
Common Stock, and as a result, the issuance of such stock could have a material
adverse effect on the market value of the Common Stock.
11
<PAGE>
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation and Bylaws could make it more difficult for a third party to
acquire, and could discourage a third party from attempting to acquire, control
of the Company. Certain of these provisions eliminate the right of stockholders
to act by written consent and impose various procedural and other requirements
which could make it more difficult for stockholders to effect certain corporate
actions. Such provisions could limit the price that certain investors might be
willing to pay in the future for shares of the Company's Common Stock and may
have the effect of delaying or preventing a change in control of the Company.
The Company may in the future adopt other measures that may have the effect of
delaying, deferring or preventing a change in control of the Company. Certain of
such measures may be adopted without any further vote or action by the
stockholders, although the Company has no present plans to adopt any such
measures. The Company is also afforded the protections of Section 203 of the
Delaware General Corporation Law, which could delay or prevent a change in
control of the Company, impede a merger, consolidation or other business
combination involving the Company or discourage a potential acquiror from making
a tender offer or otherwise attempting to obtain control of the Company. See
"Description of Capital Stock--Preferred Stock" and "--Delaware Law and
Limitations on Changes in Control."
Legal Proceedings. The Company could be subject to legal proceedings and
claims in the ordinary course of its business or otherwise, including claims
relating to royalties or claims of alleged infringement of the trademarks and
other intellectual property rights of third parties by the Company and its
licensees. Such claims, even if not meritorious, could result in the expenditure
of significant financial and managerial resources. See "Business--Legal
Proceedings."
No Prior Public Market; Possible Volatility of Stock Price. Prior to this
offering there has been no public market for the Common Stock. The initial
public offering price was determined by negotiations among the Company and the
representatives of the Underwriters. See "Underwriting." There can be no
assurance that an active public market will develop or be sustained after this
offering or that the market price of the Common Stock will not decline below the
initial public offering price. The market price of the Common Stock could be
subject to significant fluctuations in response to future announcements
concerning the Company or its partners or competitors, the introduction of new
products or changes in product pricing policies by the Company or its
competitors, proprietary rights or other litigation, changes in analysts'
earnings estimates, general conditions in the online distribution market,
developments in the financial markets and other factors. In addition, the stock
market has, from time to time, experienced extreme price and volume fluctuations
that have particularly affected the market prices for technology companies and
which have often been unrelated to the operating performance of the affected
companies. Broad market fluctuations of this type may adversely affect the
future market price of the Common Stock.
Broad Discretion in Allocation of Proceeds. The Company has not designated
any specific use for the majority of the net proceeds of this offering of
1,334,000 shares of Common Stock. Rather, the Company intends to use the
majority of the net proceeds for general corporate purposes, which may include
acquisitions. Accordingly, management will have significant flexibility in
applying the net proceeds of this offering. See "Use of Proceeds."
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,334,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$17,759,300 ($20,550,695 if the Underwriters' over-allotment option is exercised
in full), at an assumed initial public offering price of $15.00 per share and
after deducting underwriter discounts and estimated offering expenses payable by
the Company.
The Company intends to use a portion of the net proceeds to repay debt of the
Company, including two notes payable to stockholders in the aggregate principal
amount of approximately $285,000, plus accrued interest, a note payable to
Control Data in the aggregate amount of approximately $250,000, including
accrued interest, and accrued wages to current and former officers and employees
of the Company in the net amount of approximately $250,000. Such remaining net
proceeds will be used for general corporate purposes, including working capital.
Portions of such remaining net proceeds may also be used to acquire or invest
in businesses or products or to acquire complementary technologies. While from
time to time the Company evaluates potential acquisitions of such businesses,
products or technologies, there are no present understandings, commitments or
agreements with respect to any acquisition of other businesses, products or
technologies. Pending such uses, the Company may invest such net proceeds in
short-term, investment-grade, interest-bearing securities.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. It is the present policy of the Company to retain earnings to finance the
growth and development of its business and, therefore, the Company does not
anticipate paying cash dividends on its Common Stock in the foreseeable future.
In addition, certain provisions of the Company's existing indebtedness prohibit
or limit the Company's ability to pay cash dividends on its Common Stock.
13
<PAGE>
CAPITALIZATION
The following table sets forth, as of June 30, 1996, (i) the Company's actual
short-term debt and capitalization, (ii) the Company's actual as adjusted
short-term debt and capitalization after giving effect to (A) the issuance of
188,353 shares of Preferred Stock in July 1996 and (B) the issuance of 42,802
shares of Common Stock in connection with the acquisition of CTA on August 1,
1996, (iii) the Company's pro forma short-term debt and capitalization after
giving effect to (A) the conversion of all outstanding shares of Preferred Stock
into Common Stock, (B) the Furst Transactions, (C) the Jones Transactions, and
(D) the declaration, issuance and conversion of Preferred Stock dividends, all
of which are to occur upon completion of this offering, and (iv) the Company's
pro forma short-term debt and capitalization, as adjusted to give effect to the
sale by the Company of the 1,334,000 shares of Common Stock offered hereby
(after deducting estimated underwriting discount and offering expenses payable
by the Company) and the application of the net proceeds thereof. See "Use of
Proceeds."
<TABLE>
<CAPTION>
June 30, 1996
-----------------------------------------
Actual Pro Forma
As As
Actual Adjusted Pro Forma Adjusted
------ -------- --------- --------
(in thousands, except share data)
<S> <C> <C> <C> <C>
Loans payable to related parties ............................... $ 715 $ 715 $ 285 $ --
Notes payable................................................... 544 269 269 25
Short-term borrowings........................................... -- 74 74 74
Accrued interest................................................ 162 162 162 56
------ ------ ------ ------
Total short-term debt........................................... 1,421 1,220 790 155
Redeemable convertible Preferred Stock, $0.01 par value:
Series B, 6,000,000 shares authorized, no shares issued and
outstanding (187,254 shares issued and outstanding on an
actual as adjusted basis)(1).................................. -- 3,332 -- --
Series B-1, 6,000,000 shares authorized, no shares issued and
outstanding................................................... -- -- -- --
Stockholders' equity (deficit):
Series A convertible Preferred Stock, $0.01 par value;
12,000,000 shares authorized, 404,847 shares issued and
outstanding on an actual basis; 405,946 shares issued
and outstanding on an actual as adjusted basis; no
shares issued and outstanding, on a pro forma or pro
forma as adjusted basis..................................... 4 4 -- --
Undesignated Preferred Stock, $0.01 par value; 10,000,000
shares authorized, no shares issued or outstanding........... -- -- -- --
Common Stock, $0.01 par value; 36,000,000 shares
authorized, 794,183 shares issued and outstanding on an
actual basis; 836,985 shares issued and outstanding on
an actual as adjusted basis; 1,757,132 shares issued and
outstanding, on a pro forma basis; 3,091,132 shares
issued and outstanding, on a pro forma as adjusted
basis(1).................................................... 8 8 18 31
Additional paid-in capital ..................................... 5,991 6,690 10,751 28,497
Accumulated deficit............................................. (7,886) (8,036) (8,041) (7,941)
------ ------ ------ ------
Total stockholders' equity (deficit)............................ (1,883) (1,334) 2,728 20,587
------ ------ ----- ------
Total capitalization........................................... $ (462) $3,218 $3,518 $20,742
======= ====== ====== =======
</TABLE>
- -----------
(1) Actual capitalization excludes (i) 291,056 shares reserved for issuance
under the Company's Amended and Restated Stock Option Plan (the "Option
Plan"), (ii) 523,983 shares issuable upon exercise of warrants at a
weighted average exercise price of $10.55 per share, and (iii) 39,055
shares issuable upon conversion of $730,000 in convertible debt of the
Company. The actual as adjusted capitalization also excludes options to
purchase 22,256 shares of Common Stock granted under the Company's Option
Plan in August 1996 and warrants to purchase an aggregate of 1,186 shares
of Common Stock, at a weighted average exercise price of $18.69 per share
issued in July 1996, and includes the conversion of $300,000 in convertible
debt into 16,050 shares of the Company's Series B Preferred Stock in July
1996. Subsequent to June 30, 1996, the Board of Directors and stockholders
adopted the Company's 1996 Stock Plan (the "1996 Plan") and reserved
136,967 shares of Common Stock for issuance thereunder. As of the date of
this Prospectus, there were options to purchase 380,840 shares outstanding
under the Option Plan and the 1996 Plan at a weighted average exercise
price of $9.46 per share. See "Management--Stock Plans," "Certain
Transactions," "Description of Capital Stock--Warrants" and Note 9 of Notes
to UOL Financial Statements.
14
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1996
was $1,970,946, or $1.12 per share of Common Stock. Net tangible book value per
share represents total tangible assets less total liabilities divided by the
number of shares of Common Stock outstanding after giving effect to (A) the
conversion of all outstanding shares of Preferred Stock into Common Stock, (B)
the Furst Transactions, (C) the Jones Transactions, and (D) the declaration,
issuance and conversion of Preferred Stock dividends all of which are to occur
upon completion of this offering (collectively, the "IPO Transactions"). After
giving effect to the sale of the 1,334,000 shares of Common Stock offered by the
Company hereby (at an assumed initial public offering price per share of $15.00)
and after deducting underwriting discount and estimated offering expenses, the
pro forma as adjusted net tangible book value of the Company as of June 30, 1996
would have been $19,830,246, or $6.42 per share, representing an immediate
increase in such net tangible book value of $5.30 per share to existing
stockholders and an immediate dilution of $8.58 per share to the new investors.
The following table illustrates this per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Initial public offering price per share......................... $15.00
Pro forma net tangible book value per share as of June 30,
1996.......................................................... $1.12
Pro forma increase in net tangible book value per share
attributable to new investors................................. 5.30
----
Pro forma as adjusted net tangible book value per share after
this offering.................................................. 6.42
----
Pro forma dilution per share to new investors................... $ 8.58
======
</TABLE>
The following table summarizes, as of June 30, 1996, the differences
between the number of shares of Common Stock purchased from the Company, the
total consideration and the average price per share paid by: (i) existing
stockholders; (ii) pro forma investors in (A) the purchase of 187,254 shares of
the Company's Series B Preferred Stock, convertible into 390,956 shares of
Common Stock, in July 1996, (B) the receipt of 1,099 shares of Series A
Preferred Stock in satisfaction of anti-dilution provisions triggered by the
issuance of the Series B Preferred Stock, (C) the issuance of 42,802 shares of
Common Stock in connection with the acquisition of CTA, (D) the declaration of
accrued dividends of shares of Series A Preferred Stock convertible into 39,926
shares of Common Stock, and (E) the IPO Transactions (collectively the "Pro
Forma Investors"); and (iii) the new investors purchasing shares of Common Stock
in this offering (at an assumed initial public offering price per share of
$15.00 and before deducting underwriting discount and estimated offering
expenses):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Shares Purchased Total Consideration
--------------- ------------------- Average Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
Existing stockholders 1,199,030 38.8% $ 5,539,145 18.7% $ 4.62
Pro Forma Investors .. 558,102 18.1% 4,066,333 13.7% 7.29
New investors......... 1,334,000 43.1% 20,010,000 67.6% 15.00
--------- ---- ---------- ---- -----
Total.............. 3,091,132 100.0% $29,615,478 100.0%
========= ===== =========== =====
</TABLE>
The foregoing tables assume no exercise of stock options or warrants or
conversion of convertible debt after June 30, 1996, except with respect to the
Furst Transactions and the Jones Transactions. As of September 16, 1996, there
were outstanding options to purchase an aggregate of 380,840 shares of Common
Stock under the Company's stock plans at a weighted average exercise price of
$9.46 per share and warrants to purchase an aggregate of 479,893 shares of
Common Stock, at a weighted average exercise price of $10.08 per share. To the
extent options or warrants are exercised, there may be further dilution to the
new investors. See "Capitalization," "Management--Stock Plans," "Certain
Transactions," "Description of Capital Stock--Warrants" and Note 9 of Notes to
UOL Financial Statements.
15
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
financial statements and the notes thereto included elsewhere herein. The
statement of operations data set forth below with respect to the years ended
December 31, 1993, 1994 and 1995 and the six month period ended June 30, 1996
and the balance sheet data as of December 31, 1994 and 1995 and June 30, 1996
are derived from, and are referenced to, the audited financial statements of the
Company included elsewhere in this Prospectus. The statement of operations data
set forth below with respect to the years ended December 31, 1991 and 1992 and
the balance sheet data as of December 31, 1991, 1992 and 1993 are derived from
financial statements not included in this Prospectus. The statement of
operations data set forth below with respect to the six month period ended June
30, 1995 is derived from, and is referenced to, the unaudited financial
statements of the Company included elsewhere in this Prospectus. The unaudited
financial statements include all normal recurring adjustments that the Company
considers necessary for a fair presentation of its financial position and
results of operations. The results of operations for the six month period ended
June 30, 1996 are not necessarily indicative of the results that may be expected
for the full year ending December 31, 1996, or any other future period.
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
--------------------------------------------- ------------------------
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues:
Licensing and support revenues...... $ -- $ -- $ -- $ 710 $ 416 $ 257 $ 173
Online revenues .................... -- -- 14 14 56 28 38
Development and other revenues...... 899 404 274 82 76 4 21
--- --- --- -- -- --- --
Total net revenues .................. 899 404 288 806 548 289 232
Costs and expenses:
Cost of revenues ................... 534 146 64 146 94 46 46
Sales and marketing................. 230 178 130 296 933 326 596
Product development................. 175 132 151 206 576 229 375
General and administrative.......... 303 268 207 890 927 303 513
Depreciation and amortization....... 10 9 1 298 309 149 18
-- - - --- --- --- --
Total costs and expenses............. 1,252 733 553 1,836 2,839 1,053 1,548
Loss from operations................. (353) (329) (265) (1,030) (2,291) (764) (1,316)
Other income (expense) .............. -- -- 6 (6) 96 94 206
Gain on debt forgiveness............. -- -- -- 609 30 30 --
Interest expense..................... (97) (91) (155) (260) (75) (42) (34)
--- --- ---- ---- --- --- ---
Net loss............................. $ (450) $ (420) $ (414) $ (687) $(2,240) $ (682) $(1,144)
======= ====== ====== ======= ======= ====== =======
Net loss per share(1).............. $ (0.68) $(0.62) $(0.62) $ (0.98) $ (2.29) $(0.71 )$ (1.19)
======= ====== ====== ======= ======= ====== =======
Weighted average shares
outstanding(1).................... 664 664 664 699 1,056 1,043 1,071
=== === === === ===== ===== =====
Pro forma net loss per share(1) .. $ (1.80) $ (0.87)
======= =======
Pro forma weighted average shares
outstanding(1) ................... 1,343 1,469
===== =====
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------- June 30,
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (deficit).. $(1,776) $(1,377) $(2,724) $(2,587) $(1,402) $(2,002)
Total assets............... 117 254 352 879 613 679
Total liabilities.......... 1,989 2,554 3,075 3,158 1,887 2,563
Accumulated deficit ....... (2,957) (3,385) (3,807) (4,503) (6,742) (7,886)
Total stockholders'
deficit .................. (1,872) (2,300) (2,722) (2,279) (1,274) (1,883)
</TABLE>
- ------------
(1) Computed on the basis described in Note 2 of Notes to UOL Financial
Statements.
16
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AND STATEMENTS OF OPERATIONS
The pro forma combined balance sheet gives effect to the acquisition
completed by the Company subsequent to the six month period ended June 30, 1996.
The actual as adjusted balance sheet gives effect to the equity financing to
raise $3.5 million in exchange for the issuance of Series B redeemable
convertible Preferred Stock which occurred on July 19, 1996. The pro forma
balance sheet gives effect to the conversion of all outstanding shares of
Preferred Stock into Common Stock, the declaration, issuance, and conversion of
Preferred Stock dividends, the Furst Transactions, and the Jones Transactions.
The pro forma as adjusted balance sheet gives effect to the sale by the Company
of 1,334,000 shares of Common Stock pursuant to this offering and the
application of the net proceeds therefrom as described in "Use of Proceeds."
The pro forma combined statements of operations are based on available
information and on certain assumptions and adjustments described in the
accompanying notes which the Company believes are reasonable. The pro forma
combined statements of operations are provided for informational purposes only
and do not purport to present the results of operations of the Company had the
transactions assumed therein occurred on or as of the dates indicated, nor are
they necessarily indicative of the results of operations which may be achieved
in the future. The unaudited pro forma combined statements of operations should
be read in conjunction with "Management's Discussion and Analysis of Financial
Conditions and Results of Operations" and the financial statements of the
Company, including the notes thereto, included elsewhere in this Prospectus.
17
<PAGE>
PRO FORMA BALANCE SHEET
AS OF JUNE 30, 1996
<TABLE>
<CAPTION>
Historical Historical Acquisition Pro Forma
UOL(a) CTA(a) Adjustments(b) Combined
------ ------ -------------- --------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash...................................... $ 190,951 $ 14,486 $ -- $ 205,437
Accounts receivable....................... 48,626 70,676 -- 119,302
Loans receivable from related parties..... 296,031 -- -- 296,031
Prepaid expenses and other current assets. 25,288 39,109 -- 64,397
Deferred income taxes..................... -- 34,350 (34,350) --
------ ------ ------- --------
Total current assets....................... 560,896 158,621 (34,350) 685,167
Property and equipment, net................ 118,511 564,198 (437,070) 245,639
Goodwill and other intangibles, net ....... -- -- 757,048 757,048
------ ------ ------- --------
Total assets............................... $ 679,407 $722,819 $ 285,628 $1,687,854
=========== ======== ========== ==========
Liabilities and stockholders' equity
(deficit)
Current liabilities:
Accounts payable and accrued expenses.... $ 1,131,895 $193,734 $ 150,000 $1,475,629
Loans payable to related parties......... 715,300 55,086 (55,086) 715,300
Notes payable--current portion .......... 543,669 52,751 (27,709) 568,711
Accrued interest......................... 161,949 -- -- 161,949
Deferred revenue......................... 10,000 16,000 -- 26,000
Short-term borrowings.................... -- 74,271 -- 74,271
------ ------ ------- --------
Total current liabilities.................. 2,562,813 391,842 67,205 3,021,860
Notes payable, less current portion ....... -- 256,414 (256,414) --
Redeemable convertible Preferred Stock
Series B.................................. -- -- -- --
Series B-1................................ -- -- -- --
Stockholders' equity (deficit):
Series A convertible Preferred Stock...... 4,048 -- -- 4,048
Common Stock.............................. 7,942 2,000 (1,572) 8,370
Additional paid-in capital................ 5,990,978 -- 698,972 6,689,950
Retained earnings (accumulated deficit)... (7,886,374) 72,563 (222,563) (8,036,374)
---------- ------ -------- ----------
Total stockholders' equity (deficit) ...... (1,883,406) 74,563 474,837 (1,334,006)
---------- ------ ------- ----------
Total liabilities and stockholders' equity
(deficit)................................. $ 679,407 $722,819 $ 285,628 $ 1,687,854
=========== ======== ========== ===========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
Adjustments Actual As Pro Forma Offering Pro Forma
from Financing(c) Adjusted Adjustments(d) Pro Forma Adjustments(e) As Adjusted
----------------- -------- -------------- --------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash...................................... $ 3,032,000 $ 3,237,437 $ 300,000 $3,537,437 $ 16,974,869 $20,512,306
Accounts receivable....................... -- 119,302 -- 119,302 -- 119,302
Loans receivable from related parties..... -- 296,031 -- 296,031 248,430) 47,601
Prepaid expenses and other current assets. -- 64,397 -- 64,397 -- 64,397
Deferred income taxes..................... -- -- -- -- -- --
------- ------ --------- ------ ---------- ------------
Total current assets....................... 3,032,000 3,717,167 300,000 4,017,167 16,726,439 20,743,606
Property and equipment, net................ -- 245,639 -- 245,639 -- 245,639
Goodwill and other intangibles, net ....... -- 757,048 -- 757,048 -- 757,048
------- ------ --------- ------ ---------- -----------
Total assets............................... $ 3,032,000 $ 4,719,854 $ 300,000 $5,019,854 $ 16,726,439 $21,746,293
=========== =========== =========== ========== ============ ===========
Liabilities and stockholders' equity
(deficit)
Current liabilities:
Accounts payable and accrued expenses.... $ -- $ 1,475,629 $ -- $1,475,629 $ (497,675) $ 977,954
Loans payable to related parties......... -- 715,300 (430,000) 285,300 (285,300) --
Notes payable--current portion .......... (300,000) 268,711 -- 268,711 (243,669) 25,042
Accrued interest......................... -- 161,949 -- 161,949 (106,217) 55,732
Deferred revenue......................... -- 26,000 -- 26,000 -- 26,000
Short-term borrowings.................... -- 74,271 -- 74,271 -- 74,271
------- ------ --------- ------ ---------- ----------
Total current liabilities.................. (300,000) 2,721,860 (430,000) 2,291,860 (1,132,861) 1,158,999
Notes payable, less current portion ....... -- -- -- --
Redeemable convertible Preferred Stock
Series B.................................. 3,332,000 3,332,000 (3,332,000) -- --
Series B-1................................ -- -- -- -- --
Stockholders' equity (deficit):
Series A convertible Preferred Stock...... 11 4,059 (4,059) -- -- --
Common Stock.............................. -- 8,370 9,201 17,571 13,340 30,911
Additional paid-in capital................ (11) 6,689,939 4,061,191 10,751,130 17,745,960 28,497,090
Retained earnings (accumulated deficit)... -- (8,036,374) (4,333) (8,040,707) 100,000 (7,940,707)
------- ------ --------- ------ ---------- ----------
Total stockholders' equity (deficit) ...... -- (1,334,006) 4,062,000 2,727,994 17,859,300 20,587,294
------- ------ --------- ------ ---------- ----------
Total liabilities and stockholders' equity
(deficit)................................. $ 3,032,000 $ 4,719,854 $ 300,000 $ 5,019,854 $16,726,439 $21,746,293
=========== =========== ============ =========== =========== ===========
</TABLE>
18
<PAGE>
PRO FORMA STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Historical Historical Acquisition Pro Forma
UOL(f) CTA(f) Adjustments Combined
------ ------ ----------- --------
<S> <C> <C> <C> <C>
Net revenues................................... $ 547,679 $770,064 $ -- $ 1,317,743
Operating expenses:
Cost of revenues.............................. 93,630 427,466 -- 521,096
------ ------- ------- -------
Sales and marketing........................... 932,898 25,396 -- 958,294
Product development........................... 576,470 123,261 -- 699,731
General and administrative.................... 1,235,403 238,774 297,177 (h) 1,771,354
--------- ------- ------- ---------
Loss from operations........................... (2,290,722) (44,833) (297,177) (2,632,732)
Other income (expense):
Other income (expense)........................ 96,348 4,097 (4,097) 96,348
Gain on debt forgiveness ..................... 30,303 -- -- 30,303
Interest expense.............................. (75,570) (40,703) 26,800 (i) (89,473)
------- ------- ------ -------
Income (loss) before income taxes.............. (2,239,641) (81,439) (274,474) (2,595,554)
Income tax expense (benefit)................... -- (36,377) -- (36,377)
------- ------- ------- -------
Net loss....................................... (2,239,641) (45,062) (274,474) (2,559,177)
Accrued dividends to preferred stockholders ... (174,830) -- -- (174,830)
-------- ------- ------- --------
Net loss available to common stockholders ..... $(2,414,471) $(45,062) $(274,474) $(2,734,007)
=========== ======== ========= ===========
Net loss per share(m).......................... $ (2.29) $ (2.49)
=========== ===========
Weighted average shares outstanding(m) ........ 1,056,052 1,098,854 (l)
========= =========
Pro forma net loss per share(m)................ $ (1.80) $ (1.97)
=========== ===========
Pro forma weighted average shares
outstanding(m)................................ 1,342,588 1,385,390 (l)
========= =========
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
Historical Historical Acquisition Pro Forma
UOL(g) CTA(g) Adjustments Combined
------ ------ ----------- --------
<S> <C> <C> <C> <C>
Net revenues................................... $ 231,747 $463,112 $ -- $ 694,859
Operating expenses:
Cost of revenues.............................. 45,976 175,929 -- 221,905
------ ------- ------- -------
Sales and marketing........................... 596,314 20,482 -- 616,796
Product development........................... 374,523 131,321 -- 505,844
General and administrative.................... 531,150 172,253 (76,796)(j) 780,199
------- ------- ------- -------
Loss from operations........................... (1,316,216) (36,873) (76,796) (1,429,885)
Other income (expense):
Other income (expense)........................ 205,529 -- -- 205,529
Interest expense.............................. (33,388) (22,479) 16,750 (k) (39,117)
------- ------- ------ -------
Income (loss) before income taxes.............. (1,144,075) (59,352) (60,046) (1,263,473)
Income tax expense (benefit)................... -- (3,859) -- (3,859)
-------- ------- ------- --------
Net income (loss).............................. (1,144,075) (55,493) (60,046) (1,259,614)
Accrued dividends to preferred stockholders ... (127,710) -- -- (127,710)
-------- ------- ------- --------
Net loss available to common stockholders ..... $(1,271,785) $(55,493) $ (60,046) $(1,387,324)
=========== ======== =========== ===========
Net loss per share(m).......................... $ (1.19) $ (1.25)
=========== ===========
Weighted average shares outstanding(m) ........ 1,070,677 1,113,479 (l)
========= =========
Pro forma net loss per share(m)................ $ (0.87) $ (0.92)
=========== ===========
Pro forma weighted average shares
outstanding(m)................................ 1,469,429 1,512,231 (l)
========= =========
</TABLE>
19
<PAGE>
- ------------
(a) Balance Sheet as of June 30, 1996.
(b) Represents adjustments for the CTA acquisition based on a purchase price of
approximately $700,000. The CTA acquisition has been accounted for using the
purchase method. The purchase price has been allocated on a preliminary
basis to the assets and liabilities acquired based on fair values of such
assets and liabilities which are estimated to equal their book value. (The
Company did not acquire the building, vehicles, certain equipment or the
deferred tax asset and did not assume certain related party debt and other
notes payable.) The balance of the purchase price was allocated as follows:
$200,000 to intangible assets (contracts/customer lists) and $557,000 to
goodwill. The intangible assets will be amortized on a straight-line basis
over the following lives: the contracts/customer lists will be amortized
over three years, and the goodwill will be amortized over ten years.
(c) Represents adjustments for July 19, 1996 Series B redeemable convertible
Preferred Stock financing whereby the Company sold 187,254 shares of Series
B redeemable convertible Preferred Stock for total proceeds of approximately
$3,500,000, including the $300,000 convertible promissory note which was
converted into 16,050 shares of Series B redeemable convertible Preferred
Stock. Additionally, the Company issued 1,099 shares of Series A convertible
Preferred Stock to holders of Series A Preferred Stock to satisfy
anti-dilution provisions, related to the July 19, 1996 financing.
(d) Represents the conversion of all outstanding shares of convertible Preferred
Stock into shares of Common Stock, the declaration, issuance and conversion
of Preferred Stock dividends, the Furst Transactions and the Jones
Transactions.
(e) Represents the sale by the Company of 1,334,000 shares of Common Stock
pursuant to this offering and the application of the net proceeds therefrom
as described in "Use of Proceeds."
(f) Statement of operations for the year ended December 31, 1995.
(g) Statement of operations for the six months ended June 30, 1996.
(h) Adjustments to reflect (i) $122,371 of amortization expense related to
goodwill and other intangible assets (ii) $150,000 of bonus expense related
to the employment agreement with the former stockholder, and (iii) $60,000
of rent expense related to the building, pursuant to a lease agreement
executed with the owner of the building, who is also the former, sole
stockholder of CTA, and eliminates $35,194 of depreciation expense related
to the building, vehicles and certain equipment, which was not acquired by
the Company.
(i) Adjustment to eliminate $26,800 of interest expense related to the notes
payable associated with the building and vehicle.
(j) Adjustments to reflect (i) $61,186 of amortization expense related to
goodwill and other intangible assets and (ii) $30,000 of rent expense
related to the building, pursuant to a lease agreement executed with the
owner of the building, who is also the former, sole stockholder of CTA and
eliminates $14,390 of depreciation expense related to the building, vehicle
and certain equipment, which was not acquired by the Company.
(k) Adjustment to eliminate $16,750 of interest expense related to the notes
payable associated with the building and vehicle.
(l) Represents shares of Common Stock issued in connection with the CTA
acquisition as if the acquisition had occurred on January 1, 1995.
(m) See Note 2 of Notes to UOL Financial Statements for a description of the
computation of the net loss per share and the weighted average shares
outstanding.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following presentation of management's discussion and analysis of the
Company's financial condition and results of operation should be read in
conjunction with the Company's Financial Statements, accompanying notes thereto
and other financial information appearing elsewhere in this Prospectus.
OVERVIEW
The Company is a leading publisher of high quality educational courseware
for the online education and training market through the Web. The Company offers
its courseware to part-time students and working adults in partnerships with
academic institutions and business partners. The Company plans to develop and
expand its network of academic and business partners, its portfolio of
courseware and related products and its distribution system as rapidly as
possible, to take advantage of its position as a leading publisher of Web-based
courseware for the education and training market.
The Company was formed in 1984 as IMSATT Corporation, a multimedia research
and development company. Through 1989, the Company developed and marketed
multimedia tools and services. In 1989, the Company began developing multimedia
courseware for the academic and business markets, and in 1991, the Company
acquired from Control Data the rights to resell the CYBIS online courseware,
which consisted primarily of courses in language arts, mathematics, social
studies, science, business and a variety of technical subjects. In 1993, the
Company modified its business focus to capitalize on market opportunities for
online education resulting from technological advances relating to the Internet.
Since 1993, the Company has raised additional financing and focused its
development efforts on migrating its technology to the Web in preparation for
the launch of its first Web-based course.
The Company introduced its first Web-based demonstration course in November
1995. Having demonstrated its ability to deliver online courseware over the Web
and recognizing the opportunity to be a leader in this market, the Company began
forming strategic partnerships with key academic institutions and business
partners to develop and market its online products and services. Under the
current business model, UOL's revenues are derived from three primary sources:
licensing and support revenues; online revenues; and development and other
revenues. Licensing and support revenues consist primarily of monthly fees
generated by the licensing and maintenance of the CYBIS courseware under the
Control Data subcontracts. Online revenues consist primarily of the Company's
percentage of the revenues paid by students to enroll in the Company's online
courses through its academic and business partners. Online revenues are also
expected to include the Company's percentage of the revenues derived from the
sale of products and services at commercial web-sites managed by the Company.
Development and other revenues consist primarily of fees paid to the Company for
developing courseware.
In 1994, the Company acquired the CYBIS division of Control Data, together
with a perpetual license for the CYBIS courseware, for an aggregate purchase
price of $594,000 (as adjusted in August 1996, see Note 13 of Notes to UOL
Financial Statements), payable in cash and notes payable, and agreed to act as
subcontractor to Control Data to support CYBIS customers. This transaction was
accounted for under the purchase method of accounting. Since 1994, substantially
all of the Company's revenues have been generated through the licensing and
support of the CYBIS courseware. The revenues from servicing the CYBIS customer
base have been declining due to budgetary constraints of government agencies and
the continued migration of CYBIS customers away from mainframe applications.
While the Company expects to continue to derive service revenues for the next
two to three years from its CYBIS customers, the Company believes such revenues
will not be substantial compared to the Company's expected future revenues. The
Company believes that Web-based courseware developed from the CYBIS courseware
may contribute to revenues in the future.
In August 1996, the Company acquired CTA, a provider of technology-based
online training products and services to academic institutions, corporations and
governmental agencies, in exchange for 42,802 shares of the Company's Common
Stock in a transaction accounted for under the purchase method of accounting. In
addition, the Company issued options to purchase an aggregate of 22,256 shares
21
<PAGE>
of Common Stock (of which options to purchase 5,136 shares are fully vested) to
certain employees of CTA, including its former stockholder. The Company expects
to record goodwill and other intangibles in the amount of approximately $757,000
in connection with the acquisition of CTA and to amortize such goodwill and
other intangibles over three to ten years beginning in 1996. The Company
believes that CTA provides not only an established customer base, but also a
critical addition of content, particularly in the electrical, medical and
scientific equipment subject areas, which will enhance the Company's courseware
library. CTA and CYBIS courseware is owned exclusively by the Company and
generally no portion of revenues derived in connection therewith is shared with
any other party.
The Company believes that its future financial performance will depend
substantially on its success in developing and distributing, on behalf of its
strategic partners, proprietary online courseware. The Company's ability
continually to add courses and students to its offerings, to attract and retain
accredited educational institutions and to enter into alliances with business
partners such as Autodesk will be material factors in determining the success of
the Company.
QUARTERLY RESULTS
The following table presents unaudited quarterly financial data for each of
the five quarters in the period ended June 30, 1996. This data has been prepared
on the same basis as the audited Financial Statements appearing elsewhere in
this Prospectus and, in the opinion of management, includes all necessary
adjustments (consisting only of normal recurring adjustments) to present fairly
the unaudited quarterly results, when read in conjunction with the Company's
audited Financial Statements and the notes thereto appearing elsewhere in this
Prospectus. The operating results for any quarter are not necessarily indicative
of the results of any future period.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------
June 30, Sept.30, Dec. 31, March 31, June 30,
1995 1995 1995 1996 1996
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues:
Licensing and support
revenues.................... $ 133 $ 70 $ 89 $ 84 $ 89
Online revenues.............. 14 14 14 18 20
Development and other
revenues.................... 2 36 36 12 9
---------------------------- - -- -- -- -
Total net revenues.......... 149 120 139 114 118
Costs and expenses:
Cost of revenues ............ 24 24 24 24 22
Sales and marketing ......... 197 225 382 240 356
Product development ......... 148 183 165 202 173
General and administrative .. 174 246 377 195 318
Depreciation and
amortization................ 75 78 81 9 9
-- -- -- - -
Total costs and expenses.... 618 756 1,029 670 878
Loss from operations.......... (469) (636) (890) (556) (760)
Other income (expense):
Other income ................ 2 -- 2 120 86
Interest income (expense).... 5 (12) (22) (14) (20)
- --- --- --- ---
Net loss...................... $ (462) $(648) $ (910) $(450) $(694)
====== ===== ====== ===== =====
</TABLE>
The Company expects to experience significant fluctuations in future
quarterly operating results that may be caused by many factors. These factors
include, among others, the timing or introduction of, or enhancement to, the
Company's products and services, the demand for such products and services, the
timing of the introduction of products or services by the Company's competitors,
the extent and timing of market acceptance of online networks as an education
medium, the timing and rate at which the Company increases its expenses to
support projected growth, seasonality, competitive conditions in the industry
and general economic conditions. The Company believes that period-to-period
comparisons of
22
<PAGE>
its operating results are not meaningful and should not be relied upon as any
indication of future performance. Due to the foregoing factors, among others, it
is likely that the Company's future quarterly operating results from time to
time will not meet the expectations of market analysts or investors, which may
have an adverse effect on the price of the Company's Common Stock.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of net revenues for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended June30,
----------------------- ------------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues:
Licensing and support revenues 0.0% 88.1% 75.9% 88.6% 74.7%
Online revenues............... 4.9 1.8 10.2 9.8 16.2
Development and other
revenues..................... 95.1 10.1 13.9 1.6 9.1
----- ------ ------ ------ ------
Total net revenues.......... 100.0 100.0 100.0 100.0 100.0
----- ------ ------ ------ ------
Costs and expenses:
Cost of revenues ............. 22.4 18.1 17.1 15.8 19.9
Sales and marketing .......... 45.2 36.7 170.3 112.8 257.3
Product development .......... 52.4 25.6 105.3 79.2 161.6
General and administrative ... 71.6 110.4 169.2 104.8 221.2
Depreciation and amortization. 0.3 37.0 56.4 51.8 8.0
----- ------ ------ ------ ------
Total costs and expenses.... 191.9 227.8 518.3 364.4 668.0
----- ------ ------ ------ ------
Loss from operations........... (91.9) (127.8) (418.3) (264.4) (568.0)
Other income (expense):
Other income (expense)........ 2.2 (0.8) 17.6 32.6 88.7
Gain on debt forgiveness ..... 0.0 75.6 5.5 10.5 0.0
Interest expense.............. (53.8) (32.3) (13.7) (14.7) (14.4)
----- ------ ------ ------ ------
Net loss....................... (143.5)% (85.3)% (408.9)% (236.0)% (493.7)%
====== ===== ====== ====== ======
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
NET REVENUES
Net revenues decreased from $288,958 for the six months ended June 30, 1995
to $231,747 for the six months ended June 30, 1996, a decrease of $57,211, or
19.8%. For the six months ended June 30, 1995, approximately 88.6% of revenues
was derived from licensing and support of the Control Data subcontracts,
approximately 9.8% was derived from online revenues, and approximately 1.6% was
derived from other revenues. For the six months ended June 30, 1996,
approximately 74.7% of net revenues was derived from the Control Data
subcontracts, approximately 16.2% was derived from online revenues, and
approximately 9.1% was derived from development and other revenues. The decrease
in net revenues was a result of budgetary constraints of government agencies and
the continued migration of CYBIS customers away from mainframe applications. The
CYBIS net revenues have been declining in absolute terms since the Company's
acquisition of the CYBIS division of Control Data in 1994. Although the Company
had anticipated this decline, the Company pursued the Control Data acquisition
to obtain content which could then be marketed using newer delivery methods such
as the Web.
COST OF REVENUES
Cost of revenues increased from $45,656 for the six months ended June 30,
1995 to $45,976 for the six months ended June 30, 1996, an increase of $320, or
0.8%. These amounts represent 15.8% and 19.9% of net revenues in the 1995 and
1996 periods, respectively. Cost of revenues consisted primarily of certain
23
<PAGE>
personnel costs directly related to the Control Data subcontracts,
administration fees payable to Control Data, as well as communication costs
related to online revenues. In the future, cost of revenues is expected to
include royalties incurred to content providers. Cost of revenues as a
percentage of revenues increased due to certain fixed costs associated with the
Control Data subcontracts. In the future, because the Company expects online
revenues to increase, cost of revenues will consist primarily of costs directly
related to such online revenues.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expense increased from $325,891
for the six months ended June 30, 1995 to $596,314 for the six months ended June
30, 1996, an increase of $270,423, or 83.0%. Sales and marketing expense
increased as a percentage of net revenues from 112.8% in the 1995 period to
257.3% in the comparable period in 1996. Sales and marketing expense consisted
primarily of costs related to personnel, travel, advertising, and conference and
trade show attendance. The increase was primarily due to a marketing campaign to
secure contracts and strategic partnerships. The Company expects sales and
marketing expense to increase substantially in the future as the Company expands
its sales and marketing efforts.
Product Development. Product development expense increased from $228,952 for
the six months ended June 30, 1995 to $374,523 for the six months ended June 30,
1996, an increase of $145,571, or 63.6%. Product development expense increased
as a percentage of net revenues from 79.2% in the 1995 period to 161.6% in the
comparable period in 1996. Product development expense consisted primarily of
costs associated with the design, programming, testing, documenting and support
of the Company's new and existing courseware and software. The increase was
primarily due to a major development effort aimed at migrating the Company's
then-existing courseware to courseware compatible with the Web. The Company
expects that product development expense will substantially increase in the
future as the Company expands its courseware library. Through June 30, 1996, the
Company has expensed its product development costs and expects to continue to
expense such costs until such time as the realizability of the Company's
software is established.
General and Administrative. General and administrative expense increased from
$302,728 for the six months ended June 30, 1995 to $512,717 for the six months
ended June 30, 1996, an increase of $209,989, or 69.4%. General and
administrative expense increased as a percentage of net revenues from 104.8% in
the 1995 period to 221.2% in the comparable period in 1996. The increase in
general and administrative expense was attributable primarily to costs
associated with additional personnel, network operations, and legal and
accounting services to support anticipated growth of the Company.
Depreciation and Amortization. Depreciation and amortization expense
decreased from $149,692 for the six months ended June 30, 1995 to $18,433 for
the six months ended June 30, 1996, a decrease of $131,259, or 87.7%.
Depreciation and amortization expense decreased as a percentage of net revenues
from 51.8% in the 1995 period to 8.0% in the comparable period in 1996.
Substantially all of the $149,692 depreciation and amortization expense recorded
in the 1995 period was attributable to goodwill amortization. On January 1,
1994, the Company recorded goodwill in the amount of $575,825 in connection with
the CYBIS acquisition, which goodwill was amortized over a period of two years
ended December 31, 1995. The Company expects to record additional goodwill and
other intangibles in the amount of approximately $757,000 in connection with the
acquisition of CTA and to amortize such goodwill and other intangibles over
three to ten years beginning in 1996.
Interest, Other Income (Expense), and Gain on Debt Forgiveness. Interest
expense decreased from $42,677 for the six months ended June 30, 1995 to $33,388
for the six months ended June 30, 1996, a decrease of $9,289, or 21.8%. These
amounts represent 14.7% and 14.4% of net revenues for the 1995 and 1996 periods,
respectively. Interest expense consisted of interest expense on debt and loans
from officers and other affiliates. The decrease in interest expense was
primarily due to the conversion of $326,082 of debt to equity in the first
quarter of 1995. Other income and gain on debt forgiveness was $124,627 for the
six months ended June 30, 1995 and $205,529 for the six months ended June 30,
1996. These gains were primarily due to debt forgiveness.
24
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
NET REVENUES
Net revenues decreased from $805,935 in 1994 to $547,679 in 1995, a decrease
of $258,256, or 32.0%. In 1994, approximately 88.1% of revenues was derived from
licensing and support of the Control Data subcontracts, approximately 1.8% was
derived from online revenues, and approximately 10.1% was derived from
development and other revenues. In 1995, approximately 75.9% of net revenues was
derived from the Control Data subcontracts, approximately 10.2% was derived from
online revenues and approximately 13.9% was derived from development and other
revenues. The decrease in net revenues was a result of budgetary constraints of
government agencies and the continued migration of CYBIS customers away from
mainframe applications.
COST OF REVENUES
Cost of revenues decreased from $146,002 in 1994 to $93,630 in 1995, a
decrease of $52,372, or 35.9%. These amounts represent 18.1% and 17.1% of net
revenues in 1994 and 1995, respectively. In 1994, cost of revenues consisted
primarily of certain personnel costs directly related to the Control Data
subcontracts, costs of print materials and other items sold by the Company and,
in the last quarter of the year, communication costs related to online revenues.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expense increased from $295,839 in
1994 to $932,898 in 1995, an increase of $637,059, or 215.3%. Sales and
marketing expense increased as a percentage of net revenues from 36.7% in 1994
to 170.3% in 1995. The increase was attributable primarily to additional
personnel, advertising and promotion and travel expenses, as the Company
increased its marketing efforts in preparation for the introduction of
courseware beginning in Fall 1996.
Product Development. Product development expense increased from $205,975 in
1994 to $576,470 in 1995, an increase of $370,495, or 179.9%. Product
development expense increased as a percentage of net revenues from 25.6% in 1994
to 105.3% in 1995. The increase was primarily due to an increase in the
Company's payroll costs attributable to its efforts to convert courses to the
Company's interactive Web format in preparation for the launch of its first Web
course in November 1995.
General and Administrative. General and administrative expense increased from
$890,145 in 1994 to $926,345 in 1995, an increase of $36,200, or 4.1%. General
and administrative expense increased as a percentage of net revenues from 110.4%
in 1994 to 169.2% in 1995.
Depreciation and Amortization. Depreciation and amortization expense
increased from $298,047 in 1994 to $309,058 in 1995, an increase of $11,011, or
3.7%. Depreciation and amortization expense increased as a percentage of net
revenues from 37.0% in 1994 to 56.4% in 1995. The Company recorded $288,273 and
$287,552 as goodwill amortization expense in 1994 and 1995, respectively.
Interest, Other Income (Expense), and Gain on Debt Forgiveness. Interest
expense decreased from $259,994 in 1994 to $75,570 in 1995, a decrease of
$184,424, or 70.9%. These amounts represent 32.3% and 13.7% of net revenues for
1994 and 1995, respectively. The decrease was attributable primarily to lower
aggregate debt outstanding in 1995, primarily as a result of the conversion of
$522,594 of debt into equity in the last quarter of 1994. Other income and gain
on debt forgiveness decreased from $602,809 in 1994 to $126,651 in 1995, a
decrease of $476,158, or 79.0%. The decrease was primarily due to the debt
forgiveness.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
NET REVENUES
Net revenues increased from $288,193 in 1993 to $805,935 in 1994, an increase
of $517,742, or 179.7%. In 1993, approximately 95.1% of net revenues was derived
from development contracts and approximately 4.9% was derived from online
revenues. In 1994, approximately 88.1% of net revenues
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<PAGE>
was derived from licensing and support of the Control Data subcontracts,
approximately 1.8% was derived from online revenues and approximately 10.1% was
derived from development and other revenues. The increase in net revenues from
1993 to 1994 was primarily due to licensing and support revenues derived from
the Control Data subcontracts, which were acquired in January 1994.
COST OF REVENUES
Cost of revenues increased from $64,486 in 1993 to $146,002 in 1994, an
increase of $81,516, or 126.4%. These amounts represent 22.4% and 18.1% of net
revenues in 1993 and 1994, respectively. In 1993, cost of revenues consisted
primarily of network service costs related to the development and sale of the
Company's courseware and services. In 1994, cost of revenues consisted primarily
of certain personnel costs directly related to the Control Data subcontracts,
costs of print materials and other items sold by the Company and, in the last
quarter of the year, communication costs related to online revenues.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expense increased from $130,203 in
1993 to $295,839 in 1994, an increase of $165,636, or 127.2%. Sales and
marketing expense decreased as a percentage of net revenues from 45.2% in 1993
to 36.7% in 1994. The increase was primarily due to the addition of marketing
personnel, travel, advertising and promotion expenses that were incurred
following the CYBIS acquisition.
Product Development. Product development expense increased from $151,132 in
1993 to $205,975 in 1994, an increase of $54,843, or 36.3%. Product development
expense decreased as a percentage of net revenues from 52.4% in 1993 to 25.6% in
1994. The increase was primarily due to expenses incurred in enhancing the CYBIS
courseware library acquired from Control Data.
General and Administrative. General and administrative expense increased from
$206,432 in 1993 to $890,145 in 1994, an increase of $683,713, or 331.2%.
General and administrative expense increased as a percentage of net revenues
from 71.6% in 1993 to 110.4% in 1994. The increase in general and administrative
costs was attributable primarily to additional personnel, technical operations
and rent expenses incurred by the Company as a result of and following the
CYBIS acquisition.
Depreciation and Amortization. Depreciation and amortization expense
increased from $834 in 1993 to $298,047 in 1994, an increase of $297,213. The
increase was primarily due to goodwill amortization expense of $288,273 recorded
in 1994 and additional depreciation expense for office equipment purchased or
obtained in connection with the CYBIS acquisition.
Interest, Other Income (Expense), and Gain on Debt Forgiveness. Interest
expense increased from $154,850 in 1993 to $259,994 in 1994, an increase of
$105,144, or 67.9%. These amounts represent 53.8% and 32.3% of net revenues for
1993 and 1994, respectively. The increase was attributable primarily to
additional debt incurred in financing the CYBIS acquisition. Other income
and gain on debt forgiveness increased from $6,241 in 1993 to $602,809 in 1994,
an increase of $596,568, or 9558.9%. The increase was primarily due to debt
forgiveness.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company, has financed its operating cash flow
needs primarily through private placements of equity securities and, to a lesser
extent, borrowings from stockholders. Cash utilized in operating activities was
$992,134 for the six months ended June 30, 1996, $2,178,492 in 1995 and $461,158
in 1994. Cash provided by operating activities was $101,434 in 1993. Use of cash
was attributable primarily to net losses in 1994, 1995 and the six months ended
June 30, 1996. Although the Company experienced net losses in 1993, increases in
accrued expenses offset such losses, resulting in the $101,434 of cash provided
by operating activities. Cash utilized in investing activities was $17,894 for
the six months ended June 30, 1996, $34,450 in 1995, $185,460 in 1994 and
$101,467 in 1993. The use of cash for investing activities was attributable
primarily to purchases of equipment and, in 1994, a cash payment of $150,000 in
connection with the CYBIS acquisition. Cash provided by financing activities was
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<PAGE>
$1,096,801 for the six months ended June 30, 1996, $2,296,521 for 1995 and
$667,217 for 1994. Financing activities consisted primarily of the sale of
Preferred Stock and Common Stock and borrowings from stockholders. Through June
30, 1996, net proceeds from the sale of the Company's equity securities
aggregated $5,538,945.
As of June 30, 1996, the Company had $190,951 in cash. In July 1996, the
Company issued 187,254 shares of Series B Preferred Stock in a private placement
for net proceeds to the Company of $3,332,000.
The Company expects negative cash flow from operations to continue for at
least the next 12 months, as it continues product development activities and
expands its sales and marketing and administrative capabilities. The Company
believes that the net proceeds from this offering, together with existing
sources of liquidity, will satisfy its anticipated working capital and capital
equipment requirements for at least one year following the offering. See "Use of
Proceeds." The Company's future capital requirements will depend on many
factors, including, but not limited to, acceptance of and demand for its
products and services, the types of arrangements that the Company may enter into
with partners and customers, cash used for acquisitions and the extent to which
the Company invests in new technology and research and development projects.
Depending on its rate of growth and profitability, if any, the Company may
require additional equity or debt financings to meet its working capital
requirements or capital equipment needs in the future or to fund and provide
working capital for its acquisitions. If additional funds are raised through the
issuance of equity securities, the percentage ownership of the Company's
stockholders would be reduced. There can be no assurance that additional
financing will be available when required or, if available, will be on terms
satisfactory to the Company. See "Risk Factors--Future Capital Needs;
Uncertainty of Additional Funding."
As of June 30, 1996, the Company had net operating loss carryforwards of
approximately $5,247,000 for federal income tax purposes, which will expire at
various dates through 2011. The Company's ability to utilize all of its net
operating loss and credit carryforwards may be limited by changes in ownership.
SUBSEQUENT EVENTS
In August 1996, the Company acquired CTA. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview."
In August 1996, the Company recorded compensation expense of $877,782, the
amount by which the deemed fair value of the Common Stock exceeded the exercise
price of certain options as of the date the Board extended their exercise
periods. Such compensation was expensed at the date of Board approval because
the options were fully vested at that time.
The Company entered into an agreement with InternetU, Inc. ("InternetU") in
September 1996 relating to the development with Autodesk of a "virtual campus"
system. See "Business -- Strategic Partners."
The Company entered into an agreement with each of two principal stockholders
of the Company in September 1996 to engage in the Furst Transactions and the
Jones Transactions. See "Certain Transactions."
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BUSINESS
UOL Publishing, Inc. is a leading publisher of high quality, interactive
and on-demand educational courseware for the online education and training
market through the Web. The Company is building its courseware library, which
includes approximately 50 courses and 150 modules in business, finance,
management, technology, and basic technical and developmental skills, through a
combination of strategic acquisitions and partnering with academic institutions
and business partners. The Company converts proven and popular courses in these
diverse subject matter areas to the Company's interactive, online format. The
Company offers its courseware primarily to part-time students and working adults
in partnerships with academic institutions and business partners. The Company
plans to develop and expand its network of academic and business partners, its
portfolio of courseware and related products, and its distribution system as
rapidly as possible, to take advantage of its position as a leading publisher of
Web-based courseware for the education and training market.
The Company plans to grow through internal courseware development and through
acquisition of educational and training products with significant existing
customer bases. The Company expects that acquisition and partnering strategies
will enable it to expand the depth and breadth of its courseware library and
augment its customer base. The Company believes that acquisitions and partnering
will provide cross-marketing opportunities to introduce new courses to its
existing customers and to offer its existing courseware library to new customers
in 1997 and beyond.
INDUSTRY BACKGROUND
TRADITIONAL HIGHER EDUCATION MARKET
Education for part-time students and working adults is a rapidly growing
segment of the education market, primarily as a result of rising tuition for
full-time programs and the demand for increasing skills required by employers.
As the United States economy continues to shift from a focus on industry to one
focused on information and knowledge, employers seeking to compete successfully
in the marketplace find it necessary to invest more in the education and
training of their employees. In 1995, over 76 million adults, or 40% of all
Americans over the age of 16, participated in some form of part-time educational
program. According to an International Foundation of Employee Benefits survey,
more than 90% of companies surveyed currently offer continuing education as an
employee benefit and 97% plan to offer this benefit by the year 2000. In
addition, during 1995, approximately 134,000 organizations in the United States
with more than 100 employees spent $52 billion to provide education and training
to their 49 million employees.
The Company believes that the education and training market for part-time
students and working adults will continue to expand, for the following reasons:
o Increasing Need for Education. Rapid technological and business change and
increased competition are forcing more people to continue education or
training throughout their careers. Additionally, employers often require
and are willing to pay for continuing education for career advancement.
o Rising Education Costs. Full-time education has become expensive for many
students as tuition costs of higher education have undergone an eight-fold
increase since 1970. As a result, between 1970 and 1995, the number of
part-time students enrolled in higher education programs has grown from
approximately 3.0 million to approximately 6.7 million, or 139%, while
full-time enrollment has grown only 44% over the same period.
o Cost-effective Communication Technology. Approximately 25% of education
and training costs are related to travel. Online delivery of education and
training significantly reduces such travel expenses and permits resources
to be concentrated directly on the educational process. In addition,
online delivery of education and training permits education to be
delivered on-demand, thereby reducing or eliminating costs associated with
students' time away from work.
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USE OF TECHNOLOGY IN HIGHER EDUCATION
Historically, academic institutions, training organizations and corporations
have provided education through the traditional classroom and traditional
distance learning methods (satellite-based delivery, mail exchanges, voice mail,
CD-ROMs). Academic institutions may face fiscal constraints that prevent them
from expanding their facilities to meet the demands created by rising
enrollments. Time and space constraints inherent in traditional classroom
methods make classroom education inconvenient and inefficient, especially for
part-time students and working adults. Distance learning addresses the space
limitation by allowing students to take courses at remote locations. The
Company's Web-based delivery system enables academic institutions, training
organizations and corporations to extend their reach more cost-effectively than
other distance learning methods due to its scalability. In addition, Web-based
delivery can provide students a significant degree of time and place
independence.
The Company's courseware benefits from the structural change in the way
content can be managed, delivered and consumed that was caused by the advent of
the Web and online technologies. The use of such technologies can lower
publishing costs and could significantly increase demand. Online technology
makes it possible to combine the best elements of online connectivity between
students and teachers and the interactivity of a CD-ROM. The use of new
technology is so pervasive that nearly 25% of all educational institutions (15%
of public institutions and 33% of private institutions) plan to use the Internet
for instruction. According to the American Internet User Survey, education will
be one of the major uses of the Internet in the future. The Company believes
that its online courseware combines convenience, affordability, self-pacing,
standardized curricula, individualized tailoring of courses, immediate
performance measurement and a high degree of student-teacher interaction.
ONLINE TECHNOLOGIES AND THE WORLD WIDE WEB
Since the advent of the Web portion of the Internet and graphical Web
browsers in the early 1990's, the popularity of the Internet has increased
dramatically. Web-based intranet usage is predicted to overtake Internet usage
before the year 2000. Intranets, which run on open transmission control
protocol/internet protocol ("TCP/IP") networks, enable companies to utilize
servers and browsers designed to be used for the Web in their own applications
distributed over an internal network. International Data Corporation ("IDC") has
estimated that approximately 200 million people worldwide will have access to
the Internet by the end of 1999, up from approximately 38 million at the end of
1995. In addition, according to IDC, the market for intranet software products
and services in the year 2000 will exceed $3 billion, up from approximately $276
million in 1995 and the estimated expenditures for Internet software products
and services will exceed $6 billion in the year 2000, up from approximately $259
million in 1995. Growth in the number of Internet users has been fueled by a
number of factors, including: the existing and increasing numbers of PC's in the
workplace and at home; improvements in the performance and speed of PC's and
modems; improvements in network infrastructure; enhanced ease of access to the
Internet provided by Internet service providers; consumer-oriented online
services and long distance telephone companies; emergence of standards for
Internet navigation and information access; declining costs of Internet service
due to increased competition among access providers; and increased awareness of
the Internet among businesses and consumers. Further, the Company believes that
the emergence of online technologies, such as those embodied in the Internet and
the Web, are economical and effective methods of distribution of digital
information and that such methods present a significant opportunity to
publishers of educational and training content.
The Company believes that over the next several years, the speed and
commercial use of the Internet will increase with the development of higher
bandwidth communication and online access through affordable devices in addition
to PC's, such as online access terminals, cable modems, televisions, video
phones and personal digital assistants. The Company expects that it will offer
its courseware through these online technologies to the extent that they evolve
and gain popular acceptance for the delivery of education and training to
part-time students and working adults.
COMPANY STRATEGY
The Company's strategy is to be a leading publisher of online Web-based
courseware for the education and training market. The Company plans to develop
and expand its network of academic and
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business partners, its portfolio of courseware and related products, and its
distribution systems, to take advantage of its position as a leader in the
online education and training market.
o Build Content Library. The Company's goal is to be the publisher of the
largest library of Web-based courseware for online education and training.
The Company plans to expand its existing courseware library through
acquisitions, strategic alliances with partners and internal development.
See "Business--Products and Services."
o Publish High Quality, High Demand Courseware. The Company publishes
market-tested, high quality products focused on subject areas in high
demand by part-time students and working adults, such as business,
management, finance, accounting, technology, basic technical and
developmental skills and industry-specific subjects. See
"Business--Products and Services."
o Leverage Strategic Partnerships. The Company's strategic partnerships
generally combine the Company's online publishing expertise, marketing
abilities and distinctive Web-based environment with its partners' course
content, student base, accreditation and certification. The Company
believes that by developing such strategic partnerships with a network of
academic institutions and corporations, it will be able to leverage its
partners' strengths and accelerate awareness and acceptance of its online
educational content. As of August 31, 1996, the Company had entered into
contractual arrangements with five academic institutions and 14 business
partners. See "Business--Strategic Partners."
o Expand through Acquisitions. The Company believes that it can rapidly and
cost-effectively build its courseware library and customer base through
strategic acquisitions of complementary businesses, products, services and
technologies. The Company is presently examining a variety of acquisition
opportunities designed to enhance and to expand the Company's library of
courseware. See "Business--Acquisitions."
o Develop Brand Recognition. The Company believes that establishing and
maintaining brand recognition is critical to its strategy of becoming the
leading publisher for online education and training. The Company plans to
achieve brand recognition through marketing efforts and the creation of a
proprietary user interface, which incorporates audio, animation, graphics
and text as appropriate to create a stimulating learning experience. See
"Business--Products and Services--Interactive System Tools."
o Develop Proprietary Technology. The Company intends to continue to develop
and enhance the features and functionality of its proprietary technology,
and to develop courseware internally in certain circumstances. Current
technology development efforts include completion of its proprietary
Lesson Management and Class Management systems, as well as development of
the Courseware Construction Set, which is designed to allow customization
of courses. See "Business--Interactive System Tools."
o Capitalize on Cross-Marketing Opportunities. The Company's approach of
developing Web-based education and training sites for institutions and
businesses provides it with cross-marketing opportunities. UOL's web-site
promotes the courses offered by its academic and business partners to
students currently using its system, as well as potential students through
the Web. For example, a student enrolled in one of the Company's online
courses will be made aware of courses offered by other UOL strategic
partners. In addition, UOL intends to have links to its web-site from the
web-sites of its partners. See "Business--Sales and Marketing."
PRODUCTS AND SERVICES
EXISTING COURSEWARE LIBRARY
The Company's current courseware library includes approximately 50 courses in
high demand subject matter areas such as business, management, finance,
accounting and technology, and approximately 150 modules in basic technical and
developmental skills, and industry-specific subjects. Although the Company does
not provide accreditation or certification itself, the majority of its current
courses provide either accreditation or certification through its strategic
partners. The current library was
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built from a combination of the acquisition of CYBIS courseware from Control
Data, the CTA acquisition and strategic partnerships with academic institutions
and business partners. A listing of the existing Web-based courseware is
described in the following table.
<TABLE>
<CAPTION>
COURSE TARGET AUDIENCE PRIMARY PARTNER
- ------ ---------------- ----------------
<S> <C> <C>
Business Communications (1 course)................ Higher Education Park College
DIALOG (1 course)................................. Professional Dun & Bradstreet, Inc.
Event Management Certificate Program (1 course) .. Professional Educational Services Institute/The George
Washington University
Business and Mathematics (29 courses)............. Higher Education Joint Committee on Computer-Based
Instruction/Federal Aviation Administration
Electric Power Utilities (20 courses)............. Technical Northern States Power/PacifiCorp
Personal Development (24 modules)................. Professional Crisp Publications, Inc.
Product Application Modules (40 modules) ......... Professional/ National Association of Electrical
Technical Distributors, Inc. ("NAED")
Thomas & Betts Signature Series (8 modules) ...... Professional/ Thomas & Betts Corporation, NAED
Technical
Electric Circuits (32 modules).................... Technical International Thomson Publishers/Delmar
Graybar Electrical Education Modules Professional/
(34 modules)...................................... Technical Graybar Electric Company, Inc.
Scientific Products (6 modules)................... Professional/ VWR Corporation
Tecnical
Performance Appraisals (1 module)................. Professional Dun & Bradstreet, Inc.
</TABLE>
During Fall 1996, through its five existing academic partners, UOL plans to
offer approximately 10 Web-based accredited or certified courses, with the
Company's anticipated share of average tuition revenue per student being $80.
Comparable classroom-based courses were offered in 1995 with respect to eight of
the courses being offered this Fall. The aggregate annual student enrollment in
these courses in 1995 was approximately 5,600. The Company believes that the
convenience and cost-savings offered by its online versions of these courses
will attract a portion of the students who would otherwise enroll in these
courses, as such online versions become available. The Company also believes
that its online distribution system will provide its partners with access to
students who otherwise would not take their courses.
PLANNED COURSEWARE SELECTIONS
The following table sets forth information on selected courses currently
designated to be provided as interactive online courses by the Company.
<TABLE>
<CAPTION>
COURSE TARGET AUDIENCE PRIMARY PARTNER RELEASE
- ------ --------------- --------------- -------
<S> <C> <C> <C>
Advanced Expository Writing (1 course) .. Higher Education Park College Fall 1996
American Literature (1 course)........... Higher Education Park College Fall 1996
Business Writing (1 course).............. Higher Education Park College Fall 1996
Complex Organizations (1 course) ........ Higher Education Park College Fall 1996
Income Tax Preparation (1 course) ....... Professional Peoples Income Tax, Inc. Fall 1996
Managerial Statistics (1 course) ........ Higher Education George Mason University
Institute of Graduate and
Professional Business Studies Fall 1996
Planned Giving (2 courses)............... Professional California State University-Long
Beach, University College and
Extension Services Fall 1996
Quantitative Chemistry (1 course) ....... Professional/ Technical American Chemical Society Fall 1996
Technical Writing (1 course)............. Higher Education Park College Fall 1996
Accounting Tutorial (1 course)........... Higher Education John Wiley & Sons, Inc. Spring 1997
Autodesk Product Training (6 courses) ... Professional Autodesk partners Spring 1997
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
COURSE TARGET AUDIENCE PRIMARY PARTNER RELEASE
- ------ --------------- --------------- -------
<S> <C> <C> <C>
Event Management (6 courses)............. Professional Educational Services Institute/
The George Washington Spring/Fall
University 1997
Financial Accounting (1 course).......... Higher Education George Mason University
Institute of Graduate and
Professional Business Studies Spring 1997
Management Fundamentals (2 courses) ..... Professional American Society of Association
Executives Fall 1997
Planned Giving (4 courses)............... Professional California State University-Long
Beach, University College and Spring/Fall
Extension Services 1997
Project Management (1 course)............ Professional Educational Services Institute/
The George Washington
University Spring 1997
</TABLE>
During 1997, the Company plans to introduce approximately 40-50 additional
courses through its current and approximately five new academic partners. Based
on discussions with current and potential academic partners and assuming that
such partners will charge similar tuition for the Company's proposed online
courses as for existing equivalent classroom-based courses, and that the Company
obtains a similar share of tuition revenues as it has in the past with its
existing academic partners, the Company believes that it could receive an
average share of tuition revenue per student per course of approximately $200.
The Company anticipates that the number of modules offered by CTA and the number
of business partners of CTA will increase in 1997. There can be no assurance,
however, that the Company will achieve these goals. See "Risk
Factors--Dependence on Third Party Relationships" and "--Developing Market;
Technological Changes and New Products."
INTERACTIVE SYSTEM TOOLS
The Company has designed a platform-independent delivery system which
supports a wide variety of tools and utilities supplied by third parties, such
as Netscape's or Microsoft's Web browser, Macromedia's Shockwave or Apple
Computer's Quicktime viewer. In addition, the Company is designing the following
proprietary software tools that it expects to create brand recognition for the
Company as a leading publisher of online education and training:
Lesson Management System. To allow electronic guidance, monitoring and
management of students through the courseware, the Company is developing the
Lesson Management System, which pre-tests students on learning objectives
defined by the course author or instructor, and then creates a personalized
study plan based on the level and breadth of the student's knowledge. The
Lesson Management System, intended primarily for use by students, tracks
each student's progress through a course's assigned lessons, measures
mastery of the learning objectives through the Test Architect System, and,
if necessary, offers alternative paths and methods of instruction. The beta
version of the Lesson Management System was completed and tested in August
1996 and the Company believes that the final version will be available in
December 1996.
Class Management System. To allow the system to handle courseware written
by any party under an open architecture standard, the Company is developing
a database manager which allows instructors to give direction to students in
the online classroom. The Class Manager, compliant with ODBC standards (a
nonproprietary industry protocol), handles remote enrollment and payment
processing, test creation and administration, and automatic course progress
tracking and reporting (a gradebook). The beta version of the Class
Management System was completed and tested in August 1996 and the Company
believes that the final version will be available in December 1996.
Courseware Construction Set. To allow instructors to create a customized
online course, the Company developed a visual building block facility to
produce courses from small, individual lessons or "courselets." Using a
natural language pattern-matching and semantic processing technology, the
Courseware Construction Set allows instructors to search the Company's
library of courselets, retrieve the appropriate instructional materials, and
then build a customized course through a
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familiar drag and drop interface. Courselets are authored as discrete units
of instruction and are presented through a series of proprietary,
format-specific templates called PointPages. PointPages can range from text
screens to digital videos and from plain graphical images to complex
software simulations, all within the same course. PointPages are designed to
allow instructors with no knowledge of programming to construct
multimedia-rich interactive Web-based courses. The Company anticipates that
the beta version of the Courseware Construction Set will be completed and
tested in October 1996 and the final version will be available in early
1997.
The Company designs its tools in order to create brand recognition for the
Company as a leading supplier of online education in content, as well as in
systems. In addition, the Company believes that its tools render the Company's
courseware affordable, convenient, easy to use and administer, and provides the
Company with a competitive edge in attracting additional strategic partners. See
"Risk Factors--Developing Market, Technological Changes and New Products."
STRATEGIC PARTNERS
A critical part of the Company's strategy to rapidly and cost-effectively
build a library of quality courseware is the establishment of strategic
alliances with academic institutions and other business partners. The Company
believes that its online distribution system will provide its partners with
access to students who otherwise would not take their courses.
ACADEMIC INSTITUTIONS
The Company currently has strategic relationships with five academic
institutions that have significant enrollments, offer broad curricula and
provide the Company an opportunity to publish online courseware developed by
such institutions. Its agreements with academic institutions generally provide
the Company exclusive rights to develop and distribute online courseware. The
academic institutions will market these courses in the same manner as their
existing, traditional course offerings, including through direct mail, course
catalogs, print advertising and through web-sites. The Company plans to enter
into strategic relationships with additional academic institutions by the end of
1997. See "Risk Factors--Dependence on Third Party Relationships."
Park College. After successful completion of a pilot course in Business
Communications with Park College in Spring 1996, the Company and Park College
entered into an agreement in June 1996, pursuant to which the Company will
develop 11 additional courses for Park College. The additional courses include
Business Writing, Technical Writing, American Literature and Expository Writing.
Park College is a four-year private liberal arts, co-educational college. The
Park College School for Extended Learning Military Resident Center System is one
of the nation's largest programs, consisting of approximately 26,000 enrolled
students.
California State University Institute. The Company entered into an agreement
in June 1996 to permit it to provide services to the 22 campuses in this
statewide university system. The Company plans to launch the first two of a
six-course Planned Giving certificate program during Fall 1996 with the
California State University--Long Beach. The Company plans to offer additional
courses in 1997 in such areas as telecommunications, healthcare, engineering and
business. The California State University system currently serves over 300,000
students throughout California.
The George Washington University. The Company entered into an agreement with
Educational Services Institute ("ESI") in August 1995 to jointly develop courses
to be marketed with The George Washington University ("George Washington"). The
Company currently offers one course of a seven-course Event Management program
providing online instructions and resources in the fundamentals of event
management. The online version was developed from the seminar-based Event
Management program that ESI currently conducts throughout the United States.
Total enrollment in Event Management, which was and will continue to be offered
in a seminar-based format, has been approximately 300 students since the program
was initiated in 1995. In addition to Event Management, the Company plans to
offer courses such as Project Management and Accounting in early 1997. George
Washington has a total enrollment of approximately 20,000 students.
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<PAGE>
George Mason University. The Company entered into an agreement with George
Mason University's ("GMU") Institute of Graduate and Professional Business
Studies in February 1996 to develop certain core MBA requirement courses.
Managerial Statistics is scheduled for release in Fall 1996 and Financial
Accounting is scheduled to be offered in Spring 1997. UOL plans to release
additional business courses with GMU in 1997. The Company and GMU are evaluating
other GMU programs and courses for development and implementation in 1997
including Non-Profit Management and a variety of liberal arts courses. GMU has
total enrollment of approximately 22,000 students.
University of Toledo. The Company entered into an agreement with the
University of Toledo in June 1996 to develop professional development online
courses through the University of Toledo's University College division. Some of
the disciplines under consideration for development include business management,
marketing, communication skills, production and manufacturing operations, safety
and regulatory compliance, criminal justice and healthcare. The Company and the
University of Toledo are planning to deliver the first online course, Lab
Safety, in January 1997 and the Company expects that at least three additional
courses will be added during 1997. The University of Toledo has an enrollment of
approximately 22,000 students.
The Company also has entered into letters of intent to develop Web-based
courseware for the University of California, Berkeley, and New York University.
AUTODESK AND OTHER BUSINESS PARTNERS
The Company currently has strategic relationships with Autodesk and 13 other
business partners. It plans to continue to establish relationships with
additional business partners, in particular those which offer access to large
numbers of users (including the prospective partner's employees or customers),
vendors and resellers, as well as significant amounts of content. Under these
arrangements, the Company's partner generally agrees to use its best efforts to
market and promote the Company's products and services and to share with the
Company the net revenues generated from access and other fees charged to such
partner's end-users.
Autodesk. The company entered into an agreement with autodesk, a pc software
company with more than three million users and total sales of software and
related products for the fiscal year ended january 31, 1996 in excess of
$546,000,000, to build a "virtual campus" system. The virtual campus is expected
to consist of a "bookstore" which will offer products, services and online
courseware developed by autodesk-authorized training centers, educational
resellers and developers (sometimes with the assistance of the company). In
addition, the virtual campus will provide users access to new software product
demonstrations, new software product releases and an opportunity to participate
in software certificate and assessment programs. Six autodesk partners have
already entered into agreements with the company to prepare courseware, products
and services on the virtual campus for its fall 1996 introduction.
In 1995, one million students took Autodesk courses through various
institutions, including 50,000 Autodesk users who attended courses at authorized
training centers. In 1997, the Company anticipates that a portion of these
courses will be taken by Autodesk users online, and other Autodesk software and
related products will be purchased through the virtual campus.
Participants in the markets served by Autodesk have established and will
invest in a company, InternetU, to fund development costs of the Autodesk
virtual campus. The Company entered into an agreement with InternetU in
September 1996, pursuant to which InternetU has the right to pay the Company up
to $1,550,000 within four months of the closing of this offering in return for a
share of the revenues received by UOL through the virtual campus. In connection
with this agreement InternetU will also have the right to receive warrants to
purchase up to 73,714 shares of Common Stock in the Company. InternetU has also
purchased 12,331 shares of the Company's Common Stock.
In summary, the Company receives a percentage of revenues from three primary
sources through the virtual campus: Autodesk courseware revenues; product and
service revenues; and advertising revenues.
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Other Business Partners. The Company has entered into agreements with several
other business partners, such as Dun & Bradstreet, Inc., Peoples Income Tax,
Inc., the American Society of Association Executives, the American Chemical
Society, John Wiley & Sons, Inc. and the Autodesk Press publishing imprint, a
global partnership between International Thomson Publishers and Autodesk.
Pursuant to these agreements, the Company is developing or converting courseware
for online distribution and use. As academic institutions and businesses expand
their online education and training efforts, the Company believes that its
strategic relationships with publishers will enable it to deliver online
courseware that is based on proven and popular textbooks or other publications
and is supported by the Company's proprietary system tools for enrolling,
instructing, testing and managing students. See "Risk Factors--Dependence on
Third Party Relationships."
ACQUISITIONS
The Company believes that acceptance of its products and services in the
marketplace depends upon, among other things, breadth and depth of courseware in
high demand subject areas. The Company's core library of courseware originally
was acquired from Control Data in January 1994. See Note 4 of Notes to UOL
Financial Statements.
Recently, in exchange for 42,802 shares of the Company's Common Stock, the
Company acquired Cognitive Training Associates, Inc., a Texas corporation
providing technology-based online training products and services to academic
institutions, corporations and governmental agencies. In connection with this
transaction, the Company issued options to purchase 22,256 shares of Common
Stock of the Company and entered into an employment contract with its founder,
Michael Brown. See "Management--Executive Compensation--Employment Agreements."
During the first eight months of 1996, CTA modules have been made available on
intranets through CTA's strategic partners to a potential audience of
approximately 25,000 students. An average of approximately 2,000 students
complete CTA modules each month.
Management believes that the acquisition of the CYBIS division of Control
Data, the purchase of CTA and other future acquisitions, if any, have provided
and will provide critical additions to the Company's courseware library and that
by increasing the volume and diversity of its courseware, the potential for
strategic relationships will be enhanced. The Company expects to make additional
acquisitions designed to enhance and expand its courseware library and user
audience. See "Risk Factors--Risks Associated with Acquisitions; Integration of
Acquired Operations."
SALES AND MARKETING
The Company's primary marketing goals are to create a strong brand identity
as a leading educational courseware publisher for corporations, academic
institutions and other business partners, and to establish its core technology
as an affordable option for continuing education and training needs. The Company
has eight full-time and two part-time employees in marketing and sales. The
Company markets its products and services through a variety of means, including
the Internet, direct sales, strategic marketing partners, resellers and other
arrangements. The Company intends to use cross-marketing opportunities available
through partners with web-sites or "home pages" to promote its products and
services and to recruit students. The Company believes that continuing to form
strategic marketing alliances with partners who will sell, promote and market
the Company's products and services, will be important for rapid market
penetration. See "Risk Factors--Dependence on Third Prty Relationships" and
"--Limited Marketing Experience."
CUSTOMERS
The Company's customers consist of its academic institution and business
partners, through which it offers its products and services to part-time
students and working adults. In 1995, three Company customers accounted for more
than 10.0% of its revenues: the Joint Committee on Computer-Based Instruction,
54.4%; Redstone Arsenal, 14.1%; and the University of Massachusetts, 10.1%. See
"Risk Factors--Current Dependence on a Limited Number of Customers."
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COMPETITION
The market for online educational products and services is highly
competitive, rapidly changing and has no substantial barriers to entry. The
Company expects that competition will continue to intensify. Many institutions
and businesses provide accredited and/or certified continuing education or
training that is taught on a part-time basis. In addition to traditional
classroom and distance learning providers, other institutions such as Apollo
Group, Inc. through University of Phoenix and Jones Intercable Inc. through Mind
Extension University offer their own accredited courses online or in an
email-based format. They, and many other education providers, use some of the
Company's methods, including email, bulletin boards, electronic conferencing and
CD-ROMs, as well as other methods, such as satellite communications and audio
and video tapes.
Many of the Company's existing competitors, as well as a number of potential
new competitors, have significantly greater financial, technical and marketing
resources than the Company. In addition, any of these competitors may be able to
respond more quickly to new or emerging technologies, and to devote greater
resources to the development, promotion and sale of their services than the
Company. A number of the Company's current customers and partners have also
established relationships with certain of the Company's competitors, and future
customers and partners may establish similar relationships. See "Risk
Factors--Competition" and "--Dependence on Third Party Relationships."
TRADEMARKS AND PROPRIETARY RIGHTS
The Company regards its copyrights, trademarks, trade dress, trade secrets
and similar intellectual property as critical to its success, and the Company
relies upon trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with its employees, customers,
partners and others to protect its proprietary rights. The Company has obtained
trademarks in the United States for Chalkboard, the Virtual Workforce and "What
you think...is our business" and has applied for the registration of certain of
its other trademarks, including University Online, UOL Courseware Construction
Set, Registrar Architect, Test Architect and the UOL logo. The Company intends
to apply for registration of UOL Publishing. See "Risk Factors--Trademarks and
Proprietary Rights."
LEGAL PROCEEDINGS
The Company is not currently involved in any material legal proceedings.
See "Risk Factors--Legal Proceedings" and "--Government Regulation and Legal
Uncertainties."
EMPLOYEES
As of September 16, 1996, the Company had 41 employees, including 20
full-time and three part-time employees primarily involved in product
development activities, eight full-time and two part-time in marketing and
sales, and eight in finance and administration. The Company believes that its
employee relations are good. See "Risk Factors--Dependence on Key Personnel."
FACILITIES
The Company's executive offices and its principal administration, marketing
and sales operations are located in approximately 4,000 square feet of leased
space in Falls Church, Virginia under a month-to-month lease. The Company plans
to relocate its operations to approximately 7,000 square feet of leased space in
McLean, Virginia during the month of September 1996. The Company also leases
approximately 4,000 square feet, including 1,300 square feet of warehouse space,
in Burnsville, Minnesota (the location of its mainframe server) under a lease
that expires in August 1998. In connection with its acquisition of CTA, the
Company assumed CTA's existing lease for approximately 11,000 square feet of
office space in Waxahachie, Texas that expires in July 2001. The aggregate
annual gross rent for the Company's facilities in Falls Church and Burnsville
was approximately $99,000 in 1995. See Note 7 of Notes to UOL Financial
Statements. The rent for the Waxahachie facility is $5,000 per month. The
Company believes that its current facilities are adequate for its needs for the
foreseeable future and that, should it be needed, suitable additional space will
be available to accommodate expansion of the Company's operations on
commercially reasonable terms.
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MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The executive officers, key employees and directors of the Company as of
August 31, 1996 were as follows:
Name Age Positions
- ---- --- ---------
Narasimhan P. Kannan ...... 48 Chairman of the Board of Directors and Chief
Executive Officer
Carl N. Tyson.............. 47 President, Chief Operating Officer and
Director
W. Braun Jones, Jr. ...... 51 Vice President of Strategic Ventures and
Director
Michael W. Anderson........ 42 Vice President of Technology and Operations
Diana S. Farrell........... 32 Vice President of Sales and Marketing
Leonard P. Kurtzman........ 36 Vice President, Chief Financial Officer and
Secretary
Michael L. Brown........... 47 Executive Vice President of Corporate Training
and President of CTA
Barry R. Fetterolf......... 54 Vice President of Publishing
Edson D. deCastro(1) ...... 57 Director
Dennis J. Dougherty(1)(2).. 48 Director
William E. Kimberly(2)..... 63 Director
D. Wayne Silby(2).......... 47 Director
Barry K. Fingerhut......... 51 Director
- ----------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Narasimhan P. "Nat" Kannan has served as Chief Executive Officer and Chairman
of the Board of Directors of the Company since he founded the Company in 1984.
Prior to founding the Company, he co-founded Ganesa Group, Inc., a developer of
interactive graphics and modeling software, in 1981. Prior thereto, he served as
a consultant to Booz Allen and Hamilton, Inc., the MITRE Corporation, The
Ministry of Industry of the French Government, the Brookhaven and Lawrence
Livermore National Laboratories, the White House Domestic Policy Committee on
Energy, and Control Data Corporation. He holds a B.S. in Engineering from the
Indian Institute of Technology in Madras, India, and he performed advanced
graduate work in business and engineering at Dartmouth College.
Carl N. Tyson joined the Company as President and Chief Operating Officer in
November 1995. From 1992 to 1995, Mr. Tyson served as President, College
Publishers, at Harcourt General Corporation. From 1988 to 1992 he was employed
by McGraw-Hill Inc., most recently as President, College Division. Mr. Tyson
holds a B.A. and M.A. in history from Wichita State University and a Ph.D. in
history from Oklahoma State University.
W. Braun Jones, Jr., Vice President of Strategic Ventures, has been
associated with the Company since 1992 and is co-developer of the Company's
current business strategy. Mr. Jones has served as a director of the Company
since 1994. From 1980 to 1992, Mr. Jones served as Chairman of the Board and
Chief Executive Officer of Carlyn Computer Systems, Inc., a computer dealer and
leasing company. From 1985 to 1991, he served as the Vice Chairman of the Board
of Directors of Suburban Bank, a commercial bank founded by him. Mr. Jones also
serves as a director of Micro-Integration Corp., a publicly held corporation
that manufactures mid-range computer hardware and software, and Globalink, Inc.,
a publicly held corporation that develops language translation software, and
several private companies. Mr. Jones holds a B.A. and M.B.A. from The George
Washington University.
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Michael W. Anderson joined the Company as Vice President of Technology and
Operations in March 1996. From 1994 to 1996, Mr. Anderson was a marketing
research consultant at O'Donnell & Associates, Inc. From 1990 to 1994 he served
as Vice President and Director of Marketing Operations at HarperCollins College
Publishers. From 1977 to 1990 he was employed by Scott, Foresman & Company, most
recently as Vice President of Marketing Operations. Mr. Anderson holds a B.A. in
English and Mathematics from the University of Texas.
Diana S. Farrell joined the Company as Vice President of Sales and Marketing
in June 1996. From December 1992 to June 1996, Ms. Farrell was employed by
Harcourt Brace College Publishers, a division of Harcourt General Corporation,
most recently as Senior Vice President of Marketing. From September 1990 to
December 1992, she served as a Senior Editor at Prentice Hall College Publishing
Group, a division of Paramount Communications, Inc. Ms. Farrell holds a B.A. in
Communications Arts/Marketing from Long Island University.
Leonard P. Kurtzman joined the Company in August 1996 as Vice President,
Chief Financial Officer and Secretary. From August 1986 to August 1996, Mr.
Kurtzman was employed by Systems Center, Inc. and its successor, Sterling
Software, Inc., a computer software company based in Dallas, Texas ("Sterling"),
most recently as Vice President of Finance and Administration of the System
Management Group, a division of Sterling . He holds a B.S. in Accounting from
the University of Maryland and is a Certified Public Accountant.
Michael L. Brown joined the Company as Executive Vice President of Corporate
Training and President of its wholly owned subsidiary, CTA, in August 1996. Mr.
Brown served as the President and Chief Executive Officer of CTA from 1988 until
the Company's acquisition of CTA in August 1996.
Barry R. Fetterolf joined the Company as Vice President of Publishing in
August 1996. From June 1993 to August 1996, Mr. Fetterolf served as Vice
President and Publisher of Saunders College Publishing, a division of Harcourt
Brace College Publishers. From November 1988 to June 1993, Mr. Fetterolf served
as Social Science & Economics Publisher of the Education Group of McGraw-Hill
Publishing Company. Mr. Fetterolf holds a B.S. in Business Administration from
Pennsylvania State University.
Edson D. deCastro has been a director of the Company since 1994. Since June
1995 Mr. deCastro has been Chief Executive Officer of Xenometrix, Inc. Mr.
deCastro was the founder of Data General Corporation and served as its Chief
Executive Officer from 1968 to 1990. From January 1990 to June 1995, Mr.
deCastro was an independent contractor. Mr. deCastro also serves on the boards
of directors of several early-stage technology companies. He holds a B.S. in
Electrical Engineering from the University of Lowell.
Dennis J. Dougherty has been a director of the Company since 1986. Mr.
Dougherty has been a General Partner of Intersouth Partners, L.P., a North
Carolina-based venture capital firm since 1984. Mr. Dougherty also serves as a
director of Cardiovascular Diagnostics, Inc., a publicly held medical device
corporation, and several other private companies. In 1994, Microwave
Laboratories, Inc., a venture capital portfolio company of which Mr. Dougherty
had been a director until December 1993, filed a petition for bankruptcy. Mr.
Dougherty holds a B.A. in Marketing from Oklahoma City University.
Barry K. Fingerhut has been a director of the Company since August 1996.
Since 1981 he has been employed by Geo Capital, a registered investment advisor,
and has served as its Portfolio Manager and President since 1991. Mr. Fingerhut
is a General Partner of the General Partner of Wheatley Partners, L.P., a
venture capital fund, and is a co-founder and principal of Applewood Associates,
L.P. and 21st Century Communications Partners, L.P., both investment
partnerships. Mr. Fingerhut serves as a director of Carriage Services, Inc., a
publicly-held corporation, and several private companies, including Milbrook
Press, Inc., a publisher of children's books, Glasser Legal Works, Inc., a niche
publisher of legal texts, journals and seminars, and Online Resources, Inc. Mr.
Fingerhut holds a B.S. from the University of Maryland and an M.B.A. with a
concentration in Finance/Investments from New York University.
William E. Kimberly has been a director of the Company since October 1995.
Mr. Kimberly served as the President of the Manchester Group, Ltd., an
investment banking company, from 1990 to 1992, and
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as Chairman of NAZTEC International Group, Inc., its successor, since 1994. Mr.
Kimberly also serves as a director of Globalink, Inc., a publicly held
corporation, and several other private emerging growth companies.
D. Wayne Silby has been a director of the Company since October 1995. Mr.
Silby has been the Chairman of the General Partner of Calvert Social Venture
Partners, L.P. and the President of Calvert Social Investment Fund, both
investment companies, since 1985. Mr. Silby holds a B.S. in Economics from the
Wharton School of Finance and a J.D. from Georgetown University Law School.
Directors and officers are elected annually and hold office until their
successors are elected and qualified, or until their earlier removal or
resignation. The Company currently does not pay directors' fees, but does
reimburse non-employee directors for reasonable out-of-pocket expenses in
connection with attending Board or committee meetings. There are no family
relationships among any of the directors, executive officers or key employees of
the Company. In connection with the Company's issuance of Series B Preferred
Stock to certain investors in July 1996, Mr. Kannan executed a voting agreement
(the "Kannan Voting Agreement") obligating Mr. Kannan to vote his shares at any
meeting of stockholders for the election of a representative of the holders of
the Series B Preferred Stock to the Company's Board of Directors. The current
Board of Directors designee of the holders of the Series B Preferred Stock is
Barry K. Fingerhut. The Kannan Voting Agreement terminates upon the consummation
of this offering.
BOARD COMMITTEES
The Board of Directors has an Audit Committee which reviews the results and
scope of the audit and other services provided by the Company's independent
auditors, and a Compensation Committee which makes recommendations regarding
salaries and incentive compensation for officers of the Company and determines
the amount and type of equity incentives to be granted to participants in the
Company's stock plans.
EXECUTIVE COMPENSATION
Summary Compensation Information
The following table sets forth information concerning the compensation
received for services rendered to the Company during the fiscal year ended
December 31, 1995 by the Chief Executive Officer of the Company (the "Named
Executive Officer"). No other executive officer of the Company received total
salary and bonus for such fiscal year in excess of $100,000.
SUMMARY COMPENSATION TABLE
Annual
Compensation
------------
All Other
Name and Principal Position Salary Compensation
- --------------------------- ------ ------------
Narasimhan P. Kannan .... $119,792 $ 840
Chief Executive Officer
EMPLOYMENT AGREEMENTS
In July 1996, the Company entered into an employment agreement with each of
Messrs. Kannan and Tyson. The agreements provide for an annual base salary of
$160,000 (increasing to $180,000 if the Company successfully completes an
initial public offering of its stock) for Mr. Kannan and of $210,000 for Mr.
Tyson, and annual incentive-based bonus compensation of up to 50% of such base
salary. The exact amount of such bonus compensation is determined by the
Company's Board of Directors, based upon the annual growth rate in revenues and
earnings of the Company. Under the agreements, Messrs. Kannan and Tyson are also
eligible to participate in all employee benefit plans and programs that the
Company offers to its executive employees and are entitled to reimbursement for
all documented reasonable business expenses they incur. The initial term of the
agreements expires in June 1998, but the
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agreements are subject to automatic one-year renewal terms. Consistent with
Company policies, in the event that Mr. Kannan or Mr. Tyson is terminated by the
Board without cause, or in the event that Mr. Kannan or Mr. Tyson resigns for
good reason, the Company is required to continue paying his salary for nine
months as severance pay. In the event of a material change in Mr. Kannan's
duties, titles, authority or position with the Company, he may elect, in lieu of
receiving such severance pay, to enter into a consulting arrangement with the
Company, whereby Mr. Kannan would provide consulting services to the Company for
a period of one year and be paid $750 per day for providing such services.
In connection with the Company's acquisition of CTA in August 1996, the
Company entered into an employment and noncompetition agreement with Michael
Brown. The agreement provides for an annual base salary of $150,000 and annual
incentive-based bonus compensation of up to 50% of such base salary. The exact
amount of such bonus compensation is determined by the Company's Board of
Directors, based upon Mr. Brown's performance. Mr. Brown is entitled to receive
an additional bonus of $150,000 in connection with the completion of the
Company's acquisition of CTA, which was consummated in August 1996, and
transition of control of CTA's operations to the Company, which bonus must, in
any event be paid on or before December 31, 1996. Under the agreement, Mr. Brown
is also eligible to participate in all employee benefit plans and programs that
the Company offers to its executive employees and is entitled to reimbursement
for all documented reasonable business expenses he incurs. The term of the
agreement is two years. In the event Mr. Brown is terminated by the Board
without cause, the Company is required to continue paying Mr. Brown's base
salary and providing certain other benefits for the period of time prescribed
under the Company's standard severance plan (which is currently six months).
In August 1996, the Company entered into an employment agreement with Mr.
Kurtzman. The agreement provides for an annual base salary of $150,000 and
annual incentive-based bonus compensation of up to 50% of such base salary. The
exact amount of such bonus compensation is determined by the Company's Board of
Directors, based upon the achievement of specified performance goals established
by the Board. Under the agreement, Mr. Kurtzman is also eligible to participate
in all employee benefit plans and programs that the Company offers to its
executive employees and is entitled to reimbursement for all documented
reasonable business expenses he incurs. The initial term of the agreement
expires in August 1998, but the agreement is subject to automatic one-year
renewal terms. Consistent with Company policies, in the event that Mr. Kurtzman
is terminated by the Board without cause, or in the event that Mr. Kurtzman
resigns for good reason, the Company is required to continue paying Mr.
Kurtzman's salary for six months as severance pay.
OPTION GRANTS
No grants of options to purchase the Company's Common Stock were made during
the year ended December 31, 1995 to the Named Executive Officer.
OPTION EXERCISES AND HOLDINGS
The Named Executive Officer did not exercise any options during 1995. The
following table sets forth information concerning stock options held as of such
date by the Named Executive Officer:
AGGREGATE OPTION EXERCISES IN FISCAL
YEAR AND YEAR-END OPTION VALUES
Number of Shares Value of Unexercised
Underlying Unexercised Options In-the-Money Options
at December 31, 1995 at December 31, 1995(1)
-------------------- -----------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
Narasimhan P.
Kannan.............. 68,483 -- $ 0 --
- ---------
(1) Calculated on the basis of $5.84, the estimated fair market value per share
of the Common Stock as of December 31, 1995, as determined by the Company's
Board of Directors, less the exercise price.
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STOCK PLANS
The Company's Amended and Restated Stock Option Plan (the "Option Plan") was
adopted by the Board of Directors of the Company and approved by the Company's
stockholders in November 1994. A total of 291,056 shares of Common Stock have
been reserved for issuance under the Option Plan. The Company's 1996 Stock Plan
(the "1996 Plan"; together with the Option Plan, the "Plans") was adopted by the
Board of Directors in August 1996 and approved by the Company's stockholders in
September 1996. A total of 136,967 shares of Common Stock have been reserved for
issuance under the 1996 Plan. The Plans provide for grants of "incentive stock
options," within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), to employees (including officers and employee
directors), and for grants of nonstatutory options to employees and consultants.
The 1996 Plan also allows for the grant of purchase rights, but none have been
granted to date. The Plans are currently being administered by the Board of
Directors of the Company, which determines the optionees and the terms of the
options granted, including the exercise price, number of shares subject to the
option and the exercisability thereof. Following the closing of this offering,
the Plans will be administered by the Compensation Committee of the Board of
Directors. The Option Plan and the 1996 Plan will terminate in November 1996 and
August 2006, respectively, unless sooner terminated by the Board of Directors.
The exercise price of incentive stock options granted under the Plans must be
not less than the fair market value of the Common Stock on the date of grant,
and the exercise price of nonstatutory options under the Option Plan must be not
less than 85% of the fair market value of the Common Stock on the date of grant.
With respect to any optionee who owns stock representing more than 10% of the
voting power of all classes of the Company's outstanding capital stock, the
exercise price of any incentive stock option must be equal to at least 110% of
the fair market value of the Common Stock on the date of grant, and the term of
the option must not exceed five years. The terms of all other options may not
exceed ten years. The aggregate fair market value of Common Stock (determined as
of the date of the option grant) for which incentive stock options may for the
first time become exercisable by any individual in any calendar year may not
exceed $100,000.
As of September 16, 1996, no shares of Common Stock had been issued upon
exercise of options granted under the Plans, options to purchase 251,837 and
129,003 shares of Common Stock, at weighted average exercise prices of $6.83 and
$14.60 per share, were outstanding under the Option Plan and the 1996 Plan,
respectively, and 39,219 and 7,964 shares remained available for future option
grants under the Option Plan and the 1996 Plan, respectively.
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CERTAIN TRANSACTIONS
From November 1994 to April 1996, the Company entered into Subscription
Agreements with certain investors, pursuant to which the Company issued and sold
shares of convertible Preferred Stock, par value $0.01 per share ("Series A
Preferred Stock"), for total consideration of $3,800,889, which shares will
convert into a total of 445,872 shares of Common Stock upon consummation of the
offering made hereby. Calvert Social Venture Partners, L.P. and Calvert Social
Investment Fund, two investment companies of which D. Wayne Silby, a director of
the Company, serves as the Chairman of the General Partner and President,
respectively, purchased Series A Preferred Stock convertible into 18,739 and
24,929 shares of Common Stock, respectively, upon consummation of the offering
made hereby. Spencer Trask Securities Incorporated ("Spencer Trask") acted as
Placement Agent for the Company's Series A Preferred Stock financing. Kevin
Kimberlin, a principal stockholder of the Company, is the Chairman of the Board
of Spencer Trask Holdings, Inc., the parent company of Spencer Trask. In
connection with the financing, Spencer Trask received placement fees aggregating
$391,000 and designees of Spencer Trask received warrants to purchase an
aggregate of 37,793 shares of Common Stock. All of these warrants are
exercisable until May 2002 at a weighted average exercise price of $8.92 per
share. In September 1996, contingent upon an initial public offering price per
share of $12.85 or greater, the holders of these warrants agreed to eliminate
their contractual rights to price-based anti-dilution adjustments to the number
of shares underlying these warrants, except with respect to issuances below
$8.76 per share.
In March 1995, the Company issued 25,019 shares of Common Stock to W. Braun
Jones, Jr., a director and executive officer of the Company, upon conversion of
indebtedness in the amount of $36,533 at a conversion rate of $1.46 per share.
In December 1995, the Company also repaid indebtedness owed to Mr. Jones in the
principal amount of $70,000, plus accrued interest thereon. The Company also
borrowed $130,000 from Mr. Jones in May 1996 pursuant to a subordinated
promissory note, the principal of which was convertible into 6,955 shares of
Common Stock at a conversion price of $18.69 per share prior to the Jones
Transactions (the "Jones Note"). In connection therewith, the Company also
issued to Mr. Jones warrants to purchase an aggregate of 6,955 shares of Common
Stock at an exercise price of $18.69 per share prior to the Jones Transactions .
In September 1996, in the Jones Transactions, Mr. Jones agreed to limit his
contractual rights to price-based anti-dilution adjustments to the number of
shares underlying his warrants such that the warrants are exercisable for 14,359
shares at $9.05 per share. Pursuant to the Jones Transactions, Mr. Jones is
required to convert the Jones Note into 14,838 shares of Common Stock upon
consummation of the offering made hereby.
In February 1995, the Company issued to William E. Kimberly, a director of
the Company, and his wife warrants exercisable for an aggregate of 12,840 shares
of Common Stock at an exercise price of $6.13 per share in connection with their
loans to the Company of $50,000, which indebtedness was converted into an
aggregate of 11,413 shares of Common Stock in March 1995 at a conversion price
of $4.38 per share.
In March 1996, the Company borrowed $300,000 from Frogtown Holdings, Inc.
("Frogtown"), a corporation controlled by Austin O. Furst, Jr., a principal
stockholder of the Company, in exchange for which the Company issued to Frogtown
a Senior Convertible Promissory Note convertible into shares of Common Stock at
a conversion rate of $18.69 per share prior to the Furst Transactions (the
"Frogtown Note"). Certain trusts for the benefit of Mr. Furst's daughters (the
"Trusts") also hold warrants to purchase 102,723 shares of Company Common Stock
at an exercise price of $17.52 per share, which will adjust to the initial
public offering price (the "IPO Price") upon the consummation of the offering
made hereby (the "IPO Price Warrants") and warrants to purchase 102,723 shares
of Company Common Stock at an exercise price of $8.76 per share (the "$8.76
Warrants"). In September 1996, in the Furst Transactions, the Trusts agreed to
eliminate their contractual rights to price-based anti-dilution adjustments to
the number of shares underlying the IPO Price Warrants except with respect to
issuances below $8.76. Upon consummation of the offering made hereby and
contingent upon an initial public offering price per share of $12.85 or greater,
the Trusts are required to purchase 68,481 shares underlying the $8.76 Warrants.
In consideration thereof, the Company has agreed to issue to Mr. Furst a warrant
to purchase 15,801 shares of Common Stock at a per share exercise price equal to
the IPO Price. In addition, the Company and Frogtown agreed that the Frogtown
Note will be repaid by the Company in full upon consummation of the offering
made hereby.
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<PAGE>
In July 1996, the Company entered into the Series B Preferred Stock Purchase
Agreement with Wheatley Partners, L.P., a principal stockholder of the Company,
and certain other investors, including Barry K. Fingerhut, a General Partner of
the General Partner of Wheatley and a director of the Company (the "Series B
Investors"), pursuant to which the Company issued and sold an aggregate of
187,254 shares of Series B redeemable convertible Preferred Stock (which is
convertible into 390,956 shares of Common Stock upon consummation of the
offering made hereby) for aggregate cash consideration of $3,500,000.
In August 1996, the Company completed its acquisition of CTA, pursuant to an
Agreement and Plan of Merger among CTA, the Company and a wholly-owned
subsidiary of the Company (the "Merger Agreement"). Pursuant to the Merger
Agreement, the Company acquired all of the outstanding capital stock of CTA in
exchange for 42,802 shares of Common Stock, which were issued to Michael Brown,
CTA's President, Chief Executive Officer and sole stockholder. In connection
with the acquisition, the Company issued options to purchase 22,256 shares of
Common Stock, and Mr. Brown entered into a two-year, renewable employment
agreement with the Company to serve as the Company's Executive Vice President of
Corporate Training and to remain President of CTA. See "Management--Executive
Compensation--Employment Agreements."
In connection with the resignation of John D. Phillips from the Board of
Directors in August 1996, the Board of Directors accelerated the vesting of
options granted to Mr. Phillips in November 1994 for the purchase of 6,848
shares of Common Stock at an exercise price of $1.46 per share.
From 1992 through 1995, a the Company loaned to Nat Kannan, the Company's
founder and Chief Executive Officer, funds in the principal amount, together
with interest accrued thereon through the date of this Prospectus, of
approximately $250,000. Pursuant to the terms of Mr. Kannan's employment
agreement, Mr. Kannan is obligated to apply the entire amount of back wages owed
to Mr. Kannan by the Company of approximately $391,000 to satisfy his debt
obligation and the Company's income tax withholding obligations upon
consummation of the offering made hereby.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of September 16, 1996, and as
adjusted to reflect the sale of the shares of Common Stock offered hereby, by:
(i) each person known by the Company to own beneficially more than five percent
of the Company's outstanding shares of the Common Stock; (ii) the Named
Executive Officer; (iii) each of the Company's directors; and (iv) all directors
and executive officers as a group. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission. In
computing the number of shares beneficially owned by a person and the percentage
ownership of that person, shares of Common Stock subject to options, warrants or
convertible debt held by that person that are currently exercisable or
convertible, or will become exercisable or convertible within 60 days after
September 16, 1996, are deemed outstanding. Such shares, however, are not deemed
outstanding for purposes of computing the percentage ownership of any other
person. Unless otherwise indicated in the footnotes to this table, the persons
and entities named in the table have sole voting and sole investment power with
respect to all shares beneficially owned, subject to community property laws
where applicable.
<TABLE>
<CAPTION>
Percentage
-------------------
Prior
Number of Shares to the After the
Name Beneficially Owned Offering Offering(1)
---- ------------------ -------- -----------
<S> <C> <C> <C>
Austin O. Furst, Jr.(2)..................... 328,400 17.2% 10.1%
138 Frogtown Road
New Canaan, CT 06840
Narasimhan P. Kannan(3)..................... 317,385 17.4% 10.0%
Barry K. Fingerhut(4)....................... 297,696 16.9% 9.6%
Wheatley Partners, L.P...................... 279,267 15.9% 9.0%
80 Cutler Mill Road, Suite 311
Great Neck, NY 11021
Kevin Kimberlin(5) ......................... 136,007 7.5% 4.3%
c/o Spencer Trask Securities Incorporated
535 Madison Avenue, 18th Floor
New York, NY 10022
Kimberlin Family Partners, L.P.(6).......... 130,975 7.1% 4.1%
c/o Spencer Trask Securities Incorported
535 Madison Avenue, 18th Floor
New York, NY 10022
Braun Jones, Jr.(7)......................... 112,083 6.1% 3.5%
Intersouth Partners......................... 106,136 6.0% 3.4%
P.O. Box 13546
Research Triangle Park, NC 27709
Dennis J. Dougherty(8)...................... 106,136 6.0% 3.4%
William E. Kimberly(9)...................... 54,026 3.0% 1.7%
D. Wayne Silby(10).......................... 45,950 2.6% 1.5%
Carl N. Tyson(11)........................... 10,701 * *
Edson D. deCastro(11)....................... 4,564 * *
All directors and executive officers as a
group (13 persons)(12) .................... 1,020,191 52.1% 30.1%
</TABLE>
- ------------
*Less than 1 percent
(1) Assumes the sale of 1,334,000 shares by the Company pursuant to this
offering and no exercise of the Underwriters' over-allotment option.
(2) Includes 153,622 shares underlying warrants held by trusts for which Mr.
Furst is the trustee and which are currently exercisable.
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<PAGE>
(3) Includes 68,483 shares underlying a warrant held by Mr. Kannan that is
currently exercisable.
(4) Consists of 18,429 shares held by Mr. Fingerhut and 279,267 shares held by
Wheatley Partners, L.P., a venture capital fund of which Mr. Fingerhut
serves as a General Partner of the General Partner. Mr. Fingerhut disclaims
beneficial ownership of the shares held by Wheatley Partners, L.P.
(5) Includes 79,750 shares underlying currently exercisable warrants held by
Kimberlin Family Partners, L.P., a limited partnership of which Mr.
Kimberlin serves as the General Partner, and 5,032 shares underlying
currently exercisable warrants held by Spencer Trask Holdings, Inc., of
which Mr. Kimberlin is the Chairman of the Board of Directors. Mr. Kimberlin
disclaims beneficial ownership of the shares held by Spencer Trask Holdings,
Inc.
(6) Includes 79,750 shares underlying warrants which are currently exercisable.
(7) Includes 40,747 vested shares underlying options, 31,479 shares underlying
warrants held by Mr. Jones that are currently exercisable.
(8) Consists of shares held by Intersouth Partners, L.P., a venture capital fund
of which Mr. Dougherty serves as a General Partner of the General Partner.
Mr. Dougherty disclaims beneficial ownership of such shares.
(9) Includes 10,272 shares underlying a warrant held by Mr. Kimberly that is
currently exercisable, 2,282 vested shares underlying options, as well as
5,384 outstanding shares of Common Stock and 2,568 shares underlying a
currently exercisable warrant, both held by Elena Kimberly, Mr. Kimberly's
wife.
(10)Consists of 2,282 vested shares underlying options and 18,739 and 24,929
shares held by Calvert Social Venture Partners, L.P. and Calvert Social
Investment Fund, respectively, two investment companies of which Mr. Silby
serves as Chairman of the General Partner and President, respectively. Mr.
Silby disclaims beneficial ownership of such shares.
(11) Consists of vested shares underlying options.
(12)Includes the shares discussed in footnotes (3), (4) and (7)-(11). Also
includes 42,802 outstanding shares and 28,848 vested shares underlying
options held by other executive officers.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, the authorized capital stock of the
Company will consist of 36,000,000 shares of Common Stock, $0.01 par value per
share, and 10,000,000 shares of Preferred Stock, $0.01 par value per share.
The following summary of certain provisions of the Common Stock and Preferred
Stock and outstanding warrants does not purport to be complete and is subject
to, and qualified in its entirety by, the provisions of the Company's
Certificate of Incorporation and Bylaws, each as amended, and the warrants,
which are included as exhibits to the Registration Statement of which this
Prospectus is a part.
COMMON STOCK
As of immediately prior to the consummation of the offering made hereby,
there were 1,757,132 shares of Common Stock outstanding held of record by 28
stockholders. The holders of Common Stock are entitled to one vote for each
share held of record on all matters submitted to a vote of stockholders.
Accordingly, holders of a majority of the shares of Common Stock entitled to
vote in any election of directors may elect all of the directors standing for
election. Subject to preferences that may be applicable to any outstanding
Preferred Stock, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. See "Dividend Policy." In the event of a liquidation,
dissolution or winding up of the Company, holders of Common Stock are entitled
to share ratably in the assets remaining after payment of liabilities and the
liquidation preference of any outstanding Preferred Stock. Holders of Common
Stock have no preemptive, conversion or redemption rights. All of the
outstanding shares of Common Stock are, and the shares to be sold in this
offering when issued and paid for will be, fully paid and non-assessable.
PREFERRED STOCK
Upon the closing of this offering, the outstanding shares of Series A and
Series B Preferred Stock will be converted into an aggregate of 836,828 shares
of Common Stock, and 10,000,000 shares of undesignated Preferred Stock will be
authorized for issuance. The Company's Board of Directors has the authority,
without further action by the stockholders, to issue such Preferred Stock in one
or more series and to fix the designations, powers, preferences, privileges and
relative participating, optional or special rights and the qualifications,
limitations or restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption and liquidation preferences of each
such series, any or all of which may be greater than the rights of the Common
Stock. The Board of Directors, without stockholder approval, can issue Preferred
Stock with voting, conversion or other rights that could adversely affect the
voting power and other rights of the holders of Common Stock. Preferred Stock
could thus be issued quickly with terms that could have the effect of delaying
or preventing a change in control of the Company or make removal of management
more difficult. Additionally, the issuance of Preferred Stock may have the
effect of decreasing the market price of the Common Stock. The Company currently
has no plans to issue any of the Preferred Stock subsequent to the closing of
this offering.
WARRANTS
As of immediately prior to the consummation of the offering made hereby, the
Company had issued warrants to purchase an aggregate of 479,893 shares of Common
Stock at a weighted average exercise price of $10.08 per share, all of which are
currently exercisable. Warrants to purchase 152,766 of these shares expire in
March 2001; warrants to purchase 37,793 of these shares expire in May 2002; and
warrants to purchase the remaining 289,334 shares, which were granted at various
times between July 1994 and August 1996, expire three to eight years from the
date of grant.
DELAWARE LAW AND LIMITATIONS ON CHANGES IN CONTROL
Section 203 of the Delaware General Corporation Law (the "DGCL") prevents an
"interested stockholder" (defined in Section 203, generally, as a person owning
15% or more of a corporation's outstanding voting stock) from engaging in a
"business combination" (as defined in Section 203) with a
46
<PAGE>
publicly held Delaware corporation for three years following the date such
person became an interested stockholder unless (i) before such person became an
interested stockholder, the board of directors of the corporation approved the
transaction in which the interested stockholder became an interested stockholder
or approved the business combination; (ii) upon consummation of the transaction
that resulted in the interested stockholder's becoming an interested
stockholder, the interested stockholder owns at least 85% of the voting stock of
the corporation outstanding at the time the transaction commenced (excluding
stock held by directors who are also officers of the corporation and by employee
stock plans that do not provide employees with the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer); or (iii) following the transaction in which such
person became an interested stockholder, the business combination is approved by
the board of directors of the corporation and authorized at a meeting of
stockholders by the affirmative vote of the holders of 66 2/3 of the outstanding
voting stock of the corporation not owned by the interested stockholder.
The Company's Bylaws generally require at least 50 days advance notice of any
action to be proposed by a stockholder at any meeting of stockholders and set
forth other specific procedures that a stockholder must follow. In addition, the
Bylaws provide that a special meeting of the Company's stockholders may only be
called by the Board of Directors; no such meeting may be called by the
stockholders. Further, the Certificate of Incorporation eliminates the ability
of stockholders to act by written consent after this offering, and consequently
stockholders may only act at meetings thereof.
These Bylaws provisions, the provisions authorizing the Board of Directors to
issue preferred stock without stockholder approval and the provisions of Section
203 of the DGCL could have the effect of delaying, deferring or preventing a
change in control of the Company or the removal of existing management. See
"Risk Factors--Potential Issuance of Preferred Stock; Anti-Takeover Provisions."
LIMITATION ON DIRECTORS' AND OFFICERS' LIABILITY
The Certificate of Incorporation provides that a director of the Company will
not be personally liable to the Company or its stockholders for monetary damages
for any breach of fiduciary duty as a director, except in certain cases where
liability is mandated by the DGCL. The provision has no effect on any
non-monetary remedies that may be available to the Company or its stockholders,
nor does it relieve the Company or its directors from compliance with federal or
state securities laws. The Bylaws of the Company generally provide that the
Company shall indemnify, to the fullest extent permitted by law, any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit, investigation, administrative hearing or any other
proceeding (each, a "Proceeding") by reason of the fact that he is or was a
director or officer of the Company, or is or was serving at the request of the
Company as a director, officer, employee or agent of another entity, against
expenses (including attorneys' fees) and losses, claims, liabilities, judgments,
fines and amounts paid in settlement actually incurred by him in connection with
such Proceeding.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is First
National Bank of Boston.
LISTING
The Company has applied to list the Common Stock on the Nasdaq National
Market under the trading symbol "UOLP."
47
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for the Common
Stock of the Company. Sales of substantial amounts of Common Stock in the public
market could adversely affect the trading price of the Common Stock. See "Risk
Factors--Shares Eligible for Future Sale."
Upon completion of this offering, the Company will have outstanding 3,091,132
shares of Common Stock, assuming no exercise of the Underwriters' over-allotment
option and no exercise of outstanding options or warrants, except for the Furst
Transactions and the Jones Transactions. Of these, the 1,334,000 shares offered
hereby will be freely tradeable without restriction under the Securities Act,
unless such shares are held by "affiliates" of the Company, as that term is
defined in Rule 144 under the Securities Act.
The remaining 1,757,132 shares of Common Stock outstanding upon completion of
this offering will be "restricted securities" as that term is defined in Rule
144 ("Restricted Shares"). Restricted Shares may be sold in the public market
only if registered or if they qualify for an exemption from registration under
Rules 144 or 701 under the Securities Act, which are summarized below. Sales of
Restricted Shares in the public market, or the availability of such shares for
sale, could adversely affect the market price of the Common Stock.
The executive officers, directors and certain other holders of Common Stock
are bound by contractual "lock-up" agreements providing that they will not
offer, pledge, sell, contract to sell or grant any option to purchase or
otherwise dispose of an aggregate of 1,674,281 outstanding shares of Common
Stock beneficially owned by them for a period of one year after the date of the
final prospectus relating to this offering without the prior written consent of
Friedman, Billings, Ramsey & Co., Inc. Taking into account the lock-up
agreements, the number of shares that will be available for sale in the public
market, subject in some cases to the volume and other restrictions of Rule 144,
will be as follows: (i) approximately 47,520 shares will be eligible for
immediate sale as of the date of the final prospectus relating to this offering;
(ii) approximately 3,252 additional shares will be eligible for sale beginning
90 days after the date of the final prospectus relating to this offering
pursuant to Rules 144 and 701; (iii) approximately 27,284 shares will be
eligible for sale beginning as early as March and May 1997 pursuant to Rule 144;
and (iv) approximately 1,001,329 additional shares will be eligible for sale
beginning one year after the date of the final prospectus relating to this
offering. Approximately 677,747 remaining Restricted Shares will not be eligible
for sale pursuant to Rule 144 until the expiration of their applicable two-year
holding periods, which will expire at various times through September 1998.
As of September 16, 1996, an additional 860,733 shares of Common Stock were
subject to outstanding options and warrants. Taking into account the lock-up
agreements, the number of shares that will be available for sale in the public
market upon exercise of these warrants or options, subject in some cases to the
volume and other restrictions of Rule 144, will be as follows: (i) approximately
249,713 additional shares will be eligible for sale beginning one year after the
date of the final prospectus relating to this offering; (ii) approximately
479,893 remaining shares issuable upon exercise of warrants will not be eligible
for sale pursuant to Rule 144 until the expiration of their applicable holding
periods, which will expire two years from their exercise dates; and (iii)
approximately 131,127 remaining shares issuable upon exercise of options will be
eligible for sale pursuant to Rule 701 upon the ratable vesting of such shares
at various times through August 1999.
Subject to lock-up provisions or agreements, certain of the shares issued
upon exercise of options and warrants granted by the Company prior to the date
of the final prospectus relating to this offering will be available for sale in
the public market pursuant to Rule 701 under the Securities Act. Rule 701
permits resales of such shares in reliance upon Rule 144 but without compliance
with certain restrictions, including the holding period requirement, imposed
under Rule 144. In general, under Rule 144 as currently in effect, beginning 90
days after the date of the final prospectus relating to this offering, a person
(or persons whose shares are aggregated) who has beneficially owned Restricted
Shares for at least two years (including the holding period of any prior owner
except an affiliate) would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of (i) one percent of the then
outstanding shares of Common Stock (approximately 30,911 shares immediately
after this
48
<PAGE>
offering) or (ii) the average weekly trading volume of the Common Stock during
the four calendar weeks preceding the filing of a Form 144 with respect to such
sale. Sales under Rule 144 are also subject to certain manner-of-sale and notice
requirements and to the availability of current public information about the
Company. Under Rule 144(k), a person who is not deemed to have been an affiliate
of the Company at any time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least three years
(including the holding period of any prior owner except an affiliate of the
Company) is entitled to sell such shares without complying with the
manner-of-sale, public information, volume limitation or notice provisions of
Rule 144. Unless otherwise restricted, such "144(k) shares" may therefore be
sold immediately upon the completion of this offering.
The Securities and Exchange Commission has recently proposed amendments to
Rule 144 and Rule 144(k) that would permit resale of restricted shares under
Rule 144 after a one-year, rather than a two-year holding period, subject to
compliance with the other provisions of Rule 144, and would permit resale of
restricted shares by non-affiliates under Rule 144(k) after a two-year, rather
than a three-year holding period. Adoption of such amendments could result in
resale of restricted shares sooner than would be the case under Rule 144 and
Rule 144(k) as currently in effect.
Upon completion of this offering and at specified times thereafter, certain
holders of the Company's securities will be entitled to certain rights with
respect to the registration under the Securities Act of the shares underlying
such securities. Registration of such shares under the Securities Act would
result in such shares becoming freely tradeable without restriction under the
Securities Act (except shares purchased by affiliates) immediately upon the
effectiveness of such registration. Specifically, holders of an aggregate of
approximately 836,096 shares of Common Stock, including shares issuable upon the
exercise of warrants and conversion of Preferred Stock and stock dividends
accrued thereon, have the right, subject to certain conditions and limitations,
to require the Company to register such securities under the Securities Act. A
total of approximately 508,533 of such shares have demand registration rights
exercisable after 90 days following completion of this offering; provided,
however that such rights cannot be exercised at that time because of the
execution of lock-up agreements waiving such rights for a period of one year, as
discussed above. The holders of the remaining shares with demand registration
rights may require the Company to register one-half of such shares after each of
the next two anniversary dates following completion of this offering. In
addition, holders of an aggregate of approximately 1,129,240 shares of Common
Stock, including shares issuable upon the exercise of warrants and conversion of
Preferred Stock and convertible debt, have the right, subject to certain
conditions and limitations, to require that such shares be included in any
registration of the Company's securities; provided, however, that in the case of
a registration for an underwritten public offering, the managing underwriter
may, under certain circumstances, exclude for marketing reasons some or all of
such securities from such registration. No such piggyback registration rights
are being exercised in connection with this offering. Finally, the holders of an
aggregate of approximately 474,569 shares of Common Stock, including shares
issuable upon the exercise of warrants and conversion of Preferred Stock and
convertible debt, have the right to demand from the Company an unlimited number
of registrations of such securities on Form S-3 following the date upon which
such form becomes available to the Company, subject to certain conditions and
limitations.
The Company has reserved an aggregate of 428,023 shares of Common Stock for
issuance pursuant to the Company's stock option plans, 27,393 of which either
have expired or have been forfeited. As of September 16, 1996, options to
purchase a total of 380,840 shares of Common Stock were outstanding. The Company
intends to file, approximately one year after the effective date of this
offering, a registration statement on Form S-8 to register the shares of Common
Stock reserved for issuance under the option plans, including shares subject to
outstanding options, together with 68,483 shares issuable upon exercise of a
warrant granted to an employee of the Company. Shares of Common Stock issued
under the foregoing plans or upon exercise of such warrant after the filing of
this registration statement will be freely tradeable in the public market,
subject in the case of certain holders to the Rule 144 limitations applicable to
affiliates, the above-referenced lock-up agreements with the Underwriters and
vesting restrictions imposed by the Company.
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<PAGE>
UNDERWRITING
The Underwriters named below, represented by Friedman, Billings, Ramsey &
Co., Inc. (the "Representative"), have severally agreed to purchase, subject to
the terms and conditions of the underwriting agreement (the "Underwriting
Agreement"), and the Company has agreed to sell, the number of shares of Common
Stock set forth opposite the name of each Underwriter.
Underwriters Number of Shares
- ------------ ----------------
Friedman, Billings, Ramsey & Co., Inc. ..
Total..................................
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will be
obligated to purchase all of the shares of Common Stock if any shares are
purchased.
The Representative has advised the Company that the Underwriters propose
initially to offer the Common Stock to the public on the terms set forth on the
cover page of this Prospectus, and to certain dealers at such price less a
concession not in excess of $______ per share. After the shares of Common Stock
have been released for sale to the public, the offering price and concession may
be changed. The Common Stock is offered subject to receipt and acceptance by the
Underwriters, and to certain other conditions, including the right to reject
orders in whole or in part.
The Company's executive officers, directors and certain stockholders who
beneficially own an aggregate of approximately 1,674,281 outstanding shares of
Common Stock have agreed not to offer, sell, contract to sell, pledge or grant
any option to purchase or otherwise dispose of Common Stock of the Company for a
period of one year from the date of the final prospectus relating to this
offering without the prior written consent of the Representative. The Company
has also agreed not to offer, sell, contract to sell, or otherwise dispose of
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or any rights to acquire Common Stock for a period
of one year from the date of the final prospectus relating to this offering,
without the prior written consent of the Representative, except that the Company
may grant stock options and sell shares of its Common Stock reserved for
issuance under the Plans, or issue shares upon the exercise of outstanding
options or warrants previously granted. See "Shares Eligible for Future Sale."
The Company has granted an option to the Underwriters, exercisable during the
30-day period after the date of this Prospectus, to purchase up to a maximum of
200,100 additional shares of the Common Stock at the public offering price less
underwriting discounts and commissions shown on the cover of this Prospectus.
The Underwriters may exercise this option only to cover overallotments made in
connection with the sale of the Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares of Common Stock on the same terms
as those on which the 1,334,000 shares of Common Stock are being offered.
Prior to this offering, there has been no public market for the Common Stock.
Consequently, the initial public offering price has been determined by
negotiations among the Company and the Representative. Among the factors
considered in such negotiations were the history of, and prospects for, the
Company and the industry in which it competes, an assessment of management, the
Company's past and present operations, its past and present revenues and the
trend of such revenues, the prospects for future earnings of the Company, the
present state of its development, the general condition for the securities
markets at the time of the offering and the market prices of publicly traded
common stock of comparable companies in recent periods. See "Risk Factors--No
Prior Public Market; Possible Volatility of Stock Price."
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make with respect thereto. The
Company has agreed to reimburse the Representative for its reasonable
out-of-pocket expenses incurred in connection with the performance of its
activities under the
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<PAGE>
Underwriting Agreement, including but not limited to the fees and expenses
of the Representative's outside legal counsel, consultants and accountants
(which are currently estimated to be $200,000 in legal fees and expenses and
$10,000 "blue sky" fees and expenses).
The Underwriters do not intend to confirm sales of the Common Stock offered
hereby to any account over which they exercise discretionary authority.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Wyrick, Robbins, Yates & Ponton L.L.P., Raleigh, North Carolina.
Certain legal matters relating to the offering will be passed upon for the
Underwriters by Latham & Watkins, Washington, D.C.
EXPERTS
The financial statements of UOL Publishing, Inc. (formerly University Online,
Inc.) at December 31, 1994 and 1995 and June 30, 1996, and for each of the three
years in the period ended December 31, 1995 and for the six months ended June
30, 1996, appearing in this 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 upon the authority of such firm as experts in accounting and
auditing.
The financial statements of Cognitive Training Associates, Inc. at December
31, 1994 and 1995 and June 30, 1996, and for the each of the three years in the
period ended December 31, 1995 and for the six months ended June 30, 1996,
appearing in UOL Publishing, Inc.'s 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 upon the authority of such firm as experts in accounting and
auditing.
The Statement of Operating Revenues and Direct Operating Expenses of CYBIS (a
division of Control Data Systems, Inc.) for the year ended December 31, 1993,
appearing in UOL Publishing, Inc.'s Prospectus and Registration Statement has
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and is included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a Registration Statement on Form S-1, including amendments
thereto, under the Securities Act with respect to the Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock offered hereby,
reference is hereby made to such Registration Statement and to the exhibits and
schedules filed therewith. Statements contained in this Prospectus regarding the
contents of any contract or any other document referred to are not necessarily
complete, and, in each instance reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement, each such
statement is qualified in all respects by such reference to such exhibit. The
Registration Statement, including the exhibits and schedules thereto, may be
inspected without charge at the Public Reference Section of the Commission
located at the principal office of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and copies of all or any part thereof may be obtained
from such facility upon payment of the prescribed fees.
REPORTS TO STOCKHOLDERS
The Company intends to furnish to its stockholders annual reports containing
financial statements audited by an independent public accounting firm and
quarterly reports for the first three quarters of each fiscal year containing
unaudited interim financial information.
51
<PAGE>
UOL PUBLISHING, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
UOL PUBLISHING, INC.
Report of Ernst & Young LLP, Independent Auditors................................... F-2
Balance Sheets...................................................................... F-3
Statements of Operations............................................................ F-4
Statements of Stockholders' Deficit................................................. F-5
Statements of Cash Flows............................................................ F-6
Notes to Financial Statements....................................................... F-7
COGNITIVE TRAINING ASSOCIATES, INC.
Report of Ernst & Young LLP, Independent Auditors................................... F-17
Balance Sheets...................................................................... F-18
Statements of Operations............................................................ F-19
Statements of Stockholder|Als Equity..................................................F-20
Statements of Cash Flows............................................................ F-21
Notes to Financial Statements....................................................... F-22
CYBIS (A DIVISION OF CONTROL DATA SYSTEMS, INC.)
Report of Ernst & Young LLP, Independent Auditors................................... F-26
Statement of Operating Revenues and Direct Operating Expenses for the year ended
December 31, 1993.................................................................. F-27
Notes to Financial Statement........................................................ F-28
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
UOL Publishing, Inc.
We have audited the accompanying balance sheets of UOL Publishing, Inc.
(formerly University Online, Inc.) as of December 31, 1994 and 1995 and June 30,
1996 and the related statements of operations, stockholders|Al deficit, and cash
flows for each of the three years in the period ended December 31, 1995 and for
the six month period ended June 30, 1996. These financial statements are the
responsibility of the Company|Als management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of UOL Publishing, Inc. (formerly
University Online, Inc.) at December 31, 1994 and 1995 and June 30, 1996, and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 1995 and for the six month period ended June 30,
1996, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Vienna, Virginia
July 10, 1996, except Note 13, as to which the date is
September __, 1996
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion of
the restatement of the capital accounts for the stock split as described in Note
13 to the financial statements.
Vienna, Virginia
September 16, 1996 /s/ Ernst & Young LLP
F-2
<PAGE>
UOL PUBLISHING, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
Actual As
Adjusted Pro Forma
December 31, June 30, June 30, 1996 June 30, 1996
1994 1995 1996 (see Note 11) (see Note 12)
---- ---- ---- ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash $ 20,599 $ 104,178 $ 190,951 $ 3,237,437 $ 3,537,437
Accounts receivable, less allowance of $19,950
and $30,500 at December 31, 1995 and June 30,
1996, respectively 5,122 67,364 48,626 119,302 119,302
Loans receivable from related parties 381,666 286,948 296,031 296,031 296,031
Prepaid expenses and other current assets 163,537 26,050 25,288 64,397 64,397
------- ------ ------ ------ ------
Total current assets 570,924 484,540 560,896 3,717,167 4,017,167
Property and equipment, net 20,471 128,133 118,511 245,639 245,639
Goodwill and other intangible assets, net 287,552 -- -- 757,048 757,048
------------ ----------- ----------- ----------- -----------
Total assets $ 878,947 $ 612,673 $ 679,407 $ 4,719,854 $ 5,019,854
============ =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 1,572,105 $ 1,088,435 $ 1,131,895 $ 1,475,629 $ 1,475,629
Loans payable to related parties 729,717 285,300 715,300 715,300 285,300
Notes payable 501,762 293,366 543,669 268,711 268,711
Accrued interest 239,307 133,651 161,949 161,949 161,949
Deferred revenues 115,060 86,250 10,000 26,000 26,000
Short-term borrowings -- -- -- 74,271 74,271
------------ ----------- ----------- ----------- -----------
Total current liabilities 3,157,951 1,887,002 2,562,813 2,721,860 2,291,860
Commitments
Redeemable convertible Preferred Stock, $0.01
par value:
Series B; 6,000,000 shares authorized; no
shares issued and outstanding (187,254
actual as adjusted shares) -- -- -- 3,332,000 --
Series B-1; 6,000,000 shares authorized; no
shares issued and outstanding -- -- -- -- --
Stockholders' deficit:
Series A convertible Preferred Stock, $0.01
par value; 12,000,000 shares authorized; no
shares issued and outstanding at December 31,
1994 and 384,162 and 404,847 shares issued
and outstanding at December 31, 1995 and June
30, 1996, respectively (405,946 actual as
adjusted shares) -- 3,842 4,048 4,059 --
Undesignated Preferred Stock, $.01 par value;
10,000,000 shares authorized -- -- -- -- --
Common Stock, $0.01 par value; 36,000,000
shares authorized; 709,774, 789,048 and
794,183 shares issued and outstanding at
December 31, 1994 and 1995 and June 30, 1996,
respectively (836,985 actual as adjusted
shares and 1,757,132 pro forma shares) 7,098 7,890 7,942 8,370 17,571
Additional paid-in capital 2,216,556 5,456,238 5,990,978 6,689,939 10,751,130
Accumulated deficit (4,502,658) (6,742,299) (7,886,374) (8,036,374) (8,040,707)
------------ ----------- ----------- ----------- -----------
Total stockholders' deficit (2,279,004) (1,274,329) (1,883,406) (1,334,006) 2,727,994
------------ ----------- ----------- ----------- -----------
Total liabilities and stockholders' deficit $ 878,947 $ 612,673 $ 679,407 $ 4,719,854 $ 5,019,854
============ =========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
UOL PUBLISHING, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six months ended
Years ended December 31, June 30,
1993 1994 1995 1995 1996
-------- -------- ---------- -------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Licensing and support revenues $ -- $ 710,274 $ 415,532 $ 256,127 $ 173,262
Online revenues 14,093 14,128 55,995 28,395 37,500
Development and other revenues 274,100 81,533 76,152 4,436 20,985
-------- -------- ---------- -------- ----------
Net revenues 288,193 805,935 547,679 288,958 231,747
Costs and expenses:
Cost of licensing and support revenues -- 94,657 78,918 39,543 34,665
Cost of online revenues 4,486 6,966 11,281 5,934 10,732
Cost of development and other revenues 60,000 44,379 3,431 179 579
Sales and marketing 130,203 295,839 932,898 325,891 596,314
Product development 151,132 205,975 576,470 228,952 374,523
General and administrative 206,432 890,145 926,345 302,728 512,717
Depreciation and amortization 834 298,047 309,058 149,692 18,433
-------- -------- ---------- -------- ----------
Total costs and expenses 553,087 1,836,008 2,838,401 1,052,919 1,547,963
Loss from operations (264,894) (1,030,073) (2,290,722) (763,961) (1,316,216)
Other income (expense):
Other income (expense) 6,241 (6,461) 96,348 94,324 205,529
Gain on debt forgiveness -- 609,270 30,303 30,303 --
Interest expense (154,850) (259,994) (75,570) (42,677) (33,388)
-------- -------- ---------- -------- ----------
Net loss $(413,503) $(687,258) $(2,239,641) $ (682,011) $(1,144,075)
Accrued dividends to preferred stockholders -- -- (174,830) (55,940) (127,710)
-------- -------- ---------- -------- ----------
Net loss available to common stockholders $(413,503) $(687,258) $(2,414,471) $ (737,951) $(1,271,785)
======== ======== ========== ======== ==========
Net loss per share $ (0.62) $ (0.98) $ (2.29) $ (0.71) $ (1.19)
======== ======== ========== ======== ==========
Weighted average shares outstanding 663,540 699,313 1,056,052 1,043,383 1,070,677
======== ======== ========== ======== ==========
Pro forma net loss per share $ (1.80) $ (0.87)
========== ==========
Pro forma weighted average shares outstanding 1,342,588 1,469,429
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
UOL PUBLISHING, INC.
STATEMENTS OF STOCKHOLDERS' EFICIT
<TABLE>
<CAPTION>
Series A
Series A convertible
Preferred Stock Preferred Stock Common Stock Additional
--------------- --------------- ------------ Paid-in
Shares Amount Shares Amount Shares Amount Capital
------ ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992................... 4,602 $ 46 -- -- 384,371 3,844 1,080,883
Preferred Stock dividends payable............. -- -- -- -- -- -- --
Net loss...................................... -- -- -- -- -- -- --
------- ------- -------- ------ -------- ------ ---------
Balance at December 31, 1993................... 4,602 46 -- -- 384,371 3,844 1,080,883
Preferred Stock dividends payable............. -- -- -- -- -- -- --
Conversion of debt to equity.................. -- -- -- -- 79,687 797 521,797
Series A Preferred Stock conversion........... (4,602) (46) -- -- 92,047 920 (874)
Issuance of Common Stock...................... -- -- -- -- 149,630 1,496 413,268
Conversion of Preferred Stock dividends
payable to Common Stock...................... -- -- -- -- 4,039 41 24,732
Issuance of compensatory stock and stock
options...................................... -- -- -- -- -- -- 176,750
Net loss...................................... -- -- -- -- -- -- --
------- ------- -------- ------ -------- ------ ---------
Balance at December 31, 1994................... -- -- -- -- 709,774 7,098 2,216,556
Conversion of debt to equity.................. -- -- 1,813 18 79,274 792 325,272
Issuance of Series A convertible Preferred
Stock........................................ -- -- 382,349 3,824 -- -- 2,728,610
Issuance of compensatory stock and stock
options...................................... -- -- -- -- -- -- 185,800
Net loss...................................... -- -- -- -- -- -- --
------- ------- -------- ------ -------- ------ ---------
Balance at December 31, 1995................... -- -- 384,162 3,842 789,048 7,890 5,456,238
Issuance of Common Stock...................... -- -- -- -- 5,135 52 41,948
Issuance of Series A convertible Preferred
Stock ....................................... -- -- 20,685 206 -- -- 416,292
Issuance of compensatory stock and stock
options...................................... -- -- -- -- -- -- 76,500
Net loss for the six months ended June 30, 1996. -- -- -- -- -- -- --
------- ------- -------- ------ -------- ------ ---------
Balance at June 30, 1996....................... -- -- 404,847 4,048 794,183 7,942 5,990,978
======= ======= ======== ====== ======== ====== ==========
</TABLE>
Total
Accumulated Stockholders'
Deficit Deficit
------------ --------------
Balance at December 31, 1992................... (3,384,573) (2,299,800)
Preferred Stock dividends payable............. (9,302) (9,302)
Net loss...................................... (413,503) (413,503)
------------ --------------
Balance at December 31, 1993................... (3,807,378) (2,722,605)
Preferred Stock dividends payable............. (8,022) (8,022)
Conversion of debt to equity.................. -- 522,594
Series A Preferred Stock conversion........... -- --
Issuance of Common Stock...................... -- 414,764
Conversion of Preferred Stock dividends
payable to Common Stock...................... -- 24,773
Issuance of compensatory stock and stock
options...................................... -- 176,750
Net loss...................................... (687,258) (687,258)
------------ --------------
Balance at December 31, 1994................... (4,502,658) (2,279,004)
Conversion of debt to equity.................. -- 326,082
Issuance of Series A convertible Preferred
Stock........................................ -- 2,732,434
Issuance of compensatory stock and stock
options...................................... -- 185,800
Net loss...................................... (2,239,641) (2,239,641)
------------ --------------
Balance at December 31, 1995................... 6,742,299) (1,274,329)
Issuance of Common Stock...................... -- 42,000
Issuance of Series A convertible Preferred
Stock ....................................... -- 416,498
Issuance of compensatory stock and stock
options...................................... -- 76,500
Net loss for the six months ended June 30, 1996. (1,144,075) (1,144,075)
------------ --------------
Balance at June 30, 1996....................... (7,886,374) $(1,883,406)
============ ==============
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
UOL PUBLISHING, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended
Years ended December 31, June 30,
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................. $(413,503) $(687,258) $(2,239,641) $(682,011) $(1,144,075)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization........... 834 298,047 309,058 149,692 18,433
Stock and stock option compensation
expense................................ -- 176,750 185,800 -- 76,500
Gain on debt forgiveness ............... -- (609,270) (30,303) (30,303) --
Loss on inventory write-off............. -- 46,488 -- -- --
Changes in operating assets and
liabilities:
Accounts receivable.................... 2,613 (1,647) (62,242) (41,131) 18,738
Prepaid expenses and other current
assets................................ -- (119,586) 137,487 88,835 762
Accounts payable and accrued
expenses.............................. 362,544 233,879 (386,670) (527,044) 85,460
Accrued interest....................... 125,206 229,439 (63,171) (91,561) 28,298
Deferred revenues...................... 23,740 (28,000) (28,810) -- (76,250)
--------- -------- ---------- --------- -----------
Net cash provided by (used in) operating
activities.............................. 101,434 (461,158) (2,178,492) (1,133,523) (992,134)
INVESTING ACTIVITIES
Acquisition of CYBIS division............ -- (150,000) -- -- --
Purchases of property and equipment ..... (797) (1,430) (129,168) (59,979) (8,811)
Proceeds from loans receivable from
related parties......................... -- -- 94,718 90,673 --
Advances under loans receivable from
related parties......................... (100,670) (34,030) -- -- (9,083)
--------- -------- ---------- --------- -----------
Net cash provided by (used in) investing
activities.............................. (101,467) (185,460) (34,450) 30,694 (17,894)
FINANCING ACTIVITIES
Proceeds from issuance of Common Stock .. -- 414,764 -- -- --
Proceeds from issuance of Series A
convertible Preferred Stock............. -- -- 2,732,434 2,732,434 416,498
Proceeds from loans payable to related
parties................................. -- 492,000 252,836 252,836 430,000
Proceeds from notes payable.............. -- -- -- -- 300,000
--------- -------- ---------- --------- -----------
Repayments of loans payable to related
parties................................. -- (34,000) (480,353) (407,998) --
Repayments of notes payable.............. -- (205,547) (208,396) (171,287) (49,697)
--------- -------- ---------- --------- -----------
Net cash provided by financing
activities.............................. -- 667,217 2,296,521 2,405,985 1,096,801
--------- -------- ---------- --------- -----------
Net increase (decrease) in cash ........ (33) 20,599 83,579 1,303,156 86,773
Cash at beginning of period.............. 33 -- 20,599 20,599 104,178
--------- -------- ---------- --------- -----------
Cash at end of period.................... $ -- $ 20,599 $ 104,178 $ 1,323,755 $ 190,951
========= ======== =========== ========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid............................ $ 1,477 $ 3,841 $ 181,009 $ 160,767 $ --
========= ======== =========== ========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
UOL PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED.)
1. ORGANIZATION AND NATURE OF OPERATIONS
UOL Publishing, Inc. (the "Company"), (formerly University Online, Inc.), was
incorporated in Virginia in 1984 and reincorporated in Delaware in 1985. The
Company is a leading publisher of high quality, interactive and on demand
educational courseware for the online education and training market through the
World Wide Web.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
A majority of the Company's revenues are fixed monthly payments derived from
licensing and support agreements. The Company recognizes licensing and support
revenues as services are performed pursuant to the Company's contracts.
Development revenues earned under courseware conversion contracts are recognized
using the percentage-of-completion method.
Two to three customers represented approximately 95%, 63%, 79%, 82% and 79% of
net revenues during the years ended December 31, 1993, 1994 and 1995 and the
during the six months ended June 30, 1995 and 1996, respectively.
ROYALTIES
The Company has royalty arrangements with certain entities that have provided
development funding. Royalties will become due and payable by the Company upon
the completion and sale of products currently under development. No significant
royalties have been incurred to date.
PRODUCT DEVELOPMENT
Through June 30, 1996, the Company has expensed its product development costs as
development costs. It will continue to expense such costs until such time as the
realizability of the Company's software is established.
USE OF ESTIMATES
The preparation of the 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.
RECENT PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which is effective for the Company's
1996 financial statements. SFAS No. 123 allows companies to either account for
stock-based compensation under the new provisions of SFAS No. 123 or under the
provisions of APB No. 25, but requires pro forma disclosures in the footnotes to
the financial statements as if the measurement provisions of SFAS No. 123 had
been adopted. The Company intends to continue accounting for its stock-based
compensation in accordance with the provisions of APB No. 25. As such, the
adoption of SFAS No. 123 will not impact the financial condition or the results
of operations of the Company. The disclosures required by SFAS No. 123 are
considered immaterial to the Company's financial statements.
F-7
<PAGE>
UOL PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company provides for income taxes in accordance with the liability method.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
NET LOSS PER SHARE
The Company's net loss per share calculations are based upon the weighted
average number of shares of Common Stock outstanding. Pursuant to the
requirements of the Securities and Exchange Commission Staff Accounting Bulletin
No. 83, convertible Preferred Stock, Common Stock, debt convertible into shares
of Common Stock, Common Stock purchase warrants and options to purchase Common
Stock issued at prices below the initial public offering price during the twelve
months immediately preceding the initial filing of the registration statement
relating to the initial public offering ("IPO"), have been included in the
computation of net loss per share as if they were outstanding for all periods
presented (using the treasury method assuming repurchase of Common Stock at the
estimated IPO price). Other shares issuable upon the exercise of stock options,
warrants, conversion of debt into shares of Common Stock and conversion of
Preferred Stock have been excluded from the computation because the effect of
their inclusion would be antidilutive due to the Company's net losses.
Subsequent to the Company's IPO, convertible Preferred Stock, Common Stock
purchase warrants, options to purchase Common Stock, and debt convertible into
shares of Common Stock under the treasury stock method will be included to the
extent they are dilutive. Weighted average shares used to calculate the pro
forma net loss per share for the year ended December 31, 1995 and for the six
months ended June 30, 1996, differs from the weighted average on a historical
basis due to the inclusion of shares of Common Stock resulting from the assumed
conversion of Preferred Stock as contemplated by the IPO.
3. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using the
straight-line method over an estimated useful life of five years.
Property and equipment consists of the following:
December 31, June 30,
1994 1995 1996
--------- -------- --------
Equipment.................... $ 36,326 $165,465 $174,277
Furniture and fixtures....... 31,628 31,628 31,628
--------- -------- --------
67,954 197,093 205,905
Less accumulated
depreciation................. 47,483 68,960 87,394
--------- -------- --------
$ 20,471 $128,133 $118,511
========= ======== ========
4. GOODWILL
On January 1, 1994, the Company acquired substantially all of the assets,
properties and rights of the CYBIS division of Control Data Systems, Inc.
("Control Data"), a computer-based courseware education business, for
approximately $694,000. The Company paid $150,000 in cash and the remaining
amount is to be paid in the form of two promissory notes (see Note 6). The
transaction was accounted for using the purchase method. Accordingly, the
purchase price was allocated to the assets acquired based on their estimated
fair values. This treatment resulted in approximately $576,000 of cost in excess
of net assets acquired as of January 1, 1994.
F-8
<PAGE>
UOL PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
4. GOODWILL (CONTINUED)
Goodwill is amortized on a straight-line basis over an estimated useful life of
two years. The amortization period was determined based on a cash flow analysis
of the estimated future revenue stream of contracts assumed in the acquisition.
Goodwill consisted of $575,825, less accumulated amortization of $288,273,
$575,825, and $575,825 at December 31, 1994 and 1995 and June 30, 1996,
respectively.
5. LOANS PAYABLE TO (RECEIVABLE FROM) RELATED PARTIES
During 1994, loans payable to various officers, directors, and investors,
consisting of outstanding principal and accrued interest in the amount of
$522,594, were converted into 79,687 shares of the Company's Common Stock. The
remaining accrued interest of $89,748 was forgiven and recognized as a gain as a
result of the transaction. The non-cash portion of this transaction has been
excluded from the statements of cash flows.
At December 31, 1994, the Company had loans payable due to various officers,
directors, and investors in the amount of $349,717. During 1995, the remaining
outstanding principal and accrued interest totaling $216,900 and $12,182,
respectively, as well as accounts payable totaling $97,000, were converted into
79,274 shares of Common Stock and 1,813 shares of Series A convertible Preferred
Stock. The remaining accrued interest of $30,303 was forgiven and recognized as
a gain as a result of this transaction. The non-cash portion of this transaction
has been excluded from the statements of cash flows.
At December 31, 1994 and 1995 and June 30, 1996, the Company owed $380,000,
$285,300, and $285,300, respectively, in 12% interest bearing notes payable to
various officers. The notes are secured by the Company's net revenues and
property and equipment and are to be repaid in monthly installments depending on
the Company's operating results.
Additionally, during March 1996, the Company issued a convertible promissory
note for $300,000 to a stockholder. The note bears interest at 10.5% per annum
and matures with principal and interest payable on the earlier of March 4, 1997
or on the consummation of a public offering of the Company's Common Stock. The
holder of the note has the option on or any time after the maturity date and
until one full business day after payment of the note is tendered, to convert
all or any portion of the outstanding principal and accrued interest into shares
of the Company's Common Stock. The initial conversion price is $18.69 per share,
subject to adjustment for certain events, such as stock splits, dividends on
Common Stock, or sale of the Company's Common Stock or Preferred Stock at a
price less than the conversion price (see Note 12).
On May 31, 1996, the Company issued a convertible subordinated unsecured
promissory note for $130,000 to an officer of the Company. The note bears
interest at a rate of 10% per annum and is payable upon a private round of
financing or a public offering of the Company's Common Stock, or in no event,
later than May 31, 1997. In addition, the note contains detachable warrants to
purchase 6,955 shares of the Company's Common Stock at an exercise price of
$18.69 per share. These warrants are exercisable for eight years. The Company
believes that any value associated with the warrants is deemed immaterial. The
note payable is convertible to shares of Common Stock at a rate of $18.69 per
share, subject to adjustment for certain events, such as stock splits, dividends
on Common Stock, or sale of the Company's Common Stock or Preferred Stock at a
price less than the conversion price (see Note 12).
At December 31, 1994 and 1995 and June 30, 1996, accrued interest on loans
payable to related parties totaled $172,865, $27,434 and $55,732, respectively.
Loans receivable from the Company's officers and employees amounted to $381,666,
$286,948 and $296,031 as of December 31, 1994 and 1995 and June 30, 1996,
respectively. The Company accrues interest on the loans receivable at a rate of
5% per annum. Interest income related to the loans receivable amounted to
$18,122, $14,347, $5,017 and $6,580 during the years ended December 31, 1994 and
1995 and during the six months ended June 30, 1995 and 1996, respectively.
F-9
<PAGE>
UOL PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
6. NOTES PAYABLE
A note payable in the amount of $250,000 plus accrued interest of $369,522 due
to a former customer was settled during 1994 for a cash payment of $100,000. The
Company recognized a gain of $519,522 as a result of this transaction. The
non-cash portion of this transaction has been excluded from the statements of
cash flows.
At December 31, 1994 and 1995 and June 30, 1996, the Company owed $351,762,
$293,366 and $243,669, respectively, in a non-interest bearing note payable to
Control Data (see Note 4). The note is discounted at a rate of 12% per annum and
is payable based upon a predetermined percentage of the Company's net revenues
(see Note 13). The note is secured by the related assets purchased. During 1995,
the Company also repaid the $150,000 note payable balance to Control Data.
On June 28, 1996, the Company borrowed $300,000 from an investor in exchange for
a convertible promissory note. The note bears interest at a rate of 10% per
annum, and any unpaid principal and interest is convertible into shares of the
Company's Series B redeemable convertible Preferred Stock at a conversion rate
of $18.69 per share, subject to adjustments for certain events, such as the sale
of the Company's Common or Preferred Stock at a price less than the conversion
price. Principal and interest shall be due and payable on the earlier of the
closing of the Series B Preferred Stock financing (described in Note 13) or July
31, 1996.
As of December 31, 1994 and 1995 and June 30, 1996, accrued interest on notes
payable totaled $66,442, $106,217, and $106,217, respectively.
7. COMMITMENTS
NETWORK SERVICES AGREEMENT
During 1993, the Company entered into a three year agreement with CompuServe,
Inc. ("CompuServe") whereby CompuServe was to provide network services to the
Company. The Company ceased making payments under the agreement in 1993 due to
the dissatisfaction with the services provided by CompuServe.
As a result, CompuServe asserted that the Company was liable for unpaid fees and
lost profits totaling $300,000 due to breach of contract. In October 1994, the
Company reached a conditional settlement with CompuServe whereby the Company was
required to purchase approximately $98,000 of advertising services from
CompuServe. During 1996, the Company fully satisfied its commitment to purchase
such advertising services from CompuServe. In 1996, the Company recognized a
gain of $119,274 relating to the forgiveness of amounts owed by the Company to
CompuServe; the gain is included in other income in the statements of
operations.
LEASES
The Company leases office space under noncancellable operating lease agreements.
One of these noncancellable lease agreements for office space expires August 31,
1996. Rent expense for the years ended December 31, 1993, 1994 and 1995 and for
the six months ended June 30, 1995 and 1996 was $82,196, $96,266, $98,761,
$49,943 and $45,794, respectively.
As of June 30, 1996, payments due under noncancellable operating leases were as
follows:
Six months ended December 31, 1996.............. $20,253
1997............................................ 20,107
1998............................................ 13,405
----- ------
$53,765
=======
F-10
<PAGE>
UOL PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
December 31, June 30,
1994 1995 1996
---- ---- ----
Accounts payable and accrued expenses ... $ 394,386 $ 292,511 $ 432,837
Accrued payroll in arrears and payroll
taxes.................................... 1,116,159 628,249 627,544
Accrued payroll and payroll taxes........ 25,480 119,669 --
Accrued vacation......................... 36,080 48,006 71,514
--------- ------- -------
$1,572,105 $1,088,435 $1,131,895
========== ========== ==========
The Company accrues interest on the accrued payroll in arrears at a rate of 5%
per annum. Interest expense related to the accrued payroll in arrears amounted
to $21,597, $45,158, $29,180, $17,382 and $11,544 during the years ended
December 31, 1993, 1994 and 1995 and during the six months ended June 30, 1995
and 1996, respectively.
9. STOCKHOLDERS' DEFICIT
EQUITY TRANSACTIONS
On November 11, 1994, the Company converted 4,602 shares of Series A Preferred
Stock into 92,047 shares of Common Stock to effect the Series A Preferred Stock
conversion. In addition, the cumulative Preferred Stock dividends declared to
date were converted into 4,039 shares of Common Stock.
During 1994, a total of 149,630 shares of Common Stock were issued to existing
and new investors at various prices per share for total proceeds of
approximately $415,000.
During 1995, the Company issued 382,349 shares of Series A convertible Preferred
Stock for net proceeds of approximately $2,732,000 at a price of $8.76 per
share.
During 1996, the Company issued 5,135 shares of Common Stock as payment for
certain accounts payable amounting to $42,000. The shares were issued at a price
per share of $8.76.
During 1996, the Company issued an aggregate of 20,685 shares of Series A
convertible Preferred Stock for net proceeds of approximately $416,000 at a
price of $21.03 per share.
PREFERRED STOCK
The holders of the Company's Series A convertible Preferred Stock are entitled
to receive cumulative dividends at a rate of 7 percent per year, to be paid in
shares of the Company's convertible Preferred Stock. Shares of convertible
Preferred Stock have a liquidation preference equal to $8.76 per share plus all
declared, but unpaid, dividends and have the right to vote the number of shares
of Common Stock into which each share of Preferred Stock is convertible. Shares
of convertible Preferred Stock are convertible on a one-for-one basis, subject
to adjustment, into shares of Common Stock. Each share of convertible Preferred
Stock plus all declared, but unpaid, dividends will be automatically converted
into Common Stock upon the consummation of a qualifying underwritten public
offering (if proceeds exceed a certain amount) or immediately prior to the
consummation of a consolidation, merger, or any sale or transfer of all or
substantially all of the Company's assets.
F-11
<PAGE>
UOL PUBLISHING, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
9. STOCKHOLDERS' DEFICIT (CONTINUED)
During the year ended December 31, 1995 and during the six months ended June 30,
1995 and 1996, the Company's Preferred Stock had dividends in arrears of
$174,830, $55,940, and $127,710, respectively. Debt to certain related parties
and third parties prohibit the payment of dividends to holders of Common Stock
until such debt is paid off.
STOCK OPTION PLAN
The Company has adopted a stock option plan (the "Plan") which permits the
Company to grant up to 291,056 options to selected employees, certain board
members and others who contribute materially to the success of the Company.
Stock options are generally granted at prices which the Board of Directors of
the Company believes approximates the fair market value of its Common Stock.
Common stock option activity was as follows:
Number of
Shares
---------
Outstanding at December 31,
1993............................ 45,884
Granted........................ 48,448
Exercised...................... --
Canceled or expired............ --
--------
Outstanding at December 31,
1994........................... 94,332
Granted........................ 13,696
Exercised...................... --
Canceled or expired............ (6,848)
--------
Outstanding at December 31,
1995........................... 101,180
Granted........................ 148,946
Exercised...................... --
Canceled or expired............ (20,545)
--------
Outstanding at June 30,1996 .... 229,581
========
Exercisable at June 30, 1996 ... 118,477
========
Exercise prices on the outstanding options range from $0.88 to $8.76 per share.
As of June 30, 1996, there were 61,475 options available for future grants.
Included in outstanding options are options to purchase 25,339 shares of Common
Stock which were issued with an exercise price of the lesser of $2.92 or 10% of
the stock price achieved in the next equity financing subsequent to the option
grant, in which the net proceeds to the Company exceeded $2,500,000. The
exercise price for these options will be fixed, as a result of the financing
during 1995, at $0.88 per share. Accordingly, the Company recorded a charge of
$125,800 of expense related to these options during 1995.
F-12
<PAGE>
UOL PUBLISHING, INC. -
NOTES TO FINANCIAL STATEMENTS (Continued)
9. STOCKHOLDERS' DEFICIT (CONTINUED)
WARRANTS
The Company has also granted warrants to purchase Common Stock to various
investors, employees and outside vendors. In 1994, the Company issued warrants
to purchase 383,499 shares of Common Stock at prices ranging from $2.92 to
$17.52 per share. In 1995, the Company issued warrants to purchase 120,689
shares of Common Stock at prices ranging from $6.13 to $8.76 per share. In 1996,
the Company issued warrants to purchase 12,840 shares of Common Stock to a
placement agent at an exercise price of $21.03 per share. In addition, the
Company issued 6,955 warrants to purchase Common Stock in connection with the
issuance of debt (see Note 5). Of the total warrants outstanding at June 30,
1996, 337,438 Common Stock warrants were issued in connection with equity
transactions and 186,545 Common Stock warrants were issued in connection with
convertible related party debt and short-term debt. These warrants were granted
at prices which the Board of Directors of the Company believes approximates fair
value at the time of issuance, and as such the Company believes that any value
allocable to the warrant is immaterial to the financial statements. There are
certain anti-dilution rights associated with these warrants, which are effective
upon the occurrence of certain events (see Note 12).
RESERVE FOR ISSUANCE
As of December 31, 1995 and June 30, 1996, the Company had reserved 1,212,794
and 1,301,752, respectively, shares of Common Stock issuable upon the conversion
of Preferred Stock into Common Stock, conversion of debt into Common Stock and
the exercise of outstanding options and warrants.
10. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and income tax purposes. Significant components of the Company's net deferred
tax assets were as follows:
December 31, June 30,
1994 1995 1996
---- ---- ----
Net operating losses .... $ 748,000 $ 1,645,000 $ 2,099,000
Accrued payroll.......... 339,000 229,000 229,000
Other.................... 179,000 254,000 205,000
--------- --------- ---------
Total deferred tax
assets................... 1,266,000 2,128,000 2,533,000
Valuation allowance...... (1,266,000) (2,128,000) (2,533,000)
---------- ---------- ----------
Net deferred tax assets . $ -- $ -- $ --
========== ========== ==========
As of December 31, 1995 and June 30, 1996, the Company had net operating loss
carryforwards of approximately $4,112,000 and $5,247,000, respectively, for
federal income tax purposes, which will expire at various dates through 2011.
The Company may have had changes in ownership which may impose limitations on
its ability to utilize net operating loss carryforwards under Section 382 of the
Internal Revenue Code.
F-13
<PAGE>
UOL PUBLISHING, INC. -
NOTES TO FINANCIAL STATEMENTS (Continued)
11. ACTUAL AS ADJUSTED FINANCIAL INFORMATION
The financial statements include actual as adjusted information as of June 30,
1996 to reflect the issuance of 187,254 shares of Series B redeemable
convertible Preferred Stock (see Note 13), the issuance of 1,099 shares of
Series A convertible Preferred Stock to satisfy anti-dilution provisions of
certain stock purchase agreements, and the acquisition of the outstanding shares
of Common Stock of Cognitive Training Associates, Inc. (see Note 13), all of
which have occurred subsequent to June 30, 1996.
12. PRO FORMA FINANCIAL INFORMATION
The financial statements include pro forma information as of June 30, 1996 to
reflect, upon the Company's IPO, the conversion of all outstanding shares of
Series A convertible Preferred Stock into shares of Common Stock on a
one-for-one basis, the conversion of all outstanding shares of Series B
redeemable convertible Preferred Stock into shares of Common Stock on a
1-for-2.06 basis, the declaration of accrued dividends in arrears of 42,041
shares of Preferred Stock to holders of Preferred Stock and the conversion
thereof to Common Stock, in accordance with the applicable conversion rate for
holders of Series A and Series B Preferred Stock, the exercise of warrants to
purchase 68,481 shares of Common Stock and the repayment of the $300,000
convertible loan payable balance with the proceeds therefrom, and the conversion
of the $130,000 note payable into shares of Common Stock.
During September 1996 and concurrent with the effective date of the
Company's IPO, the Company and a certain stockholder executed an agreement
whereby the stockholder agreed to exercise warrants to purchase 68,481 shares of
Common Stock at an exercise of $8.76 which will result in proceeds to the
Company of $600,000. Additionally, the Company will repay the $300,000
convertible note payable balance to a corporation controlled by this
stockholder. The Company will also issue to the stockholder warrants to purchase
15,801 shares of Common Stock at an exercise price of $15.00 per share. These
warrants will be exercisable for a period of five years. The stockholder
currently has warrants to purchase 102,723 shares of Common Stock at $17.52 per
share, which will, concurrent with the IPO, be repriced to $15.00 per share to
satisfy certain anti-dilution rights, previously granted. In addition, the
stockholder has waived all price-based anti-dilution rights as related to these
repriced warrants, except with respect to issuances below $8.76 per share.
The exercise prices of warrants to purchase 35,247 shares of Common Stock will
reduce from $17.52 or $18.69 per share to $15.00 per share to satisfy certain
anti-dilution rights, previously granted. Subsequently, the holders of these
warrants have agreed to waive further price-based anti-dilution rights in
connection with the Company's anticipated IPO, except with respect to issuances
below $8.76 per share.
The above two transactions are contingent upon the initial public offering price
being greater than $12.85 per share and gross proceeds from the IPO being at
least $20,000,000.
Upon the Company's IPO, a certain stockholder has elected to convert his
outstanding note payable balance plus accrued interest of $134,433 to 14,838
shares of Common Stock. (The number of shares reflect the anti-dilution
provisions, previously granted, to effect the reduction in the conversion price
to $9.05 per share, which will be triggered by the IPO.) Additional warrants to
purchase 7,404 shares of Common Stock at $9.05 per share were also issued to the
stockholder pursuant to previously granted anti-dilution provisions) and the
previously issued warrants to purchase 6,955 shares of Common Stock were
repriced to an exercise price of $9.05 per share.
F-14
<PAGE>
UOL PUBLISHING, INC. -
NOTES TO FINANCIAL STATEMENTS (Continued)
13. SUBSEQUENT EVENTS
On July 19, 1996, the Company signed an agreement to issue 187,254 shares of
Series B redeemable convertible Preferred Stock for total proceeds of $3.5
million. The holders of shares of the Series B redeemable convertible Preferred
Stock receive cumulative dividends at a rate of 7 percent per annum, payable in
shares of the Series B redeemable convertible Preferred Stock, as well as any
dividends declared on the Common Stock, as if the Preferred Stock was converted.
Shares of convertible Preferred Stock are convertible on a one-for-one basis at
a conversion rate of $18.69 per share, subject to adjustment for certain events,
such as the sale of Common and Preferred Stock at a price less than the
conversion price. Shares of the Company's Series B redeemable convertible
Preferred Stock have a liquidation preference over all classes of capital stock
with the exception of the Series A convertible Preferred Stock at a preference
of the stated value (i.e. conversion price) plus declared, but unpaid, dividends
on the Company's Common Stock and the amount they would have received had they
converted to Common Stock just prior to the liquidation. The stockholders also
have the right to vote the number of shares into which each share of Preferred
Stock is convertible and are entitled to have a designee elected to the Board of
Directors of the Company. The Series B redeemable convertible Preferred Stock
also contains certain anti-dilution and preemptive rights and is redeemable
solely at the option of the stockholder at the stated value at any time after
five years from the closing date of the liquidation preference. Each share of
convertible Preferred Stock plus all declared, but unpaid, dividends will be
automatically converted into shares of Common Stock upon the consummation of an
underwritten public offering of the Company's Common Stock that raises gross
proceeds for the Company of at least $20 million at a price per share of 175% or
more of the conversion price. (This price per share requirement has been waived
in connection with the Company's anticipated IPO and therefore will allow the
Company to convert the Series B redeemable convertible Preferred Stock to Common
Stock). The Company converted the $300,000 convertible promissory note into
16,050 shares of Series B redeemable convertible Preferred Stock (see Note 5).
Additionally, the Company issued 1,099 shares of Series A convertible Preferred
Stock to holders of Series A convertible Preferred Stock to satisfy
anti-dilution provisions, pursuant to certain 1996 stock purchase agreements.
Effective August 1, 1996, the Company acquired substantially all of the assets
and liabilities of Cognitive Training Associates, Inc. ("CTA"), a Texas-based
corporation, for 42,802 shares of the Company's Common Stock. The Company also
issued fully vested options to purchase 5,136 shares of the Company's Common
Stock at $.12 per share to four employees of CTA; these fully vested options
will be considered as part of the total purchase price. Additionally, the
Company granted an option to purchase 17,120 shares of the Company's Common
Stock at an exercise price of $21.03 per share to the former stockholder of CTA
in conjunction with a two year employment agreement. Management subsequently
repriced the option to $14.60 per share. Management believes that this new grant
price approximates the deemed fair market value on the date of repricing. The
option will vest over a two year period. Additionally, in conjunction with the
related employee agreement, the former stockholder of CTA will be paid $150,000
by the Company upon successful integration of CTA into the Company. The Company
also agreed to lease the building owned by the former stockholder of CTA for
$5,000 per month.
Effective August 5, 1996, the Company and Control Data executed a settlement
agreement whereby the Company agreed to pay $250,000 to settle the outstanding
debt balance of approximately $350,000. This will result in an approximate gain
of $100,000 to the Company.
Subsequent to June 30, 1996, the Company executed several employment agreements
with key executives under which the Company is required to pay an aggregate of
approximately $670,000 in base salary annually over the next two years, as well
as certain performance incentives limited to 50% of the base salary.
F-15
<PAGE>
UOL PUBLISHING, INC. -
NOTES TO FINANCIAL STATEMENTS (Continued)
13. SUBSEQUENT EVENTS (CONTINUED)
Subsequent to June 30, 1996, the Company's Board of Directors approved a new
stock option plan, "1996 Stock Plan", which provides for the future grant of
136,967 options. In connection with this new plan, the Company issued stock
options to purchase 129,003 shares of Common Stock at an exercise price of
$14.60 per share. These options were issued pursuant to employment agreements
with various officers and other employees of the Company and the options
generally vest over a two to four year period. Management believes that the
grant price of these options approximates the fair market value of the Company's
Common Stock. Additionally, the Company's Board of Directors also extended the
exercise period of 88,687 fully vested options to August 31, 1999. This
extension of exercise period created a new measurement date for these options.
As such, the Company will recognize compensation expense of $877,782 during the
third quarter of 1996 for the difference between the deemed fair value of the
Company's Common Stock on the new measurement date and the grant price of such
options.
On April 15, 1996, the Company entered into an agreement with Autodesk, Inc.
("Autodesk") to develop and maintain a campus-like graphical user interface
located on the Internet. The Company will be entitled to certain revenues
generated by the project and will pay 20% in royalties to Autodesk for the use
of certain trademark rights. During September, 1996 the Company contracted with
InternetU, Inc., ("InternetU"), a stockholder, to provide the financing for the
project. In exchange for $1,550,000, to be provided in installments through
September 30, 1997, corresponding to the achievement of certain milestones, the
Company will grant InternetU Common Stock warrants to purchase 73,714 shares of
Common Stock at an exercise price of $21.03 per share. In addition, InternetU
will receive royalties (15-30%) on future revenues generated by the project.
Upon the consummation of a public offering by the Company, these payments and
issuance of the warrants are accelerated. The cash received by the Company is
restricted to research and development costs for the project. The Company
determined that the fair value of the warrants was approximately $150,000 and
will recognize this amount as research and development expense over the term of
the development period. This agreement is cancelable and should either party to
the agreement fail to perform, no additional cash or warrants are required to be
issued. As such this event is not included in the pro forma balance sheet.
On September __, 1996 the Board of Directors approved a 1-for-11.68159232
reverse stock split of the Company's $.01 par value Series A, Series B, and
Series B-1 convertible Preferred Stock, which became effective on ____________.
All references in the accompanying financial statements to the number of shares
of convertible Preferred Stock and per-share amounts have been restated to
reflect the split.
On September __, 1996 the Board of Directors approved a 1-for-11.68159232
reverse stock split of the Company's $.01 par value Common Stock, which became
effective on ____________. All references in the accompanying financial
statements to the number of shares of Common Stock and per-share amounts have
been restated to reflect the split.
F-16
<PAGE>
UOL PUBLISHING, INC. -
NOTES TO FINANCIAL STATEMENTS (Continued)
14. PRO FORMA STATEMENTS OF OPERATIONS
On August 1, 1996, the Company acquired Cognitive Training Associates, Inc.
("CTA") in exchange for 42,802 shares of the Company's Common Stock to CTA's
sole stockholder and 5,136 fully vested options to purchase the Company's Common
Stock to four employees. The transaction was accounted for using the purchase
method. Accordingly, the financial statements will include the accounts of CTA
subsequent to the acquisition date. Following is a summary of selected pro forma
information for the year ended December 31, 1995 and the six months ended June
30, 1996 as if the transaction occurred on January 1, 1995.
Year ended Six months
December 31, ended June 30,
1995 1996
----------- -----------
(unaudited) (unaudited)
Net revenues............................... $ 1,317,743 $ 694,859
Costs and expenses:
Cost of revenues.......................... 521,096 221,905
----------- -----------
Sales and marketing....................... 958,294 616,796
Product development....................... 699,731 505,844
General and administrative................ 1,771,354 780,199
----------- -----------
Loss from operations...................... (2,632,732) (1,429,885)
Other income (expense):
Other income.............................. 96,348 205,529
Gain on debt forgiveness.................. 30,303 --
Interest expense.......................... (89,473) (39,117)
----------- -----------
Income (loss) before income taxes.......... (2,595,554) (1,263,473)
Income tax expense (benefit)............... (36,377) (3,859)
----------- -----------
Net loss................................... $(2,559,177) $(1,259,614)
Accrued dividends to preferred
stockholders.............................. (174,830) (127,710)
----------- -----------
Net loss available to common stockholders . $(2,734,007) $(1,387,324)
=========== ============
Net loss per share......................... $ (2.49) $ (1.25)
=========== ============
Weighted average shares outstanding ....... 1,098,094 1,113,479
=========== ============
F-17
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Cognitive Training Associates, Inc.
We have audited the accompanying balance sheets of Cognitive Training
Associates, Inc. as of December 31, 1994 and 1995 and June 30, 1996 and the
related statements of operations, stockholders' equity, and cash flows for the
three years in the period ended December 31, 1995 and for the six month period
ended June 30, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cognitive Training Associates,
Inc. at December 31, 1994 and 1995 and June 30, 1996, and the results of its
operations and its cash flows for the three years in the period ended December
31, 1995 and for the six month period ended June 30, 1996 in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Vienna, Virginia
July 17, 1996, except Note 9, as to which the date is
August 1, 1996
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion of
the restatement of the capital amounts in Note 9 for the reverse stock split
described in Note 13 of UOL Publishing, Inc.'s financial statements.
Vienna, Virginia
September 13, 1996 /s/ Ernst & Young LLP
F-18
<PAGE>
COGNITIVE TRAINING ASSOCIATES, INC.
BALANCE SHEETS
December 31, June 30,
1994 1995 1996
---- ---- ----
ASSETS
Current assets:
Cash...................................... $ 18,966 $ 2,000 $ 14,486
Accounts receivable ...................... 48,294 143,870 70,676
Deferred income taxes .................... -- 31,788 34,350
--------- -------- --------
Total current assets....................... 67,260 177,658 119,512
Property and equipment, net ............... 552,184 564,306 564,198
Other assets............................... 6,235 6,273 39,109
--------- -------- --------
Total assets............................... $ 625,679 $748,237 $722,819
========= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................... $ 19,929 $133,658 $193,734
Deferred revenue......................... -- 85,300 16,000
Short-term borrowings .................... -- 28,322 74,271
Notes payable to related party ........... 98,948 54,016 55,086
Notes payable - current portion .......... 27,637 43,484 52,751
Deferred income taxes .................... 5,763 -- --
--------- -------- --------
Total current liabilities.................. 152,277 344,780 391,842
Notes payable, net of current portion .... 298,284 273,401 256,414
Stockholder's equity:
Common stock, no par value, 100,000 shares
authorized, 1,000 shares issued and
outstanding.............................. 2,000 2,000 2,000
Retained earnings......................... 173,118 128,056 72,563
--------- -------- --------
Total stockholder's equity................. 175,118 130,056 74,563
--------- -------- --------
Total liabilities and stockholders' equity. $ 625,679 $748,237 $722,819
========= ======== ========
SEE ACCOMPANYING NOTES.
F-19
<PAGE>
COGNITIVE TRAINING ASSOCIATES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six months
ended
Year ended December 31, June 30,
1993 1994 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Licensing and support revenues ..... $195,060 $263,062 $374,215 $171,227
-------- -------- -------- --------
Courseware conversion revenues ...... 239,526 240,159 188,969 149,935
Other contract revenues.............. 378,941 166,722 206,880 141,950
--------- -------- -------- --------
813,527 669,943 770,064 463,112
Costs and expenses:
Cost of licensing and support
revenues........................... 144,515 158,155 273,322 89,371
Cost of courseware conversion
revenues........................... 70,457 73,363 67,021 37,593
Cost of other contract revenues..... 155,742 74,395 87,123 48,965
Sales and marketing................. 40,271 15,904 25,396 20,482
Product development................. 70,486 76,028 123,261 131,321
General and administrative.......... 216,990 238,209 238,774 172,253
-------- -------- -------- --------
Income (loss) from operations ....... 115,066 33,889 (44,833) (36,873)
Other income (expense):
Other income........................ -- -- 4,097 --
Interest expense.................... (4,624) (26,361) (40,703) (22,479)
-------- -------- -------- --------
Income (loss) before income taxes ... 110,442 7,528 (81,439) (59,352)
Income tax expense (benefit) ....... 31,529 (10,061) (36,377) (3,859)
-------- -------- -------- --------
Net income (loss).................... $ 78,913 $ 17,589 $(45,062) $(55,493)
======== ======== ======== =========
Net income (loss) per share.......... $ 78.91 $ 17.59 $ (45.06) $ (55.49)
======== ======== ======== =========
</TABLE>
SEE ACCOMPANYING NOTES.
F-20
<PAGE>
COGNITIVE TRAINING ASSOCIATES, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
Common Stock
------------------ Total
Number Retained Stockholders'
of Shares Amount Earnings Equity
--------- ------ -------- ------
Balance at Decmeber 31, 1992 $1,000 $2,000 $ 212,632 $ 214,632
Dividends.................. -- -- (136,016) (136,016)
Net income................. -- -- 78,913 78,913
----- ----- ------- -------
Balance at December 31, 1993 1,000 2,000 155,529 157,529
Net income................. -- -- 17,589 17,589
----- ----- ------- -------
Balance at December 31, 1994 1,000 2,000 173,118 175,118
Net loss .................. -- -- (45,062) (45,062)
----- ----- ------- -------
Balance at December 31, 1995 1,000 2,000 128,056 130,056
Net loss................... -- -- (55,493) (55,493)
----- ----- ------- -------
Balance at June 30, 1996 ... 1,000 $ 2,000 $ 72,563 $ 74,563
===== ======= ========= =========
SEE ACCOMPANYING NOTES.
F-21
<PAGE>
COGNITIVE TRAINING ASSOCIATES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months
ended
Year ended December 31, June 30,
1993 1994 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................. $ 78,913 $ 17,589 $ (45,062) $(55,493)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization.................... 52,137 58,184 64,125 32,961
Gain on sale of vehicle.......................... -- -- (4,097) --
Deferred income taxes............................ (4,185) (11,412) (37,551) (2,562)
Changes in operating assets and liabilities:.....
Accounts receivable............................. 11,411 12,465 (95,576) 73,194
Other assets.................................... (296) (3,190) (38) (32,836)
Accounts payable................................ 4,846 (6,384) 113,729 60,076
Deferred revenue................................ -- -- 85,300 (69,300)
------- -------- ------- -------
Net cash provided by operating activities ........ 142,826 67,252 80,830 6,040
INVESTING ACTIVITIES
Proceeds from the sale of vehicle................. -- -- 13,500 --
Purchases of property and equipment............... (92,927) (401,028) (85,650) (32,853)
------- -------- ------- -------
Net cash used in investing activities............. (92,927) (401,028) (72,150) (32,853)
FINANCING ACTIVITIES
Net proceeds from short-term borrowings........... -- -- 28,322 45,949
Proceeds from the issuance of notes payable ...... 27,691 300,000 326,071 17,584
Repayments of notes payable....................... (18,854) (50,219) (335,107) (25,304)
Proceeds from related party notes................. -- 108,192 6,289 32,000
Repayments to related party notes................. -- (9,244) (51,221) (30,930)
Dividends paid of stockholder..................... (136,016) -- -- --
------- -------- ------- -------
Net cash provided by (used in) financing
activities....................................... (127,179) 348,729 (25,646) 39,299
Net increase (decrease) in cash................... (77,280) 14,953 (16,966) 12,486
------- -------- ------- -------
Cash at beginning of period....................... 81,293 4,013 18,966 2,000
------- -------- ------- -------
Cash at end of period............................. $ 4,013 $ 18,966 $ 2,000 $ 14,486
======== ======== ======= =======
Interest paid..................................... $ 5,810 $ 25,724 $ 40,113 $ 21,115
======== ======== ======= =======
</TABLE>
SEE ACCOMPANYING NOTES.
F-22
<PAGE>
COGNITIVE TRAINING ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
Cognitive Training Associates, Inc. (the "Company") was incorporated in Texas in
1989. The Company engages in the development of skills management and technology
based applications for use in distance learning programs using various types of
online access software. The Company also provides consulting services related to
training systems, distance learning networks, and systems integration. In 1996,
the Company introduced a new service of providing access to Internet users for
in-state residents and businesses.
2. SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenues earned under courseware conversion contracts, applications development
and consulting services are recognized subsequent to the completion of
assignments. Revenues relating to licensing and support services are recognized
in the month services are performed. All unearned revenues resulting from
advance payments are deferred until services are performed.
One customer represented approximately 74%, 86%, 58% and 46% of net revenues
during the years ended December 31, 1993, 1994, 1995 and during the six month
period ended June 30, 1996, respectively. An additional customer represented
25%, 17%, and 21% of net revenues during the years ended December 31, 1993, 1995
and during the six month period ended June 30, 1996, respectively.
NET INCOME (LOSS) PER SHARE
The Company's net income (loss) per share calculations are based upon 1,000
shares of common stock, which have been issued and outstanding for all periods
presented.
USE OF ESTIMATES
The preparation of the 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.
ROYALTIES
The Company has royalty arrangements with certain entities that have provided
rights related to the distribution of courseware products through online
services. Royalties are due and payable by the Company on a monthly basis.
DIVIDENDS
During fiscal year 1993, dividends were declared by the Board of Directors for
the sole stockholder of the Company.
INCOME TAXES
The Company provides for income taxes in accordance with the liability method.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
F-23
<PAGE>
COGNITIVE TRAINING ASSOCIATES, INC. -
NOTES TO FINANCIAL STATEMENTS (Continued)
3. PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated using the straight-line
method over the estimated useful lives (39 years for the building, 3-7 years for
furniture and equipment, and 5 years for vehicles.)
Property and equipment consist of the following:
December 31, June 30,
1994 1995 1996
--------- --------- ---------
Building..................... $ 433,033 $ 437,750 $ 437,750
Furniture and equipment ..... 166,488 235,363 268,216
Vehicles..................... 129,061 108,877 93,909
--------- --------- ---------
728,582 781,990 799,875
Less accumulated
depreciation................. (176,398) (217,684) (235,677)
--------- --------- ---------
$ 552,184 $ 564,306 $ 564,198
========= ========= =========
4. SHORT-TERM BORROWINGS
At June 30, 1996, the Company had a short-term line of credit arrangement with a
bank which allowed for aggregate borrowings up to $100,000. At December 31, 1995
and June 30, 1996, $28,322 and $74,271, respectively, were outstanding under
this arrangement. Borrowings under this arrangement are payable upon demand and
bear interest at the bank's prime rate plus 2.0% per annum (10.25% at June 30,
1996). The line of credit is secured by certain of the Company's assets and is
personally guaranteed by the Company's sole stockholder.
5. NOTES PAYABLE TO RELATED PARTY
As of December 31, 1994 and 1995 and June 30, 1996, the Company owed $98,948,
$54,016 and $55,086, respectively, to the sole stockholder, pursuant to 12.0%
interest bearing notes. These notes, which are subordinated to the Company|Als
other notes payable, are secured by the Company's assets and are payable on
demand. During the years ended December 31, 1994 and 1995 and during the six
months ended June 30, 1996, interest expense related to these notes amounted to
$1,380, $7,991 and $3,085, respectively.
6. NOTES PAYABLE
As of December 31, 1994 and 1995 and June 30, 1996, the Company had an
outstanding note payable in the amount of $297,663, $282,148 and $272,250,
respectively to a bank. The note bears interest at the bank's prime rate plus
1.5% per annum. Borrowings from this note served as the primary source of funds
for the reconstruction and rehabilitation of the Company's current office
building. The principal is due in equal monthly installments of $1,650 through
March 2010 and is collateralized by the building. The note is also personally
guaranteed by the sole stockholder of the Company.
As of December 31, 1994 and 1995 and June 30, 1996, the Company had outstanding
a note payable totaling $28,258, $15,192 and $11,873, respectively, bearing
interest at 2.9% per annum. The note is payable in monthly installments of $864
and is secured by a certain vehicle of the Company.
In addition, as of December 31, 1995 and June 30, 1996, the Company owed $19,545
and $25,042, respectively, to the bank, pursuant to various note payable
agreements. These balances comprise several notes payable bearing interest at
the bank's prime rate plus 1.25% to 1.5% per annum. The notes are payable in
monthly installments ranging from $124 to $1,104 and are secured by certain of
the Company's equipment and vehicles. These notes mature at various times
through August of 1998.
F-24
<PAGE>
COGNITIVE TRAINING ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
6. NOTES PAYABLE (CONTINUED)
Aggregate maturities of the notes payable at June 30, 1996 are as follows:
Six months ending December 31, 1996............. $ 28,695
1997............................................ 36,515
1998............................................ 21,205
1999............................................ 19,800
2000............................................ 19,800
Thereafter...................................... 183,150
--------
$309,165
========
7. INCOME TAXES
Significant components of the Company's net deferred tax assets and
liabilities are as follows:
December 31, June 30,
1994 1995 1996
---- ---- ----
Deferred tax assets:
Difference between accrual and cash basis of
accounting................................. $ -- $27,840 $ 42,842
Property and equipment...................... -- 2,829 5,847
Other....................................... 1,188 1,119 661
----- ------ ------
Total deferred tax assets ................... 1,188 31,788 49,350
Deferred tax liabilities:
Difference between accrual and cash basis of
accounting................................. 5,260 -- --
Other....................................... 1,691 -- --
----- ------ ------
Total deferred tax liabilities............... 6,951 -- --
Valuation allowance.......................... -- -- (15,000)
----- ------ ------
Net deferred tax assets (liabilities) ....... $ (5,763) $31,788 $ 34,350
===== ====== ======
The Company has recorded a $15,000 valuation allowance as of June 30, 1996 due
to uncertainties associated with the realization of $15,000 of the net deferred
tax assets. The income tax expense (benefit) consists of the following:
Six months
ended
Year ended December 31, June 30,
1993 1994 1995 1996
---- ---- ---- ----
Current ................. $35,714 $ 1,351 $ 1,174 $(1,297)
Deferred................. (4,185) (11,412) (37,551) (2,562)
------ ------- ------- ------
Income tax expense
(benefit)................ $31,529 $(10,061) $(36,377) $(3,859)
======= ======== ======== =======
F-25
<PAGE>
COGNITIVE TRAINING ASSOCIATES, INC. -
NOTES TO FINANCIAL STATEMENTS (Continued)
7. INCOME TAXES (CONTINUED)
The Company's income tax expense (benefit) resulted in effective tax rates
that varied from the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
Six months
ended
Year ended December 31, June 30,
1993 1994 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Expected federal income tax provision at
graduated rates................................ $26,322 $ 1,129 $(15,939) $ (9,843)
State income taxes.............................. 5,367 1,351 1,174 --
Use of rehabilitation credit on building ....... -- (4,596) (4,294) --
Difference between graduated rates and expected
rates of reversal.............................. (2,576) (6,597) (16,564) (10,807)
Change in valuation allowance................... -- -- -- 15,000
Other........................................... 2,416 (1,348) (754) 1,791
----- ------ ---- -----
$31,529 $(10,061) $(36,377) $ (3,859)
======= ======== ======== ========
</TABLE>
8. COMMITMENTS
During 1996, the Company entered into a three year agreement with CompuServe,
Inc. ("CompuServe") whereby CompuServe will provide network services to the
Company. Beginning on May 1, 1996, the Company is obligated to make monthly
payments of $7,500 for the above services through April, 1999. In addition, the
Company was required to pay a one time implementation fee of $35,000, which the
Company has recorded as Other Assets in the Balance Sheet and will amortize over
the three year period of services.
9. SUBSEQUENT EVENT
Effective August 1, 1996, substantially all of the assets and liabilities of the
Company, with the exception of the building, vehicle, certain equipment and
certain notes payable, were acquired by UOL Publishing, Inc. (formerly
University Online, Inc.) in a stock for stock exchange. The acquisition will be
accounted for under the purchase method. Additionally, fully vested options to
purchase 5,136 shares of UOL's Common Stock at $.12 per share were given to four
employees of the Company. Pursuant to the executed employment agreement with
UOL, the sole stockholder will also be given a $150,000 bonus upon successful
completion of the Company's integration into UOL and was issued options to
purchase 17,120 shares of the UOL's Common Stock at purchase price of $21.03 per
share, subsequently repriced to $14.60 per share. The options vest over a two
year term. The Company also agreed to pay $5,000 per month to lease the
building, owned by the Company's former stockholder.
F-26
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
UOL Publishing, Inc. (formerly University Online, Inc.)
We have audited the accompanying statement of operating revenues and direct
operating expenses of CYBIS (a division of Control Data Systems, Inc.) for the
year ended December 31, 1993. This financial statement is the responsibility of
the UOL Publishing, Inc.'s management. Our responsibility is to express an
opinion on this financial statement 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 statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. 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 financial statement referred to above presents fairly, the
operating revenues and direct operating expenses of CYBIS's (a division of
Control Data Systems, Inc.) operations for the year ended December 31, 1993 in
conformity with generally accepted accounting principles.
/s/Ernst & Young LLP
Vienna, Virginia
August 23, 1996
F-27
<PAGE>
CYBIS
(A DIVISION OF CONTROL DATA SYSTEMS, INC.)
STATEMENT OF OPERATING REVENUES AND DIRECT OPERATING EXPENSES
Year ended
December 31,
1993
------------
Licensing and support revenues............... $ 795,948
Cost of revenues............................. 181,096
------------
Gross profit................................. 614,852
Selling, general, and administrative
expenses.................................... 1,134,859
------------
Operating loss............................... $ (520,007)
============
F-28
<PAGE>
CYBIS
(A DIVISION OF CONTROL DATA SYSTEMS, INC.)
NOTES TO FINANCIAL STATEMENT
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The CYBIS division of Control Data Systems, Inc. ("Control Data") is engaged in,
among other things, the marketing and support of certain computer courseware and
software programs in the area of computer-based education.
Effective January 1, 1994, UOL Publishing, Inc. (formerly University Online,
Inc.), entered into an Asset Purchase Agreement with Control Data. Pursuant to
this Asset Purchase Agreement, UOL acquired substantially all of the assets and
assumed all of the liabilities of the CYBIS division for approximately $694,000.
The accompanying statement of operating revenues and direct operating expenses
of the CYBIS division for the year ended December 31, 1993 has been prepared
from the historical books and records of Control Data and includes only those
operating revenues and operating expenses directly attributable to the CYBIS
division. Some additional indirect expenses related to the physical operating
costs of the CYBIS division, primarily personnel-related costs, finance, legal
and professional, human resources, and management information services to the
CYBIS division were incurred. These costs have been omitted from the
accompanying statement of operating revenues and direct operating expenses.
It is impractical to provide a full statement of operations reflecting the
historical results of the CYBIS division since (1) assets acquired represent
only a portion of the operations of Control Data, and do not constitute a
separate entity; and (2) the financial records, specific to the assets acquired
and related operations, exclusive of direct operating revenues and expenses,
include certain expenses incurred for all of Control Data not readily
attributable to the CYBIS division.
REVENUE RECOGNITION
Revenues are recognized in the month in which the licensing and support services
are performed.
USE OF ESTIMATES
The preparation of the financial statement in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of operating revenues and direct
operating expenses during the reporting period. Actual results could differ from
those estimates.
2. INCOME TAXES
The accompanying statement of operating revenues and direct operating expenses
does not include charges for income taxes since income taxes are considered to
be corporate expenses of Control Data.
F-29
<PAGE>
No dealer, salesperson or other
person has been authorized to give any
information or to make any
representation in connection with the 1,334,000 SHARES
offering other than those contained in
this Prospectus, and, if given or
made, such information or
representation must not be relied upon
as having been authorized by the
Company or the Underwriters. This
Prospectus does not constitute an
offer to sell or a solicitation of an
offer to buy any securities other than
the shares of Common Stock to which it [LOGO]
relates or an offer to, or a
solicitation of, any person or by
anyone in any jurisdiction in which it
would be unlawful to make such offer
or solicitation. Neither the delivery
of this Prospectus nor any sale made COMMON STOCK
hereunder shall, under any
circumstances, create any implication
that the information contained herein
is correct as of any time subsequent
to the date hereof or that there has
been no change in the affairs of the
Company since the date hereof.
----------
TABLE OF CONTENTS PROSPECTUS
----------
Page
Prospectus Summary................ 3
Risk Factors...................... 6
Use of Proceeds................... 13
Dividend Policy................... 13
Capitalization.................... 14 FRIEDMAN, BILLINGS, RAMSEY
Dilution.......................... 15 & CO., INC.
Selected Financial Data........... 16
Unaudited Pro Forma Combined
Balance Sheet and Statements of
Operations....................... 17
Management's Discussion and
Analysis of Financial Condition
and Results of Operations....... 21
Business.......................... 28
Management........................ 37
Certain Transactions.............. 42
Principal Stockholders............ 44 , 1996
Description of Capital Stock...... 46
Shares Eligible for Future Sale... 48
Underwriting...................... 50
Legal Matters..................... 51
Experts........................... 51
Additional Information............ 51
Reports to Stockholders........... 51
Index to Financial Statements..... F-1
Until _______ , 1996 (25 days after
the date of this Prospectus), all
dealers effecting transactions in the
Common Stock offered hereby whether or
not participating in this
distribution, may be required to
deliver a Prospectus. This is in
addition to the obligation of dealers
to deliver a Prospectus when acting as
Underwriters and with respect to their
unsold allotments or subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, incurred in connection with the sale of
Common Stock being registered (all amounts are estimated except the SEC
registration fee, the NASD filing fee and the Nasdaq listing fee). The Company
will bear all expenses incurred in connection with the sale of the Common Stock
being registered hereby.
SEC registration fee ................................... $ 8,464
NASD filing fee ........................................ 2,955
The Nasdaq Stock Market listing fee .................... 20,456
Printing fees and expenses ............................. *
Legal fees and expenses ................................ *
Accounting fees and expenses ........................... *
Blue sky fees and expenses ............................. *
Stock certificates and transfer agent and custodian
fees.................................................... *
Miscellaneous........................................... *
--------
Total................................................. $ *
========
- ----------
*To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 ("Section 145") of the Delaware General Corporation Law, as
amended, generally provides that a director or officer of a corporation (i)
shall be indemnified by the corporation for all expense of such legal
proceedings when he is successful on the merits, (ii) may be indemnified by the
corporation for the expenses, judgments, fines and amounts paid in settlement of
such proceedings (other than a derivative suit), even if he is not successful on
the merits, if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceedings, had no reasonable cause to believe his
conduct was unlawful, and (iii) may be indemnified by the corporation for the
expenses of a derivative suit (a suit by a stockholder alleging a breach by a
director or officer of a duty owed to the corporation), even if he is not
successful on the merits, if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interest of the
corporation. No indemnification may be made under clause (iii) above, however,
if the director or officer is adjudged liable for negligence or misconduct in
the performance of his duties to the corporation, unless a corporation
determines that, despite such adjudication, but in view of all the
circumstances, he is entitled to indemnification. The indemnification described
in clauses (ii) and (iii) above may be made only upon a determination that
indemnification is proper because the applicable standard of conduct has been
met. Such a determination may be made by a majority of a quorum of disinterested
directors, independent legal counsel, the stockholders or a court of competent
jurisdiction.
Article VI of the Company's Bylaws provides in substance that, to the fullest
extent permitted by Delaware law as it now exists or as amended, each director
and officer shall be indemnified against reasonable costs and expenses,
including attorneys' fees and any liabilities which he may incur in connection
with any action to which he may be made a party by reason of his being or having
been a director or officer of the Registrant. The indemnification provided by
the Company's Bylaws is not deemed exclusive of or intended in any way to limit
any other rights to which any person seeking indemnification may be entitled.
II-1
<PAGE>
Section 102(b)(7) of the Delaware General Corporation Law, as amended,
permits a corporation to provide in its Certificate of Incorporation that a
director of the corporation shall not be personally liable to the corporation or
its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv)
for any transaction from which the director derived an improper personal
benefit.
Article VII of the Company's Certificate of Incorporation provides for the
elimination of personal liability of a director for breach of fiduciary duty, as
permitted by Section 102(b)(7) of the Delaware General Corporation Law.
The Underwriting Agreement provides for indemnification by the Underwriters
of the Company against any losses to which it may become subject insofar as they
arise out of, or are based upon, any untrue statement or omission of a material
fact contained in this Registration Statement, to the extent that such untrue
statement or omission arose as a result of written information relating to, and
furnished to the Company by, the Underwriters specifically for use in the
preparation of this Registration Statement.
The Registrant maintains liability insurance insuring the Registrant's
officers and directors against liabilities than they may incur in such
capacities.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers or persons controlling the registrant pursuant
to the foregoing provisions, the Registrant has been informed that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is therefore unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since June 30, 1993, the registrant has issued and sold the following
unregistered securities:
1. From June 1993 through August 1996, the Company issued options and
warrants to purchase an aggregate of approximately 476,715 shares of Common
Stock to employees and directors of and consultants to the Company, 27,393 of
which have either expired in accordance with their terms or have been forfeited.
2. In October 1994, the Company issued to three family trusts warrants to
purchase an aggregate of 205,446 shares of Common Stock.
3. In November 1994, the Company issued an aggregate of approximately: (i)
96,086 shares of Common Stock in exchange for all of its then outstanding shares
of preferred stock and dividends accrued thereupon; (ii) 149,630 shares of
Common Stock to eight investors for aggregate consideration of $443,500; and
(iii) 79,687 shares of Common Stock to nine investors upon conversion of
outstanding indebtedness in the amount of $522,594.
4. From July 1994 to August 1996, the Company issued and sold shares of
convertible preferred stock (since redesignated Series A Preferred Stock) to
approximately 70 accredited investors for aggregate consideration of $3,800,889,
which shares will convert into a total of 445,872 shares of Common Stock upon
consummation of the offering made hereby. Spencer Trask Securities Incorporated
served as placement agent for this financing and received for itself and its
designees warrants to purchase 37,793 shares of Common Stock.
5. From July 1994 to August 1996, the Company issued warrants to purchase an
aggregate of 208,011 shares of Common Stock, as adjusted to give effect to the
Jones Transactions, to a total of eleven investors.
6. During 1995, the Company issued an aggregate of approximately: (i) 18,627
shares of Common Stock to four individuals, consisting of a consultant and three
service providers, as consideration for services rendered; and (ii) 60,647
shares of Common Stock, and 1,813 shares of Series A Preferred Stock to six
investors upon conversion of outstanding indebtedness.
II-2
<PAGE>
7. During 1996, the Company issued an aggregate of 5,135 shares of Common
Stock to three service providers for services rendered in 1995.
8. In July 1996, the Company issued and sold 187,254 shares of Series B
Preferred Stock convertible into 390,956 shares of Common Stock upon
consummation of this offering to 11 accredited investors for an aggregate
investment of $3,500,000.
9. In August 1996, the Company issued an aggregate of 42,802 shares of Common
Stock in connection with the acquisition of CTA, all of which shares were issued
to CTA's sole stockholder, Michael Brown, and issued a warrant to purchase an
aggregate of 12,840 shares of Common Stock to Oppenheimer & Co., Inc. as
consideration for certain investment banking services.
10. In September 1996, the Company entered into an agreement with an existing
securityholder to issue to such securityholder, upon consummation of the
offering made hereby, a warrant to purchase 15,801 shares of Common Stock in
consideration of such securityholder's waiver of certain anti-dilution rights
and agreement to exercise certain warrants to purchase Common Stock.
The sales of the above securities were deemed to be exempt from registration
under the Act in reliance upon Section 4(2) of the Act or Regulation D or Rule
701 promulgated thereunder as transactions by an issuer not involving a public
offering. Recipients of the securities in each such transaction represented
their intentions to acquire such securities for investment only and not with a
view to or for sale in connection with any distribution thereof and appropriate
legends were affixed to the instruments issued in such transactions. All
recipients had adequate access to information about the Company.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
<S> <C>
Exhibit No. Description
1.1* Form of Underwriting Agreement.
2.1 Agreement and Plan of Merger, dated as of July 31, 1996, relating to the acquisition of
Cognitive Training Associates, Inc.
3.1 Amended and Restated Certificate of Incorporation.
3.2 Amended and Restated Bylaws.
4.1* Form of Common Stock Certificate.
5.1* Opinion of Wyrick, Robbins, Yates & Ponton L.L.P.
10.1 Investment Agreement, dated as of October 8, 1986, with Intersouth Partners.
10.2 Warrant Agreement, dated as of March 22, 1995, with Spencer Trask Securities Incorporated
and Forms of Warrant Certificates.
10.3 Form of Promissory Note.
10.4 Registration Rights Agreement relating to Series A Preferred Stock, as amended.
10.5 Registration Rights Agreement, dated July 19, 1996, relating to Series B Preferred Stock.
10.6 Warrant, dated July 23, 1996, granted to Oppenheimer & Co., Inc.
10.7 Letter Agreement, dated as of September 12, 1996, with Austin O. Furst and certain related
entities.
10.8 Amended and Restated Stock Option Plan.
10.9 1996 Stock Plan.
10.10 Employment Agreement,dated July 1, 1996, with Narasimhan P. Kannan.
10.11 Employment Agreement, dated July 1, 1996, with Carl N. Tyson.
10.12 Employment Agreement, dated July 31, 1996, with Michael L. Brown.
10.13 Employment Agreement, dated August 15, 1996, with Leonard P. Kurtzman.
10.14** Agreement, dated August 14, 1995, with Educational Services Institute.
II-3
<PAGE>
Exhibit No. Description
10.15 Form of Online Educational Services Distribution Agreement.
10.16 Form of University Master Agreement for Online Education Services.
10.17 Form of Online Educational Services Agreement.
10.18 Form of Inner Circle Online Educational Services Development and Distribution
Agreement.
10.19** Agreement, dated April 15, 1996, with Autodesk, Inc.
10.20** Project Financing and Development Agreement with InternetU, Inc.
11.1 Statement Re: Computation of Per Share Loss.
21.1 List of Subsidiaries.
23.1 Consents of Ernst & Young LLP.
23.2* Consent of Wyrick, Robbins, Yates & Ponton L.L.P. (contained in Exhibit 5.1).
24.1. Power of Attorney (see page II-5).
27.1. Financial Data Schedule.
</TABLE>
- ----------
* To be filed by amendment.
** Confidential treatment requested.
(b) Financial Statement Schedule.
Schedule I--Valuation and Qualifying Account and Reserve
No other schedules have been included because the information required to be
set forth therein is not applicable.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted for directors, officers, and controlling persons of the
registrant pursuant to provisions described in Item 14 above, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer, or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the Offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, hereunto duly authorized, in the City of Falls Church, State of
Virginia on this 13th day of September, 1996.
UOL PUBLISHING, INC.
By: /s/ NARASIMHAN P. KANNAN
--------------------------------------------
Narasimhan P. Kannan, Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Narasimhan
P. Kannan and Carl N. Tyson, and each of them, his true and lawful
attorney-in-fact and agent, with full powers of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement and any related Registration Statements filed pursuant to Rule 462(b)
promulgated under the Securities Act of 1933, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully for all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Signature Capacity Date
- --------- -------- ----
/s/ NARASIMHAN P. KANNAN Director and Chief Executive September 13, 1996
- -------------------------- Officer (Principal Executive
Narasimhan P. Kannan Officer)
/s/ LEONARD P. KURTZMAN Chief Financial Officer (Principal September 13, 1996
- -------------------------- Financial and Accounting Officer)
Leonard P. Kurtzman
/s/ CARL N. TYSON
- -------------------------- Director September 13, 1996
Carl N. Tyson
/s/ EDSON D. DECASTRO
- -------------------------- Director September 13, 1996
Edson D. DeCastro
/s/ DENNIS J. DOUGHERTY
- -------------------------- Director September 13, 1996
Dennis J. Dougherty
/s/ BARRY K. FINGERHUT
- -------------------------- Director September 13, 1996
Barry K. Fingerhut
II-5
<PAGE>
/s/ W. BRAUN JONES, JR.
- -------------------------- Director September 13, 1996
W. Braun Jones, Jr
/s/ WILLIAM E. KIMBERLY
- -------------------------- Director September 13, 1996
William E. Kimberly
/s/ D. WAYNE SILBY
- -------------------------- Director September 13, 1996
D. Wayne Silby
</TABLE>
II-6
<PAGE>
SCHEDULE I - VALUATION AND QUALIFYING ACCOUNT AND RESERVE
(IN THOUSANDS)
<TABLE>
<CAPTION>
UOL Publishing, Inc.
Balance at
Beginning of Balance At
Classification Period Additions Deductions End of Period
- -------------- ------ --------- ---------- -------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1994 ... $ -- $ -- $ -- $ --
Year ended December 31, 1995 ... -- 20 -- 20
Six months ended June 30, 1996 . 20 12 -- 32
</TABLE>
S-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
UOL Publishing, Inc.
We have audited the financial statements of UOL Publishing, Inc. (formerly
University Online, Inc.) as of December 31, 1994 and 1995 and June 30, 1996 and
for each of the three years in the period ended December 31, 1995 and for the
six months period ended June 30, 1996 and have issued our report thereon dated
July 10, 1996 (included elsewhere in this Registration Statement). Our audits
also included the financial statement schedule listed in Item 16(b) of this
Registration Statement. The schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
Ernst & Young LLP
Vienna, Virginia
July 10, 1996
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion of
the restatement of the capital accounts for the reverse stock split as described
in Note 13 to the financial statements.
Vienna, Virginia
September 16, 1996 /s/ Ernst & Young LLP
1
<PAGE>
EXHIBIT INDEX
1.1* Form of Underwriting Agreement.
2.1 Agreement and Plan of Merger, dated as of July 31, 1996, relating to
the acquisition of Cognitive Training Associates, Inc.
3.1 Amended and Restated Certificate of Incorporation.
3.2 Amended and Restated Bylaws.
4.1* Form of Common Stock Certificate.
5.1* Opinion of Wyrick, Robbins, Yates & Ponton L.L.P.
10.1 Investment Agreement, dated as of October 8, 1986, with Intersouth
Partners.
10.2 Warrant Agreement, dated as of March 22, 1995, with Spencer Trask
Securities Incorporated and Forms of Warrant Certificates.
10.3 Form of Promissory Note.
10.4 Registration Rights Agreement relating to Series A Preferred Stock, as
amended.
10.5 Registration Rights Agreement, dated July 19, 1996, relating to Series
B Preferred Stock.
10.6 Warrant, dated July 23, 1996, granted to Oppenheimer & Co., Inc.
10.7 Letter Agreement, dated as of September 12, 1996, with Austin O. Furst
and certain related entities.
10.8 Amended and Restated Stock Option Plan.
10.9 1996 Stock Plan.
10.10 Employment Agreement,dated July 1, 1996, with Narasimhan P. Kannan.
10.11 Employment Agreement, dated July 1, 1996, with Carl N. Tyson.
10.12 Employment Agreement, dated July 31, 1996, with Michael L. Brown.
10.13 Employment Agreement, dated August 15, 1996, with Leonard P. Kurtzman.
10.14** Agreement, dated August 14, 1995, with Educational Services Institute.
10.15 Form of Online Educational Services Distribution Agreement.
10.16 Form of University Master Agreement for Online Education Services.
10.17 Form of Online Educational Services Agreement.
10.18 Form of Inner Circle Online Educational Services Development and
Distribution Agreement.
10.19** Agreement, dated April 15, 1996, with Autodesk, Inc.
10.20** Project Financing and Development Agreement with InternetU, Inc.
11.1 Statement Re: Computation of Per Share Loss.
21.1 List of Subsidiaries.
23.1 Consents of Ernst & Young LLP.
23.2* Consent of Wyrick, Robbins, Yates & Ponton L.L.P. (contained in
Exhibit 5.1).
24.1. Power of Attorney (see page II-5).
27.1. Financial Data Schedule.
- ----------
* To be filed by amendment.
** Confidential treatment requested.
---------------------------------------------------------
---------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
Among
UNIVERSITY ONLINE, INC.,
CTA ACQUISITION CORPORATION,
COGNITIVE TRAINING ASSOCIATES, INC.
and
THE COGNITIVE TRAINING ASSOCIATES, INC.
SHAREHOLDER NAMED HEREIN
Dated as of July 31, 1996
-----------------------------------------------------------------
-----------------------------------------------------------------
<PAGE>
Table of Contents
Page
ARTICLE 1
DEFINITIONS........................................................ 2
1.1. Definitions..................................... 2
ARTICLE 2
BASIC TRANSACTION.................................................. 7
2.1 The Merger....................................... 7
2.2 Effective Time................................... 8
2.3 University Online Common Stock................... 8
2.4 Conversion and Exchange of Shares................ 8
2.5 Fractional Shares................................ 9
2.6 Articles of Incorporation........................ 9
2.7 Bylaws........................................... 9
2.8 Directors........................................ 9
2.9 Officers.........................................10
2.10 Subsequent Actions...............................10
ARTICLE 3
CLOSING AND TERMINATION............................................10
3.1 Closing..........................................10
3.2 Transactions on the Closing Date.................10
3.3 Termination......................................11
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF EXCHANGING
SHAREHOLDER........................................................12
4.1 Organization of Cognitive Training;
Authority........................................12
4.2 Ability to Carry Out the Agreement...............13
4.3 Capitalization of Cognitive Training;
Ownership; Investment............................13
4.4 Subsidiaries and Affiliates......................14
4.5 Financial Statements; Liabilities................14
4.6 Conduct of Business Since Most Recent
Fiscal Year End; Absence of Material
Adverse Change...................................15
4.7 Title to Tangible Personal Properties;
Absence of Liens.................................18
4.8 Litigation.......................................18
4.9 Compliance with Law..............................18
4.10 Contracts........................................19
4.11 Brokers and Intermediaries.......................20
4.12 Tax Matters......................................20
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<PAGE>
4.13 Employee Benefits................................22
4.14 Articles of Incorporation and Bylaws.............24
4.15 Insurance........................................25
4.16 Intellectual Property............................25
4.17 Bank Accounts....................................28
4.18 Directors, Officers and Employees................28
4.19 Labor Relations; Employees.......................28
4.20 Transactions with Related Parties................29
4.21 Copies of Documents..............................29
4.22 Real Property....................................29
4.23 Books and Records................................30
4.24 Environmental Matters............................30
4.25 Guaranties.......................................32
4.26 Government Consents..............................32
4.27 Manufacturing Rights.............................32
4.28 Disclosure.......................................32
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF THE ACQUIRORS....................33
5.1 Organization and Authority of the Acquirors......33
5.2 Ability to Carry Out the Agreement...............33
5.3 Capitalization...................................34
5.4 Brokers and Intermediaries.......................34
ARTICLE 6
CERTAIN COVENANTS AND AGREEMENTS OF TRANSFERORS
AND ACQUIRORS......................................................34
6.1 Full Access......................................34
6.2 Regulatory Filings; Consents.....................35
6.3 Conduct of Business..............................35
6.4 Confidentiality..................................36
6.5 Books and Records................................36
6.6 Announcement.....................................37
6.7 Best Efforts.....................................37
6.8 Discussion With Others...........................37
6.9 Tax Covenant.....................................37
6.10 Cooperation in Litigation........................38
6.11 Stock Transfer Restrictions......................38
ARTICLE 7
CONDITIONS PRECEDENT OF TRANSFERORS................................39
7.1 Representations and Warranties...................39
7.2 Agreements.......................................39
7.3 Performance Certificates.........................39
7.4 No Injunction....................................39
7.5 No Violation.....................................40
7.6 Consents.........................................40
7.7 Opinion of the Acquirors' Counsel................40
ii
<PAGE>
7.8 No Proceedings...................................40
7.9 Tax-Free Reorganization..........................40
7.10 Shareholder Approval.............................40
7.11 Employment Agreement.............................41
7.12 Miscellaneous Closing Deliveries.................41
ARTICLE 8
CONDITIONS PRECEDENT OF THE ACQUIRORS..............................41
8.1 Representations and Warranties...................41
8.2 Agreements.......................................42
8.3 Performance Certificates.........................42
8.4 No Injunction....................................42
8.5 No Violation.....................................42
8.6 Consents.........................................42
8.7 Opinion of Transferors' Counsel..................42
8.8 No Adverse Change................................42
8.9 Confidentiality and Non-Disclosure Agreements....43
8.10 Resignations.....................................43
8.11 No Proceedings...................................43
8.12 Employment Agreement.............................43
8.14 Cognitive Training Common Stock..................43
8.15 Shareholder Approval.............................43
8.16 Miscellaneous Closing Deliveries.................44
ARTICLE 9
SURVIVAL OF REPRESENTATIONS, WARRANTIES AND
COVENANTS..........................................................44
9.1 Survival of Representations and Warranties.......44
9.2 Survival of Covenants and Agreements.............44
ARTICLE 10
INDEMNIFICATION....................................................45
10.1 Indemnification of University Online.............45
10.2 Indemnification of Exchanging Shareholder........46
10.3 Remedies.........................................48
10.4 Survival.........................................48
10.5 Assertion of Claims..............................48
10.6 Resolution of Conflicts; Arbitration.............49
10.7 Limitation on Liability..........................49
ARTICLE 11
MISCELLANEOUS......................................................50
11.1 Further Assurances...............................50
11.2 Expenses.........................................50
11.3 Applicable Law...................................50
11.4 Notices..........................................50
iii
<PAGE>
11.5 Entire Agreement.................................51
11.6 Amendments.......................................52
11.7 Headings; References.............................52
11.8 Counterparts.....................................52
11.9 Parties in Interest; Assignment..................52
11.10 Severability; Enforcement........................52
11.11 Jurisdiction.....................................52
11.12 Waiver...........................................53
11.13 Incorporation of Exhibits........................53
11.14 Construction.....................................53
iv
<PAGE>
EXHIBITS
EXHIBIT A - Cognitive Training Shares
EXHIBIT B - Form of Plan of Merger
EXHIBIT C - Schedule of Exceptions
EXHIBIT D - Cognitive Training Financial Statements
EXHIBIT E - Form of Opinion of Wyrick, Robbins, Yates & Ponton,
L.L.P.
EXHIBIT F - Form of Brown Employment Agreement
EXHIBIT G - Form of Opinion of Novakov, Davidson & Flynn
EXHIBIT H - Form of Non-Disclosure Agreement
v
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement") is made and entered
into as of July 31, 1996, by and among UNIVERSITY ONLINE, INC., a Delaware
corporation ("University Online"); CTA ACQUISITION CORPORATION, a Texas
corporation and a wholly owned subsidiary of University Online ("CTA
Acquisition"); COGNITIVE TRAINING ASSOCIATES, INC., a Texas ("Cognitive
Training"); and MICHAEL L. BROWN, the sole shareholder of Cognitive Training
(the "Exchanging Shareholder"). (University Online and CTA Acquisition shall
sometimes collectively be referred to as the "Acquirors" and individually as an
"Acquiror"; Cognitive Training and the Exchanging Shareholder shall sometimes
collectively be referred to as the "Transferors" and individually as a
"Transferor"; and CTA Acquisition and Cognitive Training shall sometimes
collectively be referred to as the "Constituent Corporations" and individually
as a "Constituent Corporation".)
W I T N E S S E T H:
WHEREAS, Cognitive Training is a Texas corporation with authorized
capital stock of 100,000 shares of Cognitive Training Common Stock (as defined
below), of which 1,000 shares are issued and outstanding to the Exchanging
Shareholder as set forth in Exhibit A (the "Cognitive Training Shares"); and
WHEREAS, CTA Acquisition is a Texas corporation with authorized capital
stock of 1,000 shares of Common Stock, Without Par Value per share, all of which
immediately prior to the Effective Time (as defined below) will be issued and
outstanding and held by University Online;
WHEREAS, the parties intend that the transactions contemplated hereby
will qualify as a tax-free triangular B reorganization merger of CTA Acquisition
with and into Cognitive Training pursuant to Code Section 368(a)(1)(B) and
Revenue Ruling
67-448;
WHEREAS, pursuant to the Merger (as defined below), the Exchanging
Shareholder shall receive University Online Common Stock (as defined below); and
WHEREAS, the parties expect that the Merger shall further certain of
their business objectives, including, without limitation, the expansion of the
combined companies' businesses and the utilization of the technologies of both
of University Online and Cognitive Training;
1
<PAGE>
NOW, THEREFORE, in reliance upon the premises, representations,
warranties and covenants made herein and in consideration of the mutual
agreements herein contained, the parties hereto hereby agree as follows:
ARTICLE 1
DEFINITIONS
1.1. Definitions. For purposes of this Agreement, the following terms
shall have the meaning set forth below:
"Acquiror" and "Acquirors" shall have the respective meanings set forth
in the first paragraph of this Agreement.
"Acquiror Indemnitee" and "Acquiror Indemnitees" shall have the
respective meanings set forth in Section 10.1.
"Affiliate" means, with respect to any Person, any other Person
directly or indirectly Controlling, Controlled by, or under common Control with
such other Person.
"Affiliated Group" means any affiliated group within the meaning of
Code Section 1504.
"Agreement" shall have the meaning set forth in the first paragraph of
this Agreement.
"Articles of Merger" shall have the meaning set forth in Section 2.2.
"Basis" means any past or present fact, situation, circumstance,
status, condition, activity, practice, plan, occurrence, event, incident,
action, failure to act or transaction that forms or could form the basis for any
specified consequence.
"Basket Deductible" shall have the meaning set forth in Section 10.12.
"CERCLA" shall have the meaning set forth in subsection 4.24(a).
"Claim Notice" shall have the meaning set forth in Section 10.5.
"Closing" shall have the meaning set forth in Section 3.1.
"Closing Date" shall have the meaning set forth in Section 3.1.
"Code" means the Internal Revenue Code of 1986, as amended.
2
<PAGE>
"Cognitive Training" shall have the meaning set forth in the first
paragraph of this Agreement.
"CTA Acquisition" shall have the meaning set forth in the first
paragraph of this Agreement.
"Cognitive Training Common Stock" means the Common Stock, Without Par
Value, of Cognitive Training.
"Cognitive Training Shares" shall have the meaning set forth in the
first paragraph of the recitals.
"Confidential Information" shall have the meaning set forth in Section
6.4.
"Constituent Corporation" and "Constituent Corporations" shall have the
respective meanings set forth in the first paragraph of this Agreement.
"Contracts" shall have the meaning set forth in subsection 4.10(b).
"Control" (including, with correlative meanings, the terms "Controlled
by", "Controlling" and "under common Control with"), as used with respect to any
Person, means the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of such Person, whether
through ownership of voting securities, by contract or otherwise.
"Controlled Group of Corporation" has the meaning set forth in Code
Section 1563.
"Conversion Number" means the quotient of (i) Five Hundred Thousand
(500,000) divided by (ii) the total number of the Cognitive Training Shares
outstanding immediately prior to the Effective Time.
"Converted Cognitive Training Stock" shall have the meaning set forth
in subsection 2.4(b).
"Dissenting Share" means any share of Cognitive Training capital stock
with respect to which any Cognitive Training shareholder has validly exercised
his dissenters' rights (or any equivalent thereof which would, subsequent to the
Closing, permit any Cognitive Training shareholder to tender his shares of
Cognitive Training capital stock to Cognitive Training or University Online in
exchange for cash) under Part Five of the Texas Business Corporation Act.
"Effective Time" shall have the meaning set forth in Section 2.2.
"Employee Benefit Plan" means any: (i) nonqualified deferred
compensation or retirement plan or arrangement which is
3
<PAGE>
an Employee Pension Benefit Plan; (ii) qualified defined contribution retirement
plan or arrangement which is an Employee Pension Benefit Plan; (iii) qualified
defined benefit retirement plan or arrangement which is an Employee Pension
Benefit Plan (including any Multiemployer Plan); and (iv) Employee Welfare
Benefit Plan or fringe benefit plan or program.
"Employee Pension Benefit Plan" has the meaning set forth in ERISA
Section 3(2).
"Employee Welfare Benefit Plan" has the meaning set forth in ERISA
Section 3(1).
"Encumbrances" means any and all restrictions on transfer, liens,
encumbrances, charges, pledges, security interests, taxes, claims, options,
warrants, purchase rights, contracts, commitments, equities, claims and demands.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchanging Shareholder" shall have the meaning set forth in the first
paragraph of this Agreement.
"Fiduciary" has the meaning set forth in ERISA Section 3(21).
"Financial Statements" shall have the meaning set forth in subsection
4.5(a).
"GAAP" shall have the meaning set forth in subsection 4.5(a).
"Intellectual Property" means: (i) all inventions (whether patentable
or unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications and patent disclosures, together
with all reissuances, divisions, continuations, renewals, continuations-in-part,
revisions, extensions and reexaminations thereof; (ii) all trademarks, service
marks, certification marks, collective marks, trade dress, trade styles, logos,
trade names, company names and corporate names, together with all translations,
adaptations, derivations and combinations thereof and including all goodwill
associated therewith, and all applications, registrations, recordings and
renewals in connection therewith; (iii) all copyrightable works, all copyrights,
rights and interests in copyrights and all applications, registrations,
recordings and renewals in connection therewith; (iv) all mask works and all
applications, registrations, recordings and renewals in connection therewith;
(v) all trade secrets and confidential business information (including ideas,
research and development, know-how, formulas, compositions, manufacturing and
production processes and techniques, technical data, designs, drawings,
specifications,
4
<PAGE>
customer and supplier lists, pricing and cost information, and business and
marketing plans and proposals); (vi) all computer software (including data and
related documentation); (vii) all other proprietary rights; (viii) all copies
and tangible embodiments thereof (in whatever form or medium); (ix) all income,
royalties, damages or payments now and hereafter due and/or payable under any of
the foregoing with respect to any of the foregoing and the right to sue for
past, present or future infringements of any of the foregoing; (x) all licenses
with respect to any of the foregoing; and (xi) all rights corresponding to any
of the foregoing throughout the world.
"Knowledge" means actual knowledge after reasonable investigation.
"Liability" means any liability (whether known or unknown, whether
asserted or unasserted, whether absolute or contingent, whether accrued or
unaccrued, whether liquidated or unliquidated, and whether due or to become
due), including liability for Taxes.
"Litigation" shall have the meaning set forth in subsection 4.8(a).
"Merger" shall have the meaning set forth in Section 2.1.
"Merger Shares" means collectively the shares of University Online
Common Stock issued or issuable to the Cognitive Training shareholder in
connection with the Merger in exchange for the Cognitive Training Shares.
"Most Recent Balance Sheet" shall have the meaning set forth in
subsection 4.7(a).
"Most Recent Financial Statements" shall have the meaning set forth in
subsection 4.5(a).
"Most Recent Fiscal Month End" shall have the meaning set forth in
subsection 4.5(a).
"Most Recent Fiscal Year End" means December 31, 1995.
"Multiemployer Plan" has the meaning set forth in ERISA Section 3(37).
"1933 Act" means the Securities Act of 1933, as amended.
"1934 Act" means the Securities Exchange Act of 1934, as amended.
"PBGC" means the Pension Benefit Guaranty Corporation.
"Person" means any individual, corporation, partnership, limited
partnership, trust, entity or unincorporated
5
<PAGE>
organization, or a government or any agency or political subdivision thereof.
"Prohibited Transaction" has the meaning set forth in ERISA Section 406
and Code Section 4975.
"Proprietary Information" shall have the meaning set forth in
subsection 4.16(g).
"RCARA" has the meaning set forth in subsection 4.24(a).
"Reportable Event" has the meaning set forth in ERISA Section 4043.
"Schedule" means any of the schedules to this Agreement, each of which
is incorporated by reference into this Agreement.
"SEC" means the United States Securities and Exchange Commission.
"Subsidiary" means any corporation with respect to which a specified
Person (or Subsidiary thereof) owns a majority of the capital stock or has the
power to vote or direct the voting of sufficient securities to elect a majority
of the directors.
"Surviving Corporation" shall have the meaning set forth in Section
2.1.
"Tax" or "Taxes" means any federal, state, local, foreign or other
income, gross receipts, profits, franchise, license, transfer, sales, use,
payroll, withholding, occupation, property (real or personal), excise or similar
taxes, fees, duties, assessments, withholdings or governmental charges of any
nature (including interest, penalties or additions to such Taxes).
"Tax Returns" means all returns, reports, estimates, information
returns and statements of any nature with respect to Taxes.
"Termination Date" shall have the meaning set forth in subsection
3.3(b).
"Transferor" and "Transferors" shall have the respective meanings set
forth in the first paragraph of this Agreement.
6
<PAGE>
"University Online" shall have the meaning set forth in the first
paragraph of this Agreement.
"University Online Common Stock" means the Common Stock, $0.01 par
value per share, of University Online.
ARTICLE 2
BASIC TRANSACTION
2.1 The Merger. On and subject to the terms and conditions of this
Agreement, at the Effective Time CTA Acquisition shall be merged with and into
Cognitive Training (the "Merger"), the separate corporate existence of CTA
Acquisition shall thereupon cease, and Cognitive Training shall be the surviving
corporation in the Merger (the "Surviving Corporation"). The Surviving
Corporation shall, from and after the Effective Time, possess all the rights,
privileges, powers and franchises of whatsoever nature and description, as well
as a public or private nature, and be subject to all the restrictions,
disabilities and duties of each of the Constituent Corporations; and all rights,
privileges, powers and franchises of each of the Constituent Corporations, and
all property, tangible and intangible, real, personal and mixed, and debts due
to either of the Constituent Corporations on whatever account as well for stock
subscriptions as all other things in action or belonging to each of the
Constituent Corporations shall be vested in the Surviving Corporation; and all
property, rights, privileges, powers and franchises, and all and every other
interest shall be thereafter as effectually the property of the Surviving
Corporation as they were of the several and respective Constituent Corporations,
and the title to any real estate vested by deed or otherwise in any of the
Constituent Corporations shall not revert or be in any way impaired by reason of
the Merger. All rights of creditors and all liens upon the property of the
Constituent Corporations shall be preserved unimpaired, and all debts,
liabilities and duties of the Constituent Corporations shall thenceforth attach
to the Surviving Corporation, and may be enforced against it to the same extent
as if said debts, liabilities and duties had been incurred or contracted by it.
Any claim existing or action or proceeding, whether civil, criminal or
administrative, pending by or against either Constituent Corporation may be
prosecuted to judgment or decree as if the Merger had not taken place, or the
Surviving Corporation may be substituted in such action or proceeding.
2.2 Effective Time. At the time of the Closing, the Constituent
Corporations shall cause Articles of Merger substantially in the form of Exhibit
B attached hereto (the "Articles of Merger") to be duly executed and filed with
the Department of the Secretary of State of the State of Texas as provided under
the Texas Business Corporation Act. The Merger shall become effective at the
time that the Articles of Merger is made effective on or after its filing with
the Secretary of State
7
<PAGE>
of the State of Texas, and such time is hereinafter referred to
as the "Effective Time".
2.3 University Online Common Stock. University Online shall make
available to CTA Acquisition a sufficient number of shares of University Online
Common Stock to effect the Merger.
2.4 Conversion and Exchange of Shares. The manner of converting and
exchanging shares of the corporations participating in the Merger shall be as
follows:
(a) Stock of CTA Acquisition. Each share of capital stock of
CTA Acquisition issued and outstanding immediately prior to the Effective Time
shall thereupon be converted into and become one (1) share of Common Stock of
the Surviving Corporation. Each share of such Common Stock issued pursuant to
this subsection shall be fully paid and nonassessable.
(b) Stock of Cognitive Training. At and as of the Effective
Time each Cognitive Training Share issued and outstanding immediately prior to
the Effective Time (excluding shares held by Cognitive Training as treasury
stock, which shares shall be cancelled and extinguished at the Effective Time)
shall by virtue of the Merger and without any action on the part of the holder
thereof, be exchanged for and converted into the right to receive from
University Online the number of shares of University Online Common Stock as is
equal to the Conversion Number. Cognitive Training Shares exchanged and
converted as provided in this subsection 2.4(b) are herein sometimes referred to
as "Converted Cognitive Training Stock".
(c) Exchange of Stock Certificates. Immediately after the
Effective Time, each holder of an outstanding certificate or certificates
theretofore representing shares of Converted Cognitive Training Stock shall
surrender the same to an agent or agents designated by the Surviving
Corporation, and shall thereupon be entitled to receive in exchange therefor a
certificate representing the number of shares of University Online Common Stock
into which the shares of Converted Cognitive Training Stock represented by the
certificate or certificates so surrendered shall have been exchanged and
converted pursuant to subsection 2.4(b) above. Dividends payable after the
Effective Time to holders of record in respect of shares of University Online
Common Stock into which certificates for shares of Converted Cognitive Training
Stock shall be exchangeable, shall not be paid to holders of such certificates
until their certificates are surrendered for exchange as aforesaid.
(d) No Rights. At the Effective Time, the holder of Cognitive
Training capital stock immediately prior to the Effective Time shall cease to
have any rights as a shareholder of Cognitive Training, except such rights as
may be available pursuant to this Agreement.
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(e) No Further Transfers. At and after the Effective Time, no
transfer of the Cognitive Training Shares outstanding prior to the Effective
Time shall be made on the stock transfer books of the Surviving Corporation or
otherwise. If, after the Effective Time, certificates for Cognitive Training
Shares are presented to the Surviving Corporation, they shall be cancelled and
exchanged for the Merger Shares as provided above.
2.5 Fractional Shares. No fractional shares of University Online Common
Stock shall be issued to the Exchanging Shareholder in connection with the
Merger.
2.6 Articles of Incorporation. The Articles of Incorporation of CTA
Acquisition, as amended by the Articles of Merger, in effect immediately prior
to the Effective Time shall be and remain the Articles of Incorporation of the
Surviving Corporation, until duly amended in accordance with the terms thereof
and applicable state corporation law.
2.7 Bylaws. The Bylaws of CTA Acquisition in effect immediately prior
to the Effective Time shall be the Bylaws of the Surviving Corporation, until
duly amended in accordance with the terms thereof and applicable state
corporation law.
2.8 Directors. The directors of CTA Acquisition shall become the
directors of the Surviving Corporation at and as of the Effective Time until
their successors shall have been duly elected or appointed and qualified in
accordance with the Surviving Corporation's Articles of Incorporation and
Bylaws.
2.9 Officers. The officers of CTA Acquisition shall become the officers
of the Surviving Corporation at and as of the Effective Time (retaining their
respective positions and terms of office) until their successors have been duly
elected or appointed and qualified in accordance with the Surviving
Corporation's Bylaws.
2.10 Subsequent Actions. If, at any time after the Effective Time, the
Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments, assurances or any other actions or things may be necessary or
desirable to vest, perfect or confirm of record or otherwise in the Surviving
Corporation its right, title or interest in, to or under any of the rights,
properties or assets of either of the Constituent Corporations acquired or to be
acquired by the Surviving Corporation as a result of, or in connection with, the
Merger or otherwise to carry out this Agreement, the officers and directors of
the Surviving Corporation or University Online shall be authorized to execute
and deliver, in the name and on behalf of each of the Constituent Corporations
or otherwise, all such deeds, bills of sale, assignments and assurances and to
take and do, in the name and on behalf of each of the Constituent Corporations
or otherwise, all such other actions and things as may be necessary or desirable
to vest, perfect or confirm any and
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all right, title and interest in, to and under such rights, properties or assets
in the Surviving Corporation or otherwise to carry out this Agreement.
ARTICLE 3
CLOSING AND TERMINATION
3.1 Closing. The closing of the transactions provided for herein (the
"Closing") shall take place at 10:00 a.m. (local time) on July 31, 1996 (the
"Closing Date") at the offices of Wyrick, Robbins, Yates & Ponton, L.L.P., 4101
Lake Boone Trail, Raleigh, North Carolina, unless another date or place is
agreed to in writing by the parties hereto.
3.2 Transactions on the Closing Date. (a) At the Closing the Exchanging
Shareholder and Cognitive Training, as the case may be, shall deliver to the
Acquirors the following:
(i) the executed Articles of Merger;
(ii) stock certificates, evidencing all of the Cognitive
Training Shares, in each case endorsed in blank or with an executed
blank stock power attached, and with all necessary stock transfer tax
stamps attached thereto; and
(iii) each of the certificates, instruments and other
documents and agreements contemplated by Article 8 hereof.
(b) At the Closing the Acquirors shall deliver to the
Exchanging Shareholder and Cognitive Training, as the
case may be, the following:
(i) stock certificates evidencing the Merger Shares;
and
(ii) each of the certificates, instruments and other documents and
agreements contemplated by Article 7 hereof.
3.3 Termination. Notwithstanding any other provision to the contrary
herein, this Agreement may be terminated at any time:
(a) without liability on the part of any party hereto (unless
occasioned by reason of failure of one of the parties hereto to perform its
obligations hereunder), by mutual consent of all parties to this Agreement;
(b) without liability on the part of any party hereto (unless
occasioned by reason of failure of one of the parties hereto to perform its
obligations hereunder), by either University Online or Cognitive Training, if
the transactions contemplated hereby are not consummated on or before September
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30, 1996, or such later date as may be agreed upon in writing by the parties
hereto (the "Termination Date");
(c) by University Online, if (i) Cognitive Training or the Exchanging
Shareholder shall breach in any material respect any of their respective
representations, warranties or obligations hereunder, (ii) University Online
shall have notified Cognitive Training and the Exchanging Shareholder in writing
of such breach, (iii) such breach shall not have been cured in all material
respects or waived, and (iv) Cognitive Training or the Exchanging Shareholder,
as the case may be, shall not have provided reasonable assurance that such
breach shall be cured in all material respects on or before the Closing Date,
but only if such breach, singly or together with all other such breaches,
constitutes a failure of the conditions contained in Sections 8.1 or 8.2 hereof
as of the date of such termination; or
(d) by Cognitive Training, if (i) the Acquirors shall breach in any
material respect any of their respective representations, warranties or
obligations hereunder, (ii) Cognitive Training shall have notified the Acquirors
in writing of such breach, (iii) such breach shall not have been cured in all
material respects or waived, and (iv) the Acquirors shall not have provided
reasonable assurance that such breach shall be cured in all material respects on
or before the Closing Date, but only if such breach, singly or together with all
other such breaches, constitutes a failure of the conditions contained in
Sections 7.1 or 7.2 hereof as of the date of such termination.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF EXCHANGING SHAREHOLDER
Except as otherwise set forth in the Schedule of Exceptions attached
hereto as Exhibit C (the "Schedule of Exceptions"), the Exchanging Shareholder
represents and warrants to the Acquirors that the representations and warranties
contained in this Article 4 are true, correct and complete as of the date of
this Agreement.
4.1 Organization of Cognitive Training; Authority. Cognitive Training
is a corporation duly organized, validly existing and in good standing under the
laws of the State of Texas, with the full power and authority, corporate and
otherwise, to enter into this Agreement and to carry out and perform its
obligations under the terms of this Agreement. Cognitive Training has the full
and unrestricted power and authority, corporate and otherwise, to own, operate
and lease its assets and properties and to carry on its business as currently
conducted and in which it presently proposes to engage. Cognitive Training is
qualified to do business and in good standing in the states listed in Section
4.1 of the Schedule of Exceptions, which jurisdictions constitute the only
jurisdictions
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in which the nature of Cognitive Training's business requires it to be so
qualified. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby have been duly authorized by all requisite
corporate or other action on the part of Cognitive Training and the Exchanging
Shareholder. This Agreement has been duly executed and delivered by Cognitive
Training and the Exchanging Shareholder and constitutes the valid, binding and
enforceable obligation of Cognitive Training and the Exchanging Shareholder,
enforceable in accordance with its terms and conditions.
4.2 Ability to Carry Out the Agreement. Neither Cognitive Training nor
the Exchanging Shareholder is subject to or bound by any provision of:
(i) any law, statute, rule, regulation, ordinance or judicial
or administrative decision;
(ii) any articles or certificate of incorporation or bylaws;
(iii) any mortgage, deed of trust, lease, note, shareholder's
agreement, bond, indenture, other instrument or agreement, license,
permit, trust, custodianship or other restriction of any kind or
character whatsoever; or
(iv) any judgment, order, writ, injunction or decree of any
court, governmental body, administrative agency or arbitrator;
that would prevent or be violated by, or would result in any penalty, forfeiture
or contract termination as a result of, or under which there would be a default
as a result of, nor is the consent of any Person under any Contract required
for, the execution, delivery and performance by Cognitive Training and the
Exchanging Shareholder of this Agreement and the transactions contemplated
hereby, other than violations, penalties, forfeitures, contract terminations,
defaults or failure to obtain consents which, singly or in the aggregate, shall
not have a material adverse effect on the enforceability or validity of this
Agreement or the ability of the Transferors to perform their obligations
hereunder.
4.3 Capitalization of Cognitive Training; Ownership; Investment. (a)
The authorized capital stock of Cognitive Training consists solely of One
Hundred Thousand (100,000) shares of Cognitive Training Common Stock. The shares
of capital stock and other securities described in Exhibit A hereto are the only
shares of capital stock and other securities of Cognitive Training which are
issued and outstanding. Immediately prior to the Closing, any such securities
and any and all dividends payable in connection therewith (irrespective of
whether dividends have accrued) shall, without any liability on the part of
Cognitive Training, be converted into shares of Cognitive
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Training Common Stock. At the Closing the only class, type or kind of capital
stock or security of Cognitive Training outstanding shall be Cognitive Training
Common Stock. All shares of Cognitive Training Common Stock are duly authorized,
validly issued, fully paid and nonassessable, were issued in compliance with all
applicable federal and state securities laws, and are held of record by the
respective Cognitive Training shareholder as set forth in Exhibit A hereto.
There are no outstanding or authorized options, warrants, purchase rights,
subscription rights, conversion rights, exchange rights, rights of first
refusal, preemptive rights or other rights of any kind to acquire, directly or
indirectly, any shares of capital stock of Cognitive Training or securities
convertible into or exchangeable for, or which otherwise confer on the holder
thereof any right to acquire, any such shares or securities, nor is Cognitive
Training committed to issue any such option, warrant, right or security. There
are no outstanding or authorized stock appreciation, phantom stock, profit
participation or other similar rights with respect to Cognitive Training. There
are no voting trusts, proxies or other agreements, commitments, obligations or
understandings with respect to the voting of the capital stock of Cognitive
Training.
(b) The Exchanging Shareholder has good, valid and transferable title
to his Cognitive Training Shares set forth opposite his name in Exhibit A
hereto, free and clear of any and all Encumbrances, with full right and lawful
authority to transfer, assign, deliver, convert and exchange his Cognitive
Training Shares pursuant to this Agreement. The Exchanging Shareholder is not a
party to any option, warrant, purchase right or other contract or commitment
that could require the Exchanging Shareholder to sell, transfer, or otherwise
dispose of any capital stock of Cognitive Training.
4.4 Subsidiaries and Affiliates. Cognitive Training has no Subsidiaries
and does not control, directly or indirectly, or have any direct or indirect
equity participation or any interest in any corporation, partnership, trust,
venture, business, enterprise, firm or other business association.
4.5 Financial Statements; Liabilities. (a) Attached hereto as Exhibit D
are the following financial statements of Cognitive Training (collectively the
"Financial Statements"): (i) the audited balance sheets and statements of
income, changes in shareholder's equity and cash flows as at December 31, 1995,
1994 and 1993 and for the fiscal years ended December 31, 1995, 1994 and 1993 as
audited by Ernst & Young L.L.P.; and (ii) the unaudited balance sheet and
statements of income, changes in shareholder's equity and cash flow ("Most
Recent Financial Statements") as at and for the six (6) months ended June 30,
1996 ("Most Recent Fiscal Month End"). The Financial Statements (including the
notes thereto) have been prepared in conformity with United States generally
accepted accounting principles ("GAAP") applied on a consistent basis throughout
the periods
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covered thereby, are materially true, correct and complete, fairly present the
financial position of Cognitive Training at the dates thereof and the results of
operations of Cognitive Training for the periods covered thereby, and are
consistent with the books and records of Cognitive Training (which books and
records are correct and complete), except that the Financial Statements for the
Most Recent Fiscal Month End are not accompanied by notes and are subject to
normal year end audit adjustments which are not material in the aggregate.
(b) There are no material Liabilities of Cognitive Training (and there
is no Basis for any present or future action, suit, proceeding, hearing,
investigation, charge, complaint, claims or demand against Cognitive Training
giving rise to any Liability), except for those: (i) accrued or reflected on the
face of the Most Recent Financial Statements; or (ii) arising after the Most
Recent Fiscal Month End in the ordinary course of business and not material,
singly or in the aggregate, to Cognitive Training (none of which results from,
arises out of, relates to, is in the nature of, or was caused by any breach of
contract, breach of warranty, tort infringement or violation of law).
4.6 Conduct of Business Since Most Recent Fiscal Year End; Absence of
Material Adverse Change. Since the Most Recent Fiscal Year End, there has been
no material adverse change in the business, operations, results of operations,
assets, properties, financial condition or prospects of Cognitive Training.
Since such date, except as contemplated in this Agreement: (i) Cognitive
Training has conducted its business in the manner theretofore conducted and only
in the ordinary course consistent with past practices; and (ii) without limiting
the generality of the foregoing, Cognitive Training has not:
(a) incurred any loss of, or injury to, the assets or properties of
Cognitive Training as the result of any fire, explosion, flood, windstorm,
earthquake, labor trouble, riot, accident, act of God, public enemy or armed
forces, or other casualty (whether or not covered by insurance payable to
Cognitive Training);
(b) issued, sold or otherwise disposed of, or committed to issue, sell
or otherwise dispose of (other than as contemplated in this Agreement), any
capital stock, bonds or other securities of any kind or nature, or granted any
options, warrants or other rights to purchase or obtain (including upon
conversion, exchange, or exercise) any of its capital stock;
(c) incurred, or become subject to, any obligation or Liability in
excess of $10,000, either individually or in the aggregate, except Liabilities
incurred in the ordinary course of business consistent with past practices and
obligations under the Contracts;
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(d) discharged or satisfied any lien or Encumbrance or paid any
obligation or Liability in excess of $10,000 other than Liabilities reflected in
the Most Recent Fiscal Year End balance sheet and Liabilities incurred since the
Most Recent Fiscal Year End in the ordinary course of business consistent with
past practices;
(e) for any reason, declared or made payment of, or set aside for
payment, any dividends or distributions of any assets of any kind whatsoever in
respect of any shares of the capital stock of Cognitive Training (whether in
cash or in kind), or purchased, redeemed or otherwise acquired any of its
capital stock, any securities convertible into capital stock, or any other
securities;
(f) mortgaged, pledged or subjected to lien, charge, security interest
or any other Encumbrance any of its assets or properties with respect to any
obligations;
(g) sold, exchanged, transferred or otherwise disposed of any of its
assets or properties, tangible and intangible, or cancelled any debts or claims,
except in each case in the ordinary course of business consistent with past
practices;
(h) written down the value of any assets or properties or written off
as uncollectible any notes or accounts receivable, except write-downs and
write-offs in the ordinary course of business consistent with past practices;
(i) entered into any employment agreement or collective bargaining
agreement, written or oral; modified the terms of any such existing agreement or
contract; increased the rate of compensation payable, or to become payable, by
it to any of its officers, directors, employees, consultants, agents or
independent contractors; adopted, amended, modified, terminated or made any
contributions to, or any commitments for any contributions to, any bonus, profit
sharing, incentive, severance, pension or other employee benefit plan, payment
or arrangement made to, for or with any of the foregoing; or made any other
change in employment terms for any of its officers, directors, employees,
consultants, agents or independent contractors outside of the ordinary course of
business consistent with past practices;
(j) made or permitted any amendment or termination of any contract,
agreement, lease or license to which it is a party or which it owns otherwise
than in the ordinary course of business consistent with past practice;
(k) through negotiation or otherwise made any commitment or incurred
any Liability to any labor organization;
(l) paid any severance or termination pay to any officer or employee in
excess of two weeks' salary;
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(m) made any material change in any method of accounting or accounting
practice except where required by a change in GAAP;
(n) made any charitable contributions or pledges outside of the
ordinary course of business consistent with past practices;
(o) waived or released any rights of material value other than in the
ordinary course of business consistent with past practices;
(p) effected any material reduction or increase of advertising,
administrative, or research and development expenses of Cognitive Training other
than in the ordinary course of business consistent with past practices;
(q) made or committed to make capital expenditures (or series of
related capital expenditures) either in excess of $10,000 in the aggregate or
outside of the ordinary course of business consistent with past practices;
(r) made any accrual or arrangement for or payment of bonuses or
special compensation of any kind to any director, officer, consultant or
employee, other than as specified in this Agreement;
(s) made any investment in (capital or otherwise), any loan to, or any
acquisition of securities or assets of, any other Person (or series of related
investments, loans or acquisitions);
(t) made or authorized any change in the charter or bylaws of Cognitive
Training, other than as specified in this Agreement;
(u) issued any note, bond, or other debt security, increased bank debt,
or created, incurred, assumed, or guaranteed any indebtedness for borrowed money
or capital lease obligations together with Liabilities involving more than
$50,000 in the aggregate;
(v) made any loan to, or entered into any other transaction with, any
of its directors, officers or employees outside of the ordinary course of
business consistent with past practices; or
(w) agreed or committed, whether in writing or not, to do any of the
foregoing.
4.7 Title to Tangible Personal Properties; Absence of Liens. (a)
Cognitive Training has good, valid and marketable title to, or valid and
subsisting leasehold interests in, all buildings, machinery, equipment and other
tangible personal properties and assets used in the business of Cognitive
Training, located on its premises, or shown on the balance sheet of the Most
Recent Financial Statements (the "Most Recent Balance Sheet") or acquired after
the date thereof, free and clear of any
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and all Encumbrances, except for Encumbrances reflected in the Most Recent
Balance Sheet.
(b) The assets and properties owned or leased by Cognitive Training
constitute all of the assets and properties necessary to conduct the business of
Cognitive Training in the manner in which it has previously been conducted and
as presently proposed to be conducted. All such personal property is free from
material defects, has been maintained in accordance with normal industry
practice, is in good operating condition and repair, ordinary wear and tear
excepted, and is suitable for the purposes for which it presently is used and
proposed to be used.
4.8 Litigation. (a) There is no charge, complaint, action, suit,
arbitration, proceeding, hearing or investigation (collectively, "Litigation")
pending or threatened against Cognitive Training in, before or by any court or
arbitrator or governmental agency or authority. Neither the Exchanging
Shareholder nor the directors and officers of Cognitive Training has any Basis
to believe that any Litigation may be brought against Cognitive Training.
Cognitive Training is not subject to any outstanding injunction, judgment,
order, decree, ruling or charge.
(b) Cognitive Training has not breached, and is not in default of, any
of its legal obligations with respect to any of its licensors, licensees,
collaborative and other partners, joint venturers, brokers, distributors,
business consultants, franchisees, franchisors, representatives or other
independent contractors.
4.9 Compliance with Law. The Exchanging Shareholder and Cognitive
Training and its predecessors and Affiliates have complied in all respects with
all applicable statutes, laws, ordinances, regulations, rules, orders,
determinations, writs, injunctions, awards, judgments and decrees of every kind
whatsoever of any and all governmental authorities applicable to Cognitive
Training (including all agencies thereof) or to the assets, properties and
business of Cognitive Training, and no suit, action, proceeding, hearing,
investigation, charge, complaint, claim, demand or notice has been filed,
commenced or threatened against Cognitive Training alleging any failure to so
comply. All governmental approvals, permits and licenses required by Cognitive
Training in connection with the conduct of its business have been obtained, are
in full force and effect, and are being complied with in all respects. Neither
Cognitive Training nor any of its employees, agents, distributors or
representatives have not paid or received any bribe or other unlawful,
questionable or unusual payment of money or other thing of more than nominal
value, granted or accepted any extraordinary discount, or furnished or been
given any other unlawful or unusual inducement to or from any person, business
association or governmental entity in the United States or elsewhere in
connection with or in furtherance of the business of Cognitive
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Training, and such business is not in any manner dependent upon the making or
receipt of such payment, discounts or other inducements.
4.10 Contracts. (a) Section 4.10(a) of the Schedule of Exceptions sets
forth a list of each written and oral contract or agreement outstanding as of
the date hereof to which Cognitive Training is a party (collectively the
"Contracts" or individually a "Contract"):
(i) which involves the lease of personal property from or to
third parties providing for lease payments in excess of $10,000 per
annum;
(ii) under which it has created, incurred, assumed or
guaranteed (or may create, incur, assume or guarantee) indebtedness for
borrowed money (including capitalized lease obligations) involving more
than $10,000;
(iii) which is in the nature of an employment, consulting or
severance agreement or collective bargaining agreement involving the
payment of more than $10,000 or not entered into in the ordinary course
of business;
(iv) which is with the Exchanging Shareholder or any
Affiliates (other than Cognitive Training);
(v) which concerns confidentiality, nondisclosure or
noncompetition;
(vi) which is a profit sharing, stock option, stock
appreciation, deferred compensation, severance or other plan or
arrangement for the benefit of its current or former directors,
officers and employees;
(vii) which by its terms is not terminable without liability
and involves the payment or receipt of $10,000 or more;
(viii) which the consequences of a default or termination
could have a material adverse effect on the business, assets, financial
condition, operations, results of operations or future prospects of
Cognitive Training;
(ix) which is in the nature of a partnership, joint venture or
collaborative arrangement or relationship;
(x) which involves the purchase or sale of raw materials,
commodities, supplies, products or other personal property, or for the
furnishing or receipt of services, the performance of which shall
extend over a period of more than one (1) year, result in financial
loss to Cognitive Training, or involves consideration in excess of
$10,000; or
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(xi) which is outside of the ordinary course of business or
contains any provision requiring Cognitive Training to indemnify any
other party thereto.
(b) Cognitive Training has delivered to University Online a correct and
complete copy of each written Contract and a written summary setting forth the
terms and conditions of each oral Contract. All of the Contracts are legal,
valid, binding and enforceable in accordance with their respective terms against
Cognitive Training and any other parties thereto, and are in full force and
effect on identical terms following the consummation of the transactions
contemplated in this Agreement. There is not under any Contract: (i) any
existing default, breach or violation by Cognitive Training or, to the Knowledge
of Cognitive Training, by any other party thereto; (ii) an event which, after
notice or lapse of time or both, would constitute a default or breach by
Cognitive Training or, to the Knowledge of Cognitive Training, by any other
party, or permit termination, modification or acceleration, under the Contract;
or (iii) any repudiation of any provision of any Contract.
4.11 Brokers and Intermediaries. None of the Transferors has employed
any broker, finder, advisor or intermediary in connection with the transactions
contemplated by this Agreement which would be entitled to a broker's, finder's
or similar fee or commission in connection therewith or upon the consummation
thereof.
4.12 Tax Matters. (a) Cognitive Training made an election to be taxed
under the provisions of Subchapter C of the Code effective as of January 1,
1993. Cognitive Training currently utilizes the cash method of accounting for
income tax purposes, and such method of accounting has not changed since the
date of its Subchapter C election. Cognitive Training has filed all Tax Returns
that it has been required to file. All such Tax Returns were correct and
complete in all material respects. All Taxes owed by Cognitive Training (whether
or not shown on any Tax Return) have been paid. Cognitive Training currently is
not the beneficiary of any extension of time within which to file any Tax
Return. No claim has ever been made by an authority in a jurisdiction where
Cognitive Training does not file Tax Returns that it is or may be subject to
taxation by that jurisdiction. There are no Encumbrances on any of the assets of
Cognitive Training that arose in connection with any failure (or alleged
failure) to pay any Tax.
(b) Cognitive Training has withheld and paid all Taxes required to have
been withheld and paid in connection with amounts paid or owing to any employee,
consultant, independent contractor, creditor, shareholder or other Person.
(c) No Transferor or director or officer (or employee responsible for
Tax matters) of Cognitive Training has any Knowledge that any authority has or
might assess any additional
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Taxes for any period for which Tax Returns have been filed. There is no dispute
or claim concerning any Tax Liability of Cognitive Training either: (i) claimed
or raised by any authority in writing; or (ii) as to which any of the
Transferors or the directors and officers (and employees responsible for Tax
matters) of Cognitive Training has Knowledge based upon personal contact with
any agent of such authority. No federal, state, local or foreign income Tax
Returns filed with respect to Cognitive Training for taxable periods ended on or
before December 31, 1995 have been audited or currently are the subject of
audit. The Transferors have delivered to University Online correct and complete
copies of all federal, state and local income Tax Returns, examination reports
and statements of deficiencies assessed against or agreed to by Cognitive
Training since its formation.
(d) Cognitive Training has not waived any statute of limitations in
respect of Taxes or agreed to any extension of time with respect to a Tax
assessment or deficiency.
(e) Cognitive Training has not filed a consent under Code Section
341(f) concerning collapsible corporations. Cognitive Training has not made any
payments, is not obligated to make any payments, and is not a party to any
agreement that under certain circumstances could obligate it to make any
payments that shall not be deductible under Code Section 280G. Cognitive
Training has not been a United States real property holding corporation within
the meaning of Code Section 897(c)(2) during the applicable period specified in
Code Section 897(c)(1)(A)(ii). Cognitive Training has disclosed on its federal
income Tax Returns all positions taken therein that could give rise to a
substantial understatement of federal income Tax within the meaning of Code
Section 6662. Cognitive Training is not a party to any Tax allocation or sharing
agreement. Cognitive Training is not a member of an Affiliated Group filing a
consolidated federal income Tax Return and has no Liability for the Taxes of any
Person (other than Cognitive Training) under Treas. Reg. ss. 1.1502-6 (or any
similar provision of state, local or foreign law), as a transferee or successor,
by contract or otherwise.
(f) The unpaid Taxes of Cognitive Training: (i) did not, as of the Most
Recent Fiscal Month End, exceed the reserve for Tax Liability (rather than any
reserve for deferred Taxes established to reflect timing differences between
book and Tax income) set forth on the face of the Most Recent Balance Sheet
(rather than in any notes thereto); and (ii) do not exceed that reserve as
adjusted for the passage of time through the Closing Date in accordance with the
past custom and practice of Cognitive Training in filing its Tax Returns.
(g) The Exchanging Shareholder has no present plan, intention or
arrangement to dispose of any of the Merger Shares in a manner that would cause
the Merger to violate the continuity
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of shareholder interest requirement set forth in Treas. Reg. ss.1.368-1.
(h) As of the Effective Time, Cognitive Training shall not have
outstanding any warrants, options, convertible securities or any other type of
right pursuant to which any Person could acquire stock in Cognitive Training
that, if exercised or converted, would effect University Online's acquisition or
retention of control of Cognitive Training as defined in Code Section 368(c)(1).
(i) Cognitive Training operates at least one (1) significant historic
business line or owns at least a significant portion of its historic business
assets, in each case within the meaning of Treas. Reg. ss.1.368-1(d).
4.13 Employee Benefits. (a) Section 4.13 of the Schedule of Exceptions
lists each Employee Benefit Plan that Cognitive Training maintains or to which
Cognitive Training contributes. Each such Employee Benefit Plan (and each
related trust, insurance contract or fund) complies in form and in operation in
all respects with the applicable requirements of ERISA, the Code, and other
applicable laws.
(b) All required reports and descriptions (including Form 5500 Annual
Reports, Summary Annual Reports, PBGC-1's and Summary Plan Descriptions) have
been filed or distributed appropriately with respect to each such Employee
Benefit Plan. The requirements of Part 6 of Subtitle B of Title I of ERISA and
of Code Section 4980B have been met with respect to each such Employee Benefit
Plan which is an Employee Welfare Benefit Plan.
(c) All contributions (including all employer contributions and
employee salary reduction contributions) which are due have been paid to each
such Employee Benefit Plan which is an Employee Pension Benefit Plan, and all
contributions for any period ending on or before the Closing Date which are not
yet due, have been paid to each such Employee Pension Benefit Plan or accrued in
accordance with the past custom and practice of Cognitive Training. All premiums
or other payments for all periods ending on or before the Closing Date have been
paid with respect to each such Employee Benefit Plan which is an Employee
Welfare Benefit Plan.
(d) Each such Employee Benefit Plan which is an Employee Pension
Benefit Plan meets the requirements of a "qualified plan" under Code Section
401(a) and has received, within the last two (2) years, a favorable
determination letter from the Internal Revenue Service.
(e) The market value of assets under each such Employee Benefit Plan
which is an Employee Pension Benefit Plan (other than any Multiemployer Plan)
equals or exceeds the present value of all vested and nonvested Liabilities
thereunder determined in
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accordance with PBGC methods, factors and assumptions applicable to an Employee
Pension Benefit Plan terminating on the date for determination.
(f) The Transferors have delivered to University Online correct and
complete copies of the plan documents and summary plan descriptions, the most
recent determination letter received from the Internal Revenue Service, the most
recent Form 5500 Annual Report and all related trust agreements, insurance
contracts and other funding agreements which implement each such Employee
Benefit Plan.
(g) With respect to each Employee Benefit Plan that Cognitive Training
and the Controlled Group of Corporations which includes Cognitive Training
maintains or ever has maintained or to which any of them contributes, ever has
contributed, or ever has been required to contribute:
(i) No such Employee Benefit Plan which is an Employee Pension
Benefit Plan (other than any Multiemployer Plan) has been completely or
partially terminated or been the subject of a Reportable Event as to
which notices would be required to be filed with the PBGC. No
proceeding by the PBGC to terminate any such Employee Pension Benefit
Plan (other than any Multiemployer Plan) has been instituted or
threatened.
(ii) There have been no Prohibited Transactions with respect to any
such Employee Benefit Plan. No Fiduciary has any Liability for breach
of fiduciary duty or any other failure to act or comply in connection
with the administration or investment of the assets of any such
Employee Benefit Plan. No action, suit, proceeding, hearing or
investigation with respect to the administration or the investment of
the assets of any such Employee Benefit Plan (other than routine claims
for benefits) is pending or threatened. Neither the Exchanging
Shareholder nor the directors or officers (or employees with
responsibility for employee benefits matters) of Cognitive Training has
any Knowledge of any Basis for any such action, suit, proceeding,
hearing or investigation.
(iii) Cognitive Training has not incurred, and neither the
Exchanging Shareholder nor the directors or officers (or employees with
responsibility for employee benefits matters) of Cognitive Training has
any reason to expect that Cognitive Training shall incur, any Liability
to the PBGC (other than PBGC premium payments) or otherwise under Title
IV of ERISA (including any withdrawal Liability) or under the Code with
respect to any such Employee Benefit Plan which is an Employee Pension
Benefit Plan.
(h) None of Cognitive Training and the other members of the Controlled
Group of Corporations that includes Cognitive Training contributes to ever has
contributed to, or ever has been required
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to contribute to any Multiemployer Plan or has any Liability (including
withdrawal Liability) under any Multiemployer Plan.
(i) Cognitive Training does not maintain or contribute, never has
maintained or contributed and never has been required to contribute to any
Employee Welfare Benefit Plan providing medical, health or life insurance or
other welfare-type benefits for current or future retired or terminated
employees, their spouses or their dependents (other than in accordance with Code
Section 4980B).
4.14 Articles of Incorporation and Bylaws. Cognitive Training has
delivered to the Acquirors complete and correct copies of the Articles of
Incorporation and Bylaws of Cognitive Training, as currently in effect. The
Transferors have not defaulted under or violated any provision of the Articles
of Incorporation or Bylaws of Cognitive Training.
4.15 Insurance. With respect to each insurance policy that is currently
in effect (including policies providing property, casualty, liability or
workers' compensation coverage or bond or surety arrangements) or self-insurance
arrangement to which Cognitive Training is a party, a named insured, or
otherwise the beneficiary of coverage: (i) the policy is legal, valid, binding,
enforceable and in full force and effect; (ii) the policy shall continue to be
legal, valid, binding, enforceable and in full force and effect on identical
terms following the consummation of the transactions contemplated by this
Agreement; (iii) Cognitive Training is not nor is any other party to the policy
in breach or default (including with respect to the payment of premiums or the
giving of notices), and no event has occurred which, with notice or the lapse of
time, would constitute such a breach or default, or permit termination,
modification or acceleration, under the policy; (iv) no party to the policy has
repudiated any provision thereof; and (v) no claims have been made during the
past five years. Cognitive Training has been covered since the date of its
formation by insurance in scope and amount customary and reasonable for the
businesses in which it has engaged during the aforementioned period.
4.16 Intellectual Property. (a) Cognitive Training owns or has the
legal right to use pursuant to license, sublicense, agreement or permission all
Intellectual Property necessary or desirable for the operation of the businesses
of Cognitive Training as currently conducted. Each item of Intellectual Property
owned or used by Cognitive Training immediately prior to the Closing hereunder
shall be owned or used by Cognitive Training on identical terms and conditions
subsequent to the Closing. Cognitive Training has taken all reasonable action to
maintain and protect each item of Intellectual Property that it owns or uses.
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(b) To the Knowledge of the Transferors, Cognitive Training has not
interfered with, infringed upon, misappropriated or otherwise come into conflict
with any Intellectual Property rights of third Persons, and none of the
Transferors or the directors or officers of Cognitive Training has ever received
any charge, complaint, claim, demand or notice alleging any such interference,
infringement, misappropriation or violation (including any claim that Cognitive
Training must license or refrain from using any Intellectual Property rights of
any third party). To the Knowledge of any of the Transferors or the directors or
officers of Cognitive Training, no third Person has interfered with, infringed
upon, misappropriated or otherwise come into conflict with any Intellectual
Property rights of Cognitive Training.
(c) Cognitive Training has not and shall not utilize any inventions of
any of its employees (or people it currently intends to hire, if any) made prior
to their employment by Cognitive Training. Section 4.16(c) of the Schedule of
Exceptions identifies each patent or registration which has been issued to
Cognitive Training with respect to any of its Intellectual Property, identifies
each pending patent application or application for registration which Cognitive
Training has made with respect to any of its Intellectual Property, identifies
and documents the record of conception for any of the Intellectual Property of
Cognitive Training which is either a trade secret or claimed as proprietary and
not subject to a patent or pending patent application, and identifies each
license, agreement or other permission which Cognitive Training has granted to
any third Person with respect to any of its Intellectual Property (together with
any exceptions). Cognitive Training has delivered to University Online correct
and complete copies of all such patents, registrations, applications, licenses,
agreements and permissions (as amended to date) and have made available to the
Acquirors correct and complete copies of all other written documentation
evidencing ownership and prosecution (if applicable) of each such item. Section
4.16(c) of the Schedule of Exceptions also identifies each trade name or
unregistered trademark used by Cognitive Training in connection with its
business. With respect to each item of Intellectual Property required to be
identified in Section 4.16(c) of the Schedule of Exceptions:
(i) Cognitive Training possesses all right, title and interest
in and to the item, free and clear of any Encumbrance, license or other
restriction;
(ii) the item is not subject to any outstanding injunction,
judgment, order, decree, ruling or charge;
(iii) no action, suit, proceeding, hearing, investigation,
charge, complaint, claim or demand is pending or is threatened which
challenges the legality, validity, enforceability, use or ownership of
the item; and
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(iv) Cognitive Training has never agreed to indemnify any
Person for or against any interference, infringement, misappropriation
or other conflict with respect to the item.
(d) Section 4.16(d) of the Schedule of Exceptions identifies each item
of Intellectual Property that any third Person owns and that Cognitive Training
uses pursuant to license, sublicense, agreement or permission that is not
available at retail. Cognitive Training has delivered to University Online
correct and complete copies of all such licenses, sublicenses, agreements, and
permissions (as amended to date). With respect to each item of Intellectual
Property required to be identified in Section 4.16(d) of the Schedule of
Exceptions:
(i) the license, sublicense, agreement or permission covering
the item is legal, valid, binding, enforceable and in full force and
effect;
(ii) the license, sublicense, agreement or permission shall
continue to be legal, valid, binding, enforceable and in full force and
effect on identical terms following the Closing;
(iii) no party to the license, sublicense, agreement or permission
is in breach or default, and no event has occurred which with notice or
lapse of time would constitute a breach or default or permit
termination, modification or acceleration, thereunder;
(iv) no party to the license, sublicense, agreement, or
permission has repudiated any provision thereof;
(v) with respect to each sublicense, to the Knowledge of the
Transferors, the representations and warranties set forth in clauses
(i) through (iv) above are true and correct with respect to the
underlying license;
(vi) to the Knowledge of the Transferors, the underlying item
of Intellectual Property is not subject to any outstanding injunction,
judgment, order, decree, ruling or charge;
(vii) to the Knowledge of the Transferors, no action, suit,
proceeding, hearing, investigation, charge, complaint, claim or demand
is pending or is threatened which challenges the legality, validity or
enforceability of the underlying item of Intellectual Property; and
(viii) Cognitive Training has not granted any sublicense or
similar right with respect to the license, sublicense, agreement or
permission.
(e) To the Knowledge of the Transferors, Cognitive Training's ownership
and/or right to the use of its Intellectual
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Property shall not interfere with, infringe upon, misappropriate or otherwise
come into conflict with any Intellectual Property rights of third Persons as a
result of the continued operation of its business as currently conducted and as
currently proposed to be conducted.
(f) None of the Transferors has or had any Knowledge of any new
products, inventions, procedures or methods of manufacturing or processing that
any competitors or other third Persons have developed which reasonably could be
expected to supersede or make obsolete any product or process of Cognitive
Training.
(g) None of the Transferors or the directors of Cognitive Training has
done anything to compromise the secrecy, confidentiality or value of any of its
trade secrets, know-how, inventions, prototypes, designs, processes or technical
data (collectively "Proprietary Information") required to conduct its business
as now conducted and proposed to be conducted. Cognitive Training has taken
reasonable security measures to protect the secrecy, confidentiality and value
of its Proprietary Information important to the conduct of its business,
including requiring each employee to execute an agreement containing a
confidentiality clause.
(h) None of the Transferors or the directors or officers (or employees
with responsibility for Intellectual Property matters) of Cognitive Training has
any Knowledge that any of Cognitive Training' employees, officers or consultants
is in violation of his or her respective noncompetition, confidentiality or
non-disclosure agreement.
4.17 Bank Accounts. Section 4.17 of the Schedule of Exceptions sets
forth a true and complete list of all bank accounts of Cognitive Training and
all authorized signatories to each such account.
4.18 Directors, Officers and Employees. Section 4.18 of the Schedule of
Exceptions containing a correct and complete listing as of the date hereof all
of the directors, officers and employees of Cognitive Training, showing their
names, positions and current wage or salary and bonuses.
4.19 Labor Relations; Employees. (a) Cognitive Training has no
collective bargaining agreements with any of its employees; there is no labor
union organizing activity pending or threatened with respect to Cognitive
Training; and Cognitive Training has not experienced any strikes, grievances,
claims of unfair labor practices or other collective bargaining disputes.
Cognitive Training has not committed any unfair labor practices. To the
Knowledge of the Transferors, no executive, key employee or group of employees
has any plans to terminate employment with Cognitive Training.
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(b) There is no claim nor, to the Transferors' Knowledge, grounds for
any claim by any Person or party (including, but not limited to, governmental
agencies of any kind) against Cognitive Training arising out of any federal,
state, county, local or foreign statute, ordinance or regulation relating to
discrimination against employees or any other employee practices, including
without limitation retirement or labor relations, or occupational, safety and/or
health standards, sexual harassment or intentional infliction of emotional
distress.
4.20 Transactions with Related Parties. Neither the Exchanging
Shareholder nor any present or former officer, director or shareholder of
Cognitive Training, and nor any Affiliate of the Exchanging Shareholder or of
such officer, director or shareholder: (i) has been involved in any business
(excluding relationships and payments arising from the employment or retention
by Cognitive Training of any such persons in the ordinary course of business)
arrangement or relationship with Cognitive Training, including, without
limitation, any contract, agreement or other arrangement providing for the
employment of, furnishing of services, by, rental of real or personal property
from or otherwise requiring payment to any such officer, director, shareholder
or Affiliate; or (ii) owns any asset, tangible or intangible, which is used in
the business of Cognitive Training.
4.21 Copies of Documents. True, correct and complete copies of all
documents listed in the Schedule of Exceptions have been heretofore delivered to
University Online and identified in writing as constituting such delivery.
4.22 Real Property. (a) As of the Closing, Cognitive Training will own
no real property.
(b) Section 4.22(b) of the Schedule of Exceptions lists and describes
briefly all real property leased or subleased to or by Cognitive Training.
Cognitive Training has delivered to University Online correct and complete
copies of the leases and subleases (as amended to date)listed in Section 4.22(b)
of the Schedule of Exceptions. With respect to each such lease and sublease:
(i) the lease or sublease is legal, valid, binding,
enforceable and in full force and effect;
(ii) the lease or sublease shall continue to be legal, valid,
binding, enforceable and in full force and effect on identical terms
following the consummation of the transactions contemplated hereby;
(iii) no party to the lease or sublease is in breach or
default, and no event has occurred which, with notice or lapse of time,
would constitute a breach or default or permit termination,
modification or acceleration thereunder;
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(iv) no party to the lease or sublease has repudiated any
provision thereof;
(v) there are no disputes, oral agreements or forbearance
programs in effect as to the lease or sublease;
(vi) with respect to each sublease, the representations and
warranties set forth in clauses (i) through (v) above are true and
correct with respect to the underlying lease;
(vii) Cognitive Training has not assigned, transferred,
conveyed, mortgaged, deeded in trust or encumbered any interest in the
leasehold or subleasehold;
(viii) all facilities leased or subleased thereunder have
received all approvals of governmental authorities (including licenses
and permits) required in connection with the operation thereof and have
been operated and maintained in accordance with applicable laws, rules
and regulations;
(ix) all facilities leased or subleased thereunder are
supplied with utilities and other services necessary for the operation
of said facilities; and
(x) the owner of the facility leased or subleased has good and
marketable title to the parcel of real property, free and clear of any
Encumbrance, easement, covenant or other restriction, except for
installments of special easements not yet delinquent and recorded
easements, covenants and other restrictions which do not impair the
current use, occupancy or value, or the marketability of title, of the
property subject thereto.
4.23 Books and Records. The stock records of Cognitive Training are in
all material respects complete and accurate, and the minute books of Cognitive
Training accurately reflect the actions taken at shareholder and director
meetings or by unanimous written consent and are in all material respects
correct, complete and accurate.
4.24 Environmental Matters. (a) Cognitive Training has complied and is
in compliance with all local, state and federal statutes, ordinances, and
regulations dealing with the protection of the environment or public health and
safety, including, but not limited to, the Comprehensive Environmental Response,
Compensation, and Liability Act (codified as amended, 42 U.S.C. ss.ss. 9601 et
seq.) ("CERCLA") and the Resource Conservation and Recovery Act (codified as
amended, 42 U.S.C. ss.ss. 6901 et seq.) ("RCARA").
(b) Cognitive Training has obtained all required local, state and
federal permits, licenses, certificates and approvals relating to: (i) air
emissions; (ii) discharges to surface water or groundwater; (iii) noise
emissions; (iv) solid or liquid waste
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disposal; (v) the use, generation, storage, transportation or disposal of toxic
or hazardous substances or wastes (intended hereby and hereafter to include any
and all such materials listed in any local, state or federal statute, ordinance
or regulation); (vi) the use, storage, transportation or disposal of petroleum
or petroleum products; or (vii) other environmental, health and safety matters.
(c) Cognitive Training has not caused, suffered, permitted or sustained
any emission, spill, release or discharge of any toxic or hazardous substances
or wastes, or any petroleum products, into or upon: (i) the air; (ii) soils or
any improvements located thereon, whether on Cognitive Training's property or
elsewhere; (iii) surface water or groundwater; or (iv) a sewer, septic system or
waste treatment, storage or disposal system except in accordance with applicable
law or a valid government permit, license, certificate or approval.
(d) None of the Transferors or the officers or directors (including
employees responsible for environmental matters) of Cognitive Training has
received written or oral notice of any actual or potential claims, orders,
directives, citations or causes of action based on actual or alleged violations
of any local, state, or federal statutes, ordinances or regulations dealing with
the protection of the environment or public health and safety, including, but
not limited to, CERCLA or RCARA, or oral or written notice of any actual or
potential common law claims or causes of action based upon Cognitive Training's
actual or alleged involvement with or use of any substance regulated by local,
state or federal statutes, ordinances or regulations dealing with the protection
of the environment or public health and safety.
(e) None of the Transferors or the officers or directors (including
employees responsible for environmental matters) of Cognitive Training has
received oral or written notice of any actual or potential claims, orders,
directives, citations or causes of action under any local, state or federal
statutes, ordinances or regulations dealing with the protection of the
environment or public health and safety, including, but not limited to, CERCLA
and RCARA, based upon or arising out of its actual or alleged disposal of
hazardous wastes or substances, whether on or off real property being operated
by Cognitive Training.
(f) None of the Transferors or the officers or directors (including
employees responsible for environmental matters) of Cognitive Training has any
Knowledge of any condition on any of the real property owned or leased by
Cognitive Training which may give rise to any claim, order, directive, citation
or cause of action based on any local, state or federal statute, ordinance or
regulation dealing with protection of the environment or public health and
safety, including, but not limited to, CERCLA or RCARA.
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4.25 Guaranties. Cognitive Training is not a guarantor or otherwise
liable for any Liability or obligation of any Person other than itself
(including indebtedness of any other Person).
4.26 Government Consents. No consent, approval or authorization of or
designation, declaration or filing with any state, federal or foreign
governmental authority on the part of the Exchanging Shareholder because of any
special characteristic of such Exchanging Shareholder is required in connection
with the valid execution and delivery of this Agreement and the consummation by
the Exchanging Shareholder of the transactions contemplated hereby.
4.27 Manufacturing Rights. Cognitive Training has not granted rights to
manufacture or sell its products, processes or technology to any other Person.
4.28 Disclosure. No information contained in this Agreement, any
related documents, the Financial Statements or any written statement furnished
by or on behalf of the Transferors pursuant to the terms of this Agreement
contains any untrue statement of material fact or omits to state any material
fact necessary in order to make the statements and information contained herein
or therein not misleading in light of the circumstances under which made.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF
THE ACQUIRORS
The Acquirors jointly and severally represent and warrant to Cognitive
Training that:
5.1 Organization and Authority of the Acquirors. University Online and
CTA Acquisition are corporations duly incorporated, validly existing and in good
standing under the laws of the State of Delaware and Texas, respectively, with
the corporate power and authority to enter into this Agreement and to perform
their respective obligations hereunder. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have been
duly authorized by all requisite corporate action on the part of each of the
Acquirors. This Agreement has been duly executed and delivered by each of the
Acquirors and constitutes the valid, binding and enforceable obligation of each
of the Acquirors.
5.2 Ability to Carry Out the Agreement. Neither of the Acquirors is
subject to or bound by any provision of:
(i) any law, statute, rule, regulation, ordinance or judicial
or administrative decision;
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(ii) any articles or certificate of incorporation or bylaws;
(iii) any mortgage, deed of trust, lease, note, shareholders'
agreement, bond, indenture, other instrument or agreement, license,
permit, trust, custodianship other restriction of any kind or character
whatsoever; or
(iv) any judgment, order, writ, injunction or decree of any
court, governmental body, administrative agency or arbitrator;
that would prevent or be violated by or would result in any penalty, forfeiture
or contract termination as a result of, or under which there would be a default
as a result of, nor is the consent of any Person under any material agreement
which has not been obtained required for, the execution, delivery and
performance by each of the Acquirors of this Agreement and the transactions
contemplated hereby, other than violations, penalties, forfeitures, contract
terminations, defaults or failure to obtain consents which, singly or in the
aggregate, shall not have a material adverse effect on the enforceability or
validity of this Agreement or the ability of the Transferors to perform their
obligations hereunder.
5.3 Capitalization. University Online is authorized to issue: (i)
Thirty-Six Million (36,000,000) shares of University Online Common Stock of
which 9,277,524 shares are issued and outstanding; and (ii) Thirty-Four Million
(34,000,000) shares of Preferred Stock, $0.01 par value per share, of which (A)
12,000,000 shares have been designated Series A Preferred Stock (the "Series A
Preferred Stock"), of which 4,729,559 shares are issued and outstanding, and an
additional 314,153 of which shares are stock dividends that have accrued but not
yet been paid, (B) 6,000,000 shares have been designated Series B Preferred
Stock, of which 2,187,500 shares are issued and outstanding, and (C) 6,000,000
shares have been designated Series B-1 Preferred Stock, of which no shares are
issued and outstanding. University Online also has reserved: 3,186,000 shares of
University Online Common Stock for issuance pursuant to its stock plans and has
granted options to purchase 2,922,000 shares thereunder; University Online also
has outstanding warrants to purchase 6,121,248 shares of University Online
Common Stock and debt instruments outstanding that are convertible into 268,750
shares of University Online Common Stock. All of the Merger Shares to be issued
in the Merger have been duly authorized and, upon the consummation of the
Merger, shall be validly issued, fully paid, and nonassessable.
5.4 Brokers and Intermediaries. None of the Acquirors has employed any
broker, finder, advisor or intermediary in connection with the transactions
contemplated by this Agreement which would be entitled to a broker's, finder's
or similar fee or
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commission in connection therewith or upon the consummation thereof.
ARTICLE 6
CERTAIN COVENANTS AND AGREEMENTS
OF TRANSFERORS AND ACQUIRORS
6.1 Full Access. From the date hereof until the earlier of the Closing
or the termination of this Agreement pursuant to Section 3.3 above, Cognitive
Training shall permit representatives of the Acquirors to have full access at
all reasonable times, and in a manner so as not to interfere with the normal
business operations of Cognitive Training, to all premises, properties, books,
records contracts, tax records, and documents of or pertaining to Cognitive
Training. From the date hereof until the earlier of the Closing or the
termination of this Agreement pursuant to Section 3.3 above, University Online
shall permit representatives of the Transferors to have full access at all
reasonable times, and in a manner so as not to interfere with the normal
business operations of University Online, to all premises, customers, employees,
properties, books, records, contracts, tax records and documents of or
pertaining to University Online.
6.2 Regulatory Filings; Consents. From the date hereof until the
earlier of the Closing or the termination of this Agreement pursuant to Section
3.3 above, each of the parties hereto shall: (i) take any additional action that
is necessary, proper or advisable in connection with any notices to, filings
with, and authorizations, consents and approvals of governments and governmental
agencies that it is required to give, make or obtain in order to effect the
transactions contemplated hereunder; and (ii) furnish to the other party or
parties hereto, as the case may be, such necessary information and reasonable
assistance as such other party or parties may reasonably request in connection
with its or their preparation of necessary filings or submissions to any
governmental agency. Cognitive Training shall give any notices to third Persons,
and shall use its best efforts to obtain any third Person consents, that
University Online may request in connection with the matters referred to in
Section 4.2 above.
6.3 Conduct of Business. From the date hereof until the earlier of the
Closing or the termination of this Agreement pursuant to Section 3.3 above, and
except as otherwise contemplated by this Agreement or consented to or approved
by University Online in writing, Cognitive Training shall not engage in any
practice, take an action, embark on any course of action, or enter into any
transaction outside the ordinary course of business consistent with past
practices or appropriate in connection with the transactions contemplated by
this Agreement. Without limiting the generality of the foregoing, Cognitive
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Training shall, during the period specified in the first sentence of this
Section 6.3:
(i) not take any action, engage in any practice or enter into
any transaction of the nature or sort referred to in subsections (a)
through (w) of Section 4.6, except as permitted therein or appropriate
in connection with the transactions contemplated by this Agreement;
(ii) cause the business conducted by Cognitive Training to be
operated in all respects in the ordinary and usual course and keep and
preserve its business and properties intact, including its present
operations, physical facilities, working conditions and relationships
with employees, clients, suppliers, customers, lessors and licensors of
such business;
(iii) not effect or authorize any change or amendment to the
Articles of Incorporation or Bylaws of Cognitive Training;
(iv) maintain in full force and effect all of Cognitive
Training's existing casualty, liability and other insurance until the
Closing Date in amounts not less than those in effect on the date
hereof;
(v) provide University Online with unaudited monthly Cognitive
Training balance sheets, statements of income and expenses, changes in
shareholder's equity and cash flows within twenty (20) days of the end
of each such month;
(vi) not declare, set aside or pay any dividend or make any
distribution with respect to its capital stock or redeem, purchase or
otherwise acquire any of its capital stock; and
(vii) promptly notify the Acquirors in writing of: (i) any
actions, suits or proceedings instituted or threatened against
Cognitive Training at law or in equity or admiralty, before or by any
court or governmental authority; (ii) any changes in Cognitive Training
personnel; and (iii) any adverse development causing a breach of any of
the representations and warranties contained in Article 4 above. No
disclosure by Cognitive Training pursuant to this subsection 6.3(vii)
shall be deemed to amend or supplement the disclosures contained in any
Schedule or to prevent or cure any misrepresentation, breach of
warranty, or breach of covenant.
6.4 Confidentiality. Each party to this Agreement agrees that all
information concerning the business and offices of the other parties to the
Agreement that is not generally available to the public ("Confidential
Information") and obtained from such other party shall be deemed confidential
and shall not be
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disclosed to any Person for any reason or purpose whatsoever, except in
connection with this Agreement, to the parties and their representatives
involved in this transaction, or as may by required by law or stock exchange
regulation. In the event this Agreement is terminated, all such Confidential
Information shall, upon request, be returned to the appropriate parties,
together with any and all copies made thereof.
6.5 Books and Records. University Online shall retain all books,
records and other documents pertaining to the business of Cognitive Training in
existence on the Closing Date for a period of at least five (5) years from the
Closing Date and to make the same reasonably available after the Closing Date
for such five (5) year period for inspection and copying by the Exchanging
Shareholder at the Exchanging Shareholder's expense during the normal business
hours of University Online, upon reasonable request and upon reasonable notice.
6.6 Announcement. Promptly after the execution of this Agreement,
University Online shall make a public statement approved by University Online
and Cognitive Training with respect to this Agreement and the transactions
contemplated hereby. Thereafter, prior to the Closing, no party to this
Agreement shall issue any press release or otherwise make any public statement
with respect to this Agreement and the transactions contemplated hereby without
the prior consent of the other parties to this Agreement (which consent shall
not be unreasonably withheld), except as may be required by applicable law or
stock exchange regulation.
6.7 Best Efforts. Without limiting the specific obligations of any
party hereto under any agreement or covenant hereunder, each of the parties
hereto shall use its respective best efforts to take all action and do such acts
and things necessary in order to consummate and make effective the transactions
contemplated by this Agreement (including satisfaction, but not waiver, of the
conditions to Closing set forth in Articles 7 and 8 below).
6.8 Discussion With Others. From the date hereof until the earlier of
the Closing or the termination of this Agreement pursuant to Section 3.3 above,
none of the Transferors shall: (i) discuss, solicit, initiate or encourage the
submission of any proposal or offer from any third Person concerning the sale or
acquisition of any capital stock or other voting securities, or any significant
assets of, Cognitive Training (including any acquisition structured as a merger,
consolidation or share exchange); or (ii) engage or participate in any
discussions or negotiations regarding, enter into any agreement with respect to,
furnish any information with respect to, assist or participate in, or facilitate
in any other manner any effort or attempt by any third Person to do or seek any
of the foregoing. The Transferors shall immediately notify University Online if
any
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third Person makes any proposal, offer, inquiry or contact with respect to any
of the foregoing.
6.9 Tax Covenant. The Exchanging Shareholder shall not dispose of any
of the Merger Shares received in the Merger in a manner that would cause the
Merger to violate the continuity of shareholder interest requirement set forth
in Treas. Reg. ss. 1.368-1 pursuant to Section 368 of the Code. For a period of
six months after Closing, should the Exchanging Shareholder desire to dispose of
any Merger Shares received in the Merger, he shall provide written notice to
University Online, not less than ten (10) days prior to the intended date of
disposition, specifying the number of shares of which the Exchanging Shareholder
proposes to dispose.
6.10 Cooperation in Litigation. Each party hereto shall fully cooperate
with the other in the defense or prosecution of any litigation or proceeding
already instituted or which may be instituted hereafter against or by such party
relating to or arising out of the conduct of the business of Cognitive Training
prior to or after the Closing Date (other than litigation arising out of the
transactions contemplated by this Agreement). The party requesting such
cooperation shall pay the out-of-pocket expenses (including legal fees and
disbursements) of the party providing such cooperation and of its officers,
directors, employees and agents reasonably incurred in connection with providing
such cooperation, but shall not be responsible to reimburse the party providing
such cooperation for such party's time spent in such cooperation or the salaries
or costs of fringe benefits or similar expenses paid by the party providing such
cooperation to its officers, directors, employees and agents while assisting in
the defense or prosecution of any such litigation or proceeding.
6.11 Stock Transfer Restrictions.
(a) The Exchanging Shareholder acknowledges, represents, warrants and
covenants as follows:
(i) A restrictive legend acknowledging the restrictions on
resale of the Merger Shares under the 1933 Act will be placed on the
certificates representing the Merger Shares;
(ii) University Online may put "stop transfer" orders in place
with its transfer agent to ensure compliance with the provisions of
Section 6.11; and
(iii) The Exchanging Shareholder agrees, in connection with
any registration of University Online's securities, not to sell, make
any short sale of, loan, grant any option for the purchase of, or
otherwise dispose of any University Online securities (other than those
included in the registration) without the prior written consent of
University Online or its
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underwriters, as the case may be, for such period of time after the effective
date of such registration as University Online and the underwriters may specify;
provided, however, that such period of time shall not exceed that applicable to
all directors and executive officers of University Online.
6.12 Grant of University Online Common Stock to Others. University
Online will grant 10,000 shares of University Online Common Stock to each of
Jeff Smith, David Mullinax and Rhonda Johnston, and 30,000 shares to Larry
LaCava, all vesting annually over one year based upon continued employment, such
grants to take the form of options or bonuses, as mutually determined by the
parties and the grantees.
6.13 Registration Rights. University Online will allow the Exchanging
Shareholder to register a pro rata portion or more of his Merger Shares if other
executive officers of University Online are allowed to register University
Online Common Stock during the next five years.
ARTICLE 7
CONDITIONS PRECEDENT OF TRANSFERORS
The obligation of the Transferors to consummate the transactions to be
performed by them in connection with the Closing is subject to the satisfaction
of each of the following conditions prior to or at the Closing:
7.1 Representations and Warranties. The representations and warranties
of the Acquirors made hereunder shall be true in all material respects at and as
of the Closing Date, with the same force and effect as though made at and as of
the Closing Date, except for changes permitted or contemplated by this Agreement
and except to the extent that any representation or warranty is made as of a
specified date, in which case such representation or warranty shall be true in
all material respects as of such date.
7.2 Agreements. The Acquirors shall have performed and complied in all
material respects with all their respective undertakings, covenants and
agreements required by this Agreement to be performed or complied with by the
Acquirors prior to or at the Closing.
7.3 Performance Certificates. Cognitive Training shall have been
furnished with a certificate of a proper officer of University Online and a
certificate of a proper officer of CTA Acquisition, both dated as of the Closing
Date, each certifying to the effect that each of the conditions contained in
Sections 7.1 and 7.2 above has been satisfied in all respects.
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7.4 No Injunction. No injunction, restraining order or decree of any
nature of any court or governmental or regulatory authority shall exist against
the Acquirors, the Transferors or any of their respective Affiliates, or any of
the principals, officers or directors of any of them, that restrains, prevents
or materially changes the transactions contemplated hereby.
7.5 No Violation. The consummation of the transactions contemplated
hereunder shall not be in violation of any material applicable law, statute,
rule or regulation for which a waiver has not been obtained and where such
violation would make illegal or otherwise prevent the consummation of such
transactions.
7.6 Consents. All material consents, approvals and authorizations of
governmental and regulatory authorities, and all material filings with and
notifications of governmental authorities and regulatory agencies or other
entities which regulate the business of Cognitive Training or the Acquirors,
necessary on the part of Cognitive Training or Acquirors, or their respective
Affiliates, to the execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby, shall have been obtained or effected
(and all applicable waiting periods, if any, including any extensions thereof,
under any applicable law, statute, regulation or rule shall have expired or
terminated, as applicable). University Online shall have received the written
consents or approvals of any and all third Persons required under the terms of
the Contracts to the consummation of the transactions contemplated hereunder.
7.7 Opinion of the Acquirors' Counsel. The Exchanging Shareholder shall
have received an opinion of Wyrick, Robbins, Yates & Ponton L.L.P., counsel for
the Acquirors, dated as of the Closing Date, addressed to the Exchanging
Shareholder, to the effect and substantially in the form of Exhibit E.
7.8 No Proceedings. No claim, suit, action or other proceeding shall be
pending or threatened in writing before or by any court, governmental agency or
other entity against any of the parties to this Agreement with respect to the
transactions contemplated by this Agreement.
7.9 Tax-Free Reorganization. The Merger shall constitute a tax-free
reorganization under the provisions of Code Section 368.
7.10 Shareholder Approval. This Agreement and the Merger shall have
been duly approved by the sole shareholder of Cognitive Training in accordance
with the applicable provisions of the Texas Business Corporation Act and
Cognitive Training's Articles of Incorporation and Bylaws, each as amended to
date.
7.11 Employment Agreement. The relevant parties shall have entered into
the employment, non-disclosure and noncompetition
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agreements in form and substance as set forth in Exhibit F and the same shall be
in full force and effect.
7.12 Miscellaneous Closing Deliveries. Cognitive Training shall have
received each of the following:
(a) all documents, instruments and other closing deliveries specified
in subsection 3.2(b) above; and
(b) such evidence as Cognitive Training may reasonably request in order
to establish: (i) the power and authority of each of the Acquirors to consummate
the transactions contemplated by this Agreement; (ii) compliance with the
conditions of Closing set forth herein; and (iii) satisfactory completion of all
corporate proceedings to be taken in connection with the transactions
contemplated by this Agreement together with certified copies of necessary
resolutions duly adopted by the shareholder and directors of the Acquirors (to
the extent required by law) approving the Merger and the execution and delivery
of this Agreement and all other corporate action necessary to enable the
Acquirors to comply with the terms of this Agreement.
The Transferors may waive any condition specified in this Article 7 if each of
them executes a writing so stating at or prior to the Closing or closes without
the relevant document specified, if any, being delivered.
ARTICLE 8
CONDITIONS PRECEDENT OF THE ACQUIRORS
The obligation of the Acquirors to consummate the transactions to be
performed by them in connection with the Closing is subject to the satisfaction
of each of the following conditions prior to or at the Closing:
8.1 Representations and Warranties. The representations and warranties
of the Exchanging Shareholder made hereunder shall be true in all material
respects at and as of the Closing Date, with the same force and effect as though
made at and as of the Closing Date, except for changes permitted or contemplated
by this Agreement and except to the extent that any representation or warranty
is made as of a specified date, in which case such representation or warranty
shall be true in all respects as of such date.
8.2 Agreements. The Transferors shall have performed and complied in
all material respects with all of their respective undertakings and agreements
required by this Agreement to be performed or complied with by them prior to or
at the Closing.
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8.3 Performance Certificates. The Acquirors shall have been furnished
with a certificate of Cognitive Training and the Exchanging Shareholder, dated
as of the Closing Date, certifying that the conditions contained in Sections
8.1, 8.2, 8.9 and 8.15 hereof have been satisfied in all respects.
8.4 No Injunction. No injunction, restraining order or decree of any
nature of any court or governmental or regulatory authority shall exist against
the Acquirors, the Transferors or any of their respective Affiliates, or any of
the principals, officers or directors of any of them, that restrains, prevents
or materially changes the transactions contemplated hereby.
8.5 No Violation. The consummation of the transactions contemplated
hereunder shall not be in violation of any material applicable law, statute,
rule or regulation for which a waiver has not been obtained and where such
violation would make illegal or otherwise prevent the consummation of such
transactions.
8.6 Consents. All material consents, approvals and authorizations of
governmental and regulatory authorities, and all material filings with and
notifications of governmental authorities and regulatory agencies or other
entities which regulate the business of Cognitive Training or Acquirors,
necessary on the part of Cognitive Training or Acquirors, or their respective
Affiliates, to the execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby, shall have been obtained or effected
(and all applicable waiting periods, if any, including any extensions thereof,
under any applicable law, statute, regulation or rule, including but not limited
to the HSR Act, if applicable, shall have expired or terminated, as applicable).
University Online shall have received the written consents or approvals of any
and all third Persons required under the terms of the Contracts to the
consummation of the transactions contemplated hereunder.
8.7 Opinion of Transferors' Counsel. University Online shall have
received an opinion of Novakov, Davidson & Flynn, a professional corporation,
counsel of the Transferors, dated as of the Closing Date, addressed to
University Online to the effect and substantially in the form of Exhibit H.
8.8 No Adverse Change. Since the Most Recent Fiscal Year End, there
shall have been no material adverse change in the assets, business, operations,
results of operations, financial condition or prospects of Cognitive Training,
except events or changes contemplated by this Agreement, changes consented to in
writing by University Online and changes in the ordinary course of business
which are not, either individually or in the aggregate, materially adverse.
8.9 Confidentiality and Non-Disclosure Agreements. Each of the
employees, officers and consultants of Cognitive Training shall have entered
into a confidentiality and non-disclosure
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agreement with Cognitive Training in form and substance as set forth in Exhibit
I (collectively the "Non-Disclosure Agreements" and individually a
"Non-Disclosure Agreement"), and the same shall be in full force and effect.
8.10 Resignations. The Acquirors shall have received resignations,
effective as of the Closing, of each officer and director of Cognitive Training
other than those whom University Online shall have specified in writing prior to
the Closing.
8.11 No Proceedings. No claim, suit, action or other proceeding shall
be pending or threatened in writing before or by any court, governmental agency
or other entity against any of the parties to this Agreement with respect to the
transactions contemplated by this Agreement or which adversely affect the
assets, property, operations, results of operations, financial condition or
prospects of Cognitive Training.
8.12 Employment Agreement. The relevant parties shall have entered into
the employment agreement in form and substance as set forth in Exhibit F, and
the same shall be in full force and effect.
8.13 Payment of Indebtedness. All promissory notes or other
indebtedness of the Exchanging Shareholder to Cognitive Training, if any, shall
be paid in full by the Exchanging Shareholder.
8.14 Cognitive Training Common Stock. All shares of the capital stock
of Cognitive Training owned by the Exchanging Shareholder shall be free and
clear of any and all Encumbrances (other than transfer restrictions under
applicable securities laws).
8.15 Shareholder Approval. This Agreement and the Merger shall have
been approved by the affirmative vote of holders of not less than one hundred
percent (100%) of the Cognitive Training Common Stock on a fully-diluted and
as-converted basis (including the holders of any convertible security of
Cognitive Training) in favor of this Agreement and the Merger. In connection
with such approval, there shall exist no Dissenting Shares.
8.16 Miscellaneous Closing Deliveries. The Acquirors shall have
received each of the following:
(a) all documents, instruments and other closing deliveries specified
in Section 3.2(a) above; and
(b) such evidence as the Acquirors may reasonably request in order to
establish: (i) the power and authority of the Transferors to consummate the
transactions contemplated by this Agreement; (ii) compliance with the conditions
of Closing set forth herein; and (iii) satisfactory completion of all corporate
and shareholder proceedings to be taken in connection with the
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transactions contemplated by this Agreement, together with certified copies of
resolutions duly adopted by the shareholder and directors of Cognitive Training
approving the Merger and the execution and delivery of this Agreement and all
other corporate action necessary to enable the Transferors to comply with the
terms of this Agreement.
University Online may waive any condition specified in this Article 8 if it
executes a writing so stating at or prior to the Closing or closes without the
relevant document specified, if any, being delivered.
ARTICLE 9
SURVIVAL OF REPRESENTATIONS,
WARRANTIES AND COVENANTS
9.1 Survival of Representations and Warranties. All of the
representations and warranties of the parties hereto contained in the Agreement
shall survive the Closing and continue in full force and effect for twelve (12)
months following the Closing Date, as of which time they will expire. Any claims
with respect to the foregoing sentence under Sections 10.1 and 10.2 below must
be asserted in writing with reasonable particularity by the party making such
claim prior to the end of the 12-month period referenced above, and the
obligations of the indemnifying party under Sections 10.1 and 10.2 below with
respect to such claims shall continue until such claims have been resolved.
9.2 Survival of Covenants and Agreements. The respective covenants and
agreements of the parties contained in this Agreement (except Sections 6.1
through 6.4) shall survive the Closing without limitation as to time. Any claims
as to a breach of a covenant or agreement under Sections 10.1 and 10.2 below
must be asserted in writing with reasonable particularity by the party making
such claims.
ARTICLE 10
INDEMNIFICATION
10.1 Indemnification of University Online. The Exchanging Shareholder
agrees to defend, indemnify and hold harmless University Online and its
successors and assigns (individually an "Acquiror Indemnitee", and collectively
the "Acquiror Indemnitees") from, against, and in respect of the following:
(a) any and all losses, damages, deficiencies or liabilities
caused by, resulting or arising from, or otherwise relating to: (i) any
breach of the representations and warranties of the Exchanging
Shareholder contained in this Agreement; (ii) any failure by any of the
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Transferors to perform or otherwise fulfill or comply with (X) if this
Agreement shall have been terminated, Sections 6.4, 6.7 and 6.8 or any
other covenant, undertaking, agreement or obligation to be performed,
fulfilled or complied with by the Exchanging Shareholder or Cognitive
Training prior to or in connection with the Closing; or (Y) if the
Closing shall occur, any undertaking or other agreement or obligation
hereunder to be performed, fulfilled or otherwise complied with by the
Exchanging Shareholder after the Closing (including but not limited to
the undertakings, agreements and obligations to be performed by the
Exchanging Shareholder pursuant to Section 6.9); (iii) any unknown or
undisclosed Liabilities of Cognitive Training arising out of or related
to the conduct or operation of Cognitive Training's business prior to
the Closing (other than Liabilities incurred in the ordinary course of
business subsequent to the execution of this Agreement); and (iv) any
and all legal, investment banking, accounting, auditing and other
professional fees and expenses of Cognitive Training related to this
Agreement and the transactions contemplated hereby and other
professional fees and expenses of Cognitive Training unrelated to the
this Agreement and the consummation of the transactions contemplated
hereby that have not been approved in advance by University Online or
is disclosed in the Schedule of Exceptions; and
(b) any and all actions, suits, proceedings, claims,
liabilities, demands, assessments, judgments, interest, penalties,
costs and expenses, including reasonable attorneys' fees (whether or
not incurred by the Acquiror Indemnitees or in connection with
investigating, defending, settling or prosecuting any action, suit,
proceeding or claim against any of the Acquiror Indemnitors hereunder),
incident to any of the items referred to herein or such
indemnification;
provided, however, that if any action, suit, proceeding, claim, liability,
demand or assessment shall be asserted against any Acquiror Indemnitee in
respect of which such Acquiror Indemnitee proposes to demand indemnification,
such Acquiror Indemnitee shall notify the Exchanging Shareholder thereof within
a reasonable period of time after assertion thereof, and such notice shall
include copies of all suit, service and claim documents, all other relevant
documents in the possession of the Acquiror Indemnitee, and an explanation of
the Acquiror Indemnitee's contentions and defenses with as much specificity and
particularity as the circumstances permit, provided that the failure of the
Acquiror Indemnitee to give such notice shall not relieve the Exchanging
Shareholder of his obligations under this Section 10.1, if the Acquiror
Indemnitee shall have demonstrated that: (i) it acted in good faith and without
unreasonable delay; and (ii) the Exchanging Shareholder shall not have been
prejudiced thereby. Subject to rights of or duties to any insurer or other third
Person having liability therefor, the
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Exchanging Shareholder shall have the right within ten (10) days after receipt
of such notice to assume the control of the defense, compromise or settlement of
any such action, suit, proceeding, claim, liability, demand or assessment,
including, at its own expense, employment of counsel; provided further, however,
that if the Exchanging Shareholder shall have exercised his right to assume such
control, the Acquiror Indemnitee: (X) may, in its sole discretion and expense,
employ counsel to represent it (in addition to counsel employed by the
Exchanging Shareholder) in any such matter, and in such event counsel selected
by the Exchanging Shareholder shall be required to cooperate with such counsel
of the Acquiror Indemnitee in such defense, compromise or settlement for the
purpose of informing and sharing information with such Acquiror Indemnitee; and
(Y) shall, at its own expense, make available to the Exchanging Shareholder
those employees of the Acquiror Indemnitees whose assistance, testimony or
presence is reasonably deemed by the Exchanging Shareholder necessary or
beneficial to assist the Exchanging Shareholder in evaluating and in defending
any such action, suit, proceeding, claim, liability, demand or assessment;
provided further, however, that any such access shall be conducted in such a
manner as not to interfere unreasonably with the operations of the businesses of
the Acquiror Indemnitees.
10.2 Indemnification of Exchanging Shareholder. University Online
agrees to defend, indemnify and hold harmless the Exchanging Shareholder and his
respective successors and assigns (individually a "Transferor Indemnitee", and
collectively the "Transferor Indemnitees") from, against and in respect of:
(a) any and all losses, damages, deficiencies or liabilities
caused by, resulting or arising from or otherwise relating to: (i) any
breach of the representations and warranties of the Acquirors contained
in this Agreement; and (ii) any failure by the Acquirors to perform or
otherwise fulfill or comply with (X) if this Agreement shall have been
terminated, Sections 6.4 or 6.7 or any other covenant, undertaking,
agreement or obligation to be performed, fulfilled or complied with by
the Acquirors prior to or in connection with the Closing; or (Y) if the
Closing shall occur, any undertaking or other agreement or obligation
hereunder to be performed, fulfilled or otherwise complied with by
University Online after the Closing; and
(b) any and all actions, suits, proceedings, claims,
liabilities, demands, assessments, judgments, interest, penalties,
costs and expenses, including reasonable attorneys' fees (whether or
not incurred by the Transferor Indemnitees in connection with
investigating, defending, settling or prosecuting any action, suit,
proceeding or claim against University Online hereunder), incident to
any of the items referred to herein or such indemnification;
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provided, however, that if any action, suit, proceeding, claim, liability,
demand or assessment shall be asserted against any Transferor Indemnitee in
respect of which such Transferor Indemnitee proposes to demand indemnification,
such Transferor Indemnitee shall notify University Online thereof within a
reasonable period of time after assertion thereof, and such notice shall include
copies of all suit, service and claim documents, all other relevant documents in
the possession of the Transferor Indemnitees and an explanation of the
Transferor Indemnitees' contentions and defenses with as much specificity and
particularity as the circumstances permit, provided that the failure of the
Transferor Indemnitee to give such notice shall not relieve University Online of
its obligations under this Section 10.2 if the Transferor Indemnitee shall have
demonstrated that: (i) it acted in good faith and without unreasonable delay;
and (ii) University Online shall not have been prejudiced thereby. Subject to
rights of or duties to any insurer or other third Person having liability
therefor, University Online shall have the right within ten (10) days after
receipt of such notice to assume the control of the defense, compromise or
settlement of any such action, suit, proceeding, claim, liability, demand or
assessment, including, at its own expense, employment of counsel; provided
further, however, that if University Online shall have exercised its right to
assume such control, the Transferor Indemnitees: (X) may, in their sole
discretion and expense, employ one (1) counsel to represent them (in addition to
counsel employed by University Online) in any such matter, and in such event
counsel selected by University Online shall be required to cooperate with such
counsel of the Transferor Indemnitees in such defense, compromise or settlement
for the purpose of informing and sharing information with such Transferor
Indemnitees; and (Y) shall, at its own expense, make available to Transferor
Indemnitees those employees of University Online or any Affiliate of University
Online whose assistance, testimony or presence is reasonably deemed by the
Transferor Indemnitees necessary or beneficial to assist the Transferor
Indemnitees in evaluating and in defending any such action, suit, proceedings,
claim, liability, demand or assessment; provided further, however, that any such
access shall be conducted in such a manner as not to interfere unreasonably with
the operations of the business of University Online or any of its Affiliates.
10.3 Remedies. The indemnification provisions of this Article 10 are in
addition to, and not in lieu or in derogation of, any other rights or remedies
any party may have in equity for a breach of representations, warranties or
covenants. Each of the parties acknowledges and agrees that the other parties
hereto would be damaged irreparably in the event any of the provisions of this
Agreement are not performed in accordance with their specific terms or otherwise
are breached. Accordingly, each of the parties hereto agrees the other parties
hereto shall be entitled to an injunction or injunctions to prevent breaches of
the provisions of this Agreement and to enforce specifically this Agreement and
the terms and provisions hereof in any competent
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court having jurisdiction over the parties (subject to the provisions of Section
11.11 below), in addition to any other remedy to which they may be entitled, in
equity.
10.4 Survival. Notwithstanding anything herein to the contrary, this
Article 10 shall survive termination of this Agreement without limitation.
10.5 Assertion of Claims. Subject to the minimum claims requirements
set forth below, if any Acquiror Indemnitee shall have any claim of
indemnification pursuant to Article 10 hereof, it shall promptly give written
notice thereof to the Exchanging Shareholder, including in such notice a brief
description of the facts upon which such claim or adjustment is based and the
amount thereof (the "Claim Notice"). Unless the Exchanging Shareholder shall
give written notice, within twenty (20) days after receipt of the Claim Notice,
to University Online objecting to such claims, the lesser of (a) that number of
the Merger Shares that is equal in value to the sum of the amount of claim or
claims to be satisfied, or (b) all the Merger Shares, shall be forfeited to
University Online.
10.6 Resolution of Conflicts; Arbitration.
(a) If the Exchanging Shareholder give such written objection
to University Online, the Exchanging Shareholder and University Online shall
attempt promptly and in good faith to agree upon the rights of the parties with
respect to each indemnity claim. If the Exchanging Shareholder and University
Online should so agree, a memorandum setting forth such agreement shall be
prepared and signed by both parties and the agreed upon settlement paid by the
applicable party.
(b) If no such agreement can be reached after good faith
negotiation, either University Online or the Exchanging Shareholder may demand
arbitration of the matter unless the amount of the damage or loss is at issue in
pending litigation with a third party, in which event arbitration shall not be
commenced until such amount is ascertained or both parties agree to arbitration;
and in any such event the matter shall be settled by arbitration conducted by
three arbitrators. University Online and the Exchanging Shareholder shall each
select one arbitrator, and the two arbitrators so selected shall select a third
arbitrator. The decision of the arbitrators so selected as to the validity and
amount of any claim in such Claim Notice shall be binding and conclusive upon
the parties to this Agreement. Judgment upon any award rendered by the
arbitrators may be entered in any court having jurisdiction. Any such
arbitration shall be held in Washington, D. C. Any such arbitration shall be
conducted under the rules then in effect of the American Arbitration
Association, and shall be based on the provisions and limitations of this
Article 10.
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10.7 Limitation on Liability. (a) Notwithstanding any provision to the
contrary in this Article 10, no claim, either individually or in the aggregate,
for indemnification hereunder, shall be valid and assertable unless such claims
in the aggregate are equal to or greater than Twenty-Five Thousand Dollars
($25,000) (the "Basket Deductible"), in which case, subject to the limitations
set forth in subsection (b) below, the indemnifying party shall be liable for
amounts exceeding $25,000, which shall be payable as set forth in subsection (c)
below.
(b) In no event shall the aggregate liability of the Exchanging
Shareholder for indemnification hereunder or otherwise arising out of or
relating to this Agreement exceed the aggregate value of the Merger Shares as of
the Closing Date. In no event shall the aggregate liability of University Online
and CTA Acquisition for indemnification hereunder or otherwise arising out of or
relating to this Agreement exceed the aggregate value of the Merger Shares as of
the Closing Date.
(c) Claims of Acquiror Indemnitees hereunder shall be satisfied only by
the return of Merger Shares which for purposes of this Section shall be valued
at the greater of $2.50 per share or fair market value; provided, however, that
Acquiror Indemnitees shall have the right to recover the proceeds of any such
Merger Shares that are sold by the Exchanging Shareholder.
(d) The parties agree that, prior to submitting any claim for
indemnification under this Article 10, they shall use reasonable efforts to
determine the amount, if any, by which their losses would be offset by recovery
of insurance proceeds and to provide the indemnitor notice of and a description
of such determination.
ARTICLE 11
MISCELLANEOUS
11.1 Further Assurances. From time to time at or after the Closing,
each of the parties agrees to take, or cause to be taken, such further actions,
to execute, deliver and file, or cause to be executed, delivered and filed, such
further documents and instruments, and to obtain consents, as may be necessary
or reasonably requested in order to fully effectuate the purposes, terms and
conditions of this Agreement.
11.2 Expenses. Each of the parties hereto shall bear its respective
legal, investment banking, accounting, audit, and other costs and expenses
associated with this Agreement and the consummation of the transactions
contemplated hereby.
11.3 Applicable Law. Except as otherwise expressly provided herein,
this Agreement shall be governed by, and construed in accordance with, the law
of the State of Delaware without
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reference to any choice or conflict of law principle, provision or rule,
including all matters of construction, validity and performance.
11.4 Notices. All notices, requests, permissions, waivers, and other
communications hereunder shall be in writing and shall be deemed to have been
duly given (i) upon personal delivery or receipt of a telecopy transmission,
(ii) two (2) days after being sent by registered or certified United States
mail, return receipt requested, or (iii) one (1) day after being transmitted by
a nationally recognized overnight courier service, properly addressed and
postage prepaid to the intended recipient as follows:
If to the Exchanging Shareholder, to:
Michael L. Brown
P. O. Box 310
Waxahachie, Texas 75165
Telephone No.: (214) 923-1663
Telecopier No.: (214) 923-1666
With a copy to:
John R. Pearce III, Esq.
Novakov, Davidson & Flynn
2000 St. Paul Place
750 N. St. Paul
Dallas, Texas 75201-3286
Telephone No.: (214) 922-9221
Telecopier No.: (214) 969-7557
If to the Acquirors, to:
W. Braun Jones, Jr.
University Online, Inc.
105 W. Broad Street, Suite 301
Falls Church, Virginia 22046
Telephone No.: (703) 533-7500
Telecopy No.: (703) 532-3929
with a copy to:
Donald R. Reynolds, Esq.
Wyrick, Robbins, Yates & Ponton L.L.P.
4101 Lake Boone Trail, Suite 300
Raleigh, North Carolina 27607
Telephone No.: (919) 781-4000
Telecopy No.: (919) 781-4865
11.5 Entire Agreement. This Agreement (including the Exhibits attached
hereto and the documents referred to herein, all of which are a part hereof)
constitutes the entire agreement and understanding of the parties hereto with
respect to the
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subject matter contained herein, supersedes and cancels all prior agreements,
negotiations, correspondence, undertakings and communications of the parties,
oral or written, respecting such subject matter (including, without limitation,
the letter of intent dated May 3, 1996, which is hereby terminated). There are
no restrictions, promises, representations, warranties, agreements or
undertakings of any party hereto with respect to the transactions under this
Agreement other than those set forth herein or made hereunder.
11.6 Amendments. This Agreement may be amended only by a written
instrument executed by the parties or their respective successors or assigns.
11.7 Headings; References. The article, section and paragraph headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. All references
herein to "Articles", "Sections" or "Exhibits" shall be deemed to be references
to Articles or Sections hereof or Exhibits hereto unless otherwise indicated.
11.8 Counterparts. This Agreement may be executed in one or more
counterparts and each counterpart shall be deemed to be an original.
11.9 Parties in Interest; Assignment. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective
successors. Nothing in this Agreement, express or implied, is intended to confer
upon any Person not a party to this Agreement any rights or remedies under or by
reason of this Agreement. No party to this Agreement may assign or delegate all
or any portion of its rights, obligations or liabilities under this Agreement
without the prior written consent of the other parties to this Agreement.
11.10 Severability; Enforcement. The invalidity of any portion hereof
shall not affect the validity, force or effect of the remaining portions hereof.
If it is ever held that any restriction hereunder is too broad to permit
enforcement of such restriction to its fullest extent, each party agrees that a
court of competent jurisdiction may enforce such restriction to the maximum
extent permitted by law, and each party hereby consents and agrees that such
scope may be judicially modified accordingly in any proceeding brought to
enforce such restriction.
11.11 Jurisdiction. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY AND
UNCONDITIONALLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL
COURTS LOCATED IN THE STATE OF DELAWARE FOR ANY ACTIONS, SUITS, OR PROCEEDINGS
ARISING OUT OF OR RELATING TO THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
HEREBY, EACH PARTY HERETO AGREES NOT TO COMMENCE ANY ACTION, SUIT OR PROCEEDING
RELATING THERETO EXCEPT IN SUCH COURTS, AND FURTHER AGREES THAT SERVICE OF ANY
PROCESS, SUMMONS, NOTICE OR DOCUMENT
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BY U.S. REGISTERED MAIL TO THE RESPECTIVE PARTY'S ADDRESS SET FORTH ABOVE SHALL
BE EFFECTIVE SERVICE OF PROCESS OF ANY ACTION, SUIT OR PROCEEDING BROUGHT
AGAINST ANY OF ACQUIRORS IN ANY SUCH COURT. EACH OF THE PARTIES HERETO HEREBY
IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY OBJECTION TO THE LAYING OF VENUE OF
ANY ACTION, SUIT OR PROCEEDING ARISING OUT OF THIS AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY, IN SUCH STATE OR FEDERAL COURTS AS AFORESAID AND HEREBY
FURTHER IRREVOCABLY AND UNCONDITIONALLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM
IN ANY SUCH COURT THAT ANY SUCH ACTION, SUIT OR PROCEEDING BROUGHT IN ANY SUCH
COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
11.12 Waiver. Any of the conditions to Closing set forth in this
Agreement may be waived at any time prior to or at the Closing hereunder by the
party entitled to the benefit thereof. The failure of any party hereto to
enforce at any time any of the provisions of this Agreement shall in no way be
construed to be a waiver of any such provision, nor in any way to affect the
validity of this Agreement or any part hereof or the right of such party
thereafter to enforce each and every such provision. No waiver of any breach of
or non-compliance with this Agreement shall be held to be a waiver of any other
or subsequent breach or non-compliance.
11.13 Incorporation of Exhibits. All of the Exhibits identified in this
Agreement are incorporated by reference into this Agreement and made a part
hereof.
11.14 Construction. The parties hereto have participated jointly in the
negotiation and drafting of this Agreement. In the event of any ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if grafted jointly by the parties hereto and no presumption or burden of
proof shall arise favoring or disfavoring any party hereto by virtue of the
authorship of any of the provisions of this Agreement.
[The next page is the signature page.]
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IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement and Plan of Merger as of the date first above written.
UNIVERSITY ONLINE:
UNIVERSITY ONLINE, INC.,
By:________________________________
Title: ____________________________
CTA ACQUISITION:
CTA ACQUISITION CORPORATION
By:________________________________
Title: ____________________________
COGNITIVE TRAINING:
COGNITIVE TRAINING ASSOCIATES, INC.
By:________________________________
Michael L. Brown, President
EXCHANGING SHAREHOLDER:
_____________________________(SEAL)
Michael L. Brown
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EXHIBIT A
COGNITIVE TRAINING SHARES
NAME SHARES
Michael L. Brown 1,000
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
UNIVERSITY ONLINE, INC.
I. University Online, Inc., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify that its Certificate of Incorporation,
originally filed with the Delaware Secretary of State on March 22, 1985 under
the name "INTELMACH CORPORATION", as amended, is hereby amended and restated in
its entirety as follows:
ARTICLE I
The name of the Corporation is UOL Publishing, Inc.
ARTICLE II
The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, Wilmington, County of New Castle,
Delaware 19801. The name of its registered agent is The Corporation Trust
Company.
ARTICLE III
The general nature of the business and the object and purposes to be
transacted, promoted or carried on by the Corporation are:
(1) to design, produce and market certain advanced technology
products;
(2) to hold equity and other interests in other corporations
and other legal entities engaged in such activities; and
(3) to engage in any other lawful act or activity for which
corporations may be organized under the General Corporation
Law of Delaware.
ARTICLE IV
A. Classes of Stock.
The Corporation is authorized to issue two classes of stock to
be designated, respectively, Common Stock and Preferred Stock. The total number
of shares of stock which the Corporation has authority to issue is Seventy
Million (70,000,000) shares, par value One Cent ($0.01) per share, of which
Thirty-Six Million (36,000,000) shares shall be designated "Common
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Stock," and Thirty-Four Million (34,000,000) shares shall be designated
"Preferred Stock." Of the 34,000,000 authorized shares of Preferred Stock,
Twelve Million (12,000,000) of such shares shall be designated "Series A
Preferred Stock," Six Million (6,000,000) shares of such stock shall be
designated as "Series B Preferred Stock" and Six Million (6,000,000) of such
shares shall be designated as "Series B-1 Preferred Stock."
B. Rights, Preferences, Privileges and Restrictions of Preferred Stock.
Shares of Preferred Stock may be issued from time-to-time in one or more series,
each such series to have such distinctive designation or title as may be stated
and expressed in this Article IV or as may be fixed by the Board of Directors
prior to the issuance of any shares of such series. Each such series of
Preferred Stock shall have such voting powers, designations, preferences and
relative, participating, optional or other special rights, and such
qualifications, limitations, or restrictions as shall be stated and expressed in
this Article IV or in the resolution or resolutions providing for the issue of
such shares of Preferred Stock as may be adopted from time-to-time by the Board
of Directors, in accordance with the laws of the State of Delaware.
(1) Rank. The Series B Preferred Stock, the Series B-1
Preferred Stock and the Series A Preferred Stock shall, with respect to dividend
rights and with respect to rights upon liquidation, winding up or dissolution,
rank pari passu with one another, and senior and prior in right to (a) each
class of Common Stock of the Corporation, (b) any series of preferred stock
hereafter created and (c) any other equity interests (including, without
limitation, warrants, stock appreciation rights, phantom stock rights, profit
participation rights in debt instruments or other rights with equity features,
calls or options exercisable for or convertible into such capital stock or
equity interests) in the Corporation that by its terms rank junior to the Series
A Preferred Stock, the Series B Preferred Stock or the Series B-1 Preferred
Stock (all of such classes or series of capital stock and other equity
interests, including, without limitation, all classes of Common Stock of the
Corporation, are collectively referred to as "Junior Securities").
(2) Redemption.
(a) Series A Preferred Stock. There shall be no redemption or
sinking fund obligation with respect to the Series A Preferred Stock.
(b) Series B and Series B-1 Preferred Stock.
(i) Shares of Series B Preferred Stock and
Series B-1 Preferred Stock shall be entitled to the rights set forth
below in this Subsection (b) (with all references in this Subsection
(b) to a repurchase price per share to be adjusted proportionally in
respect of fractional shares, rounded to the nearest cent for each
holder or group of affiliated holders).
(ii) At any time or from time to time on or
after the date five (5) years after the Series B Issue Date, each
holder of Series B Preferred Stock or Series B-1 Preferred Stock, as
the case may be, shall have the right to request the Corporation to
purchase all or any portion of the shares of such series of stock held
by each such holder,
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and upon the exercise of such right, the Corporation shall purchase
such shares of stock, (such rights being referred to as the "Put").
Such holder may exercise the Put by providing the Corporation with
notice of the exercise thereof specifying the number of shares of
Series B Preferred Stock or Series B-1 Preferred Stock, as the case may
be, with respect to which it is exercising the Put (such notice being
referred to as a "Request Notice"). The Corporation shall, as soon as
practicable, but in no event later than sixty (60) days after the date
of receipt of such Request Notice, redeem all of the shares of Series B
Preferred Stock or Series B-1 Preferred Stock, as the case may be, with
respect to which the Put has been exercised, paying to the holder of
such shares of stock exercising the Put an amount in cash for each such
share equal to the Series B Liquidation Preference.
(iii) Upon the surrender of the certificate
or certificates representing (or a lost certificate affidavit together
with indemnity reasonably satisfactory to the Corporation relating to)
the shares of Series B Preferred Stock or Series B-1 Preferred Stock,
as the case may be, to be repurchased by the Corporation pursuant to
this Subsection (b) duly endorsed for transfer or accompanied by stock
powers duly executed in blank, the Series B Liquidation Preference in
respect of such shares shall be paid to the order of the person whose
name appears on such certificate or certificates in immediately
available funds. Each surrendered certificate shall be canceled and
retired.
(3) Liquidation Preference.
(a) Series A Preferred Stock.
(i) In the event of any liquidation,
dissolution or winding-up of the affairs of the Corporation (a
"Liquidation Event"), whether voluntary or involuntary, before any
payment of cash or distribution of other property shall be made to the
holders of Common Stock, the holders of Series A Preferred Stock shall
be entitled to receive out of the assets of the Corporation legally
available for distribution to its stockholders, an amount per share
equal to (as such amount shall be adjusted to reflect subdivisions and
combinations of shares and stock dividends), with respect to each
outstanding share of Series A Preferred Stock, $0.75, together with all
accrued but unpaid dividends with respect to each such share (the
"Series A Liquidation Amount"). If the assets and funds legally
available for distribution among the holders of Series A Preferred
Stock shall be insufficient to permit the payment to such holders of
the full preferential amount, then such assets and funds shall be
distributed ratably among the holders of Series A Preferred Stock and
all other classes and series of Preferred Stock ranking (as to any such
distribution) on a parity with the Series A Preferred Stock in
proportion to the total preferential amount which each such holder is
entitled to receive.
(b) Series B and Series B-1 Preferred Stock. Upon a
Liquidation Event, the holders of the Series B Preferred Stock or Series B-1
Preferred Stock shall be entitled, before any assets of the Corporation shall be
distributed among or paid over to the holders of Junior Securities, to receive
from the assets of the Corporation available for distribution to stockholders
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in immediately available funds, an amount per share equal to: (y) if the total
value of the Fully Diluted Shares at the time of the Liquidation Event is less
than or equal to the Liquidation Threshold Amount, then the holders shall be
entitled to (i) $1.60 (proportionally adjusted from time to time to reflect
stock dividends, stock splits, recapitalization or any other stock subdivision
or combination), plus (ii) the amount such holders would be entitled to receive
had they converted their shares of Series B Preferred Stock into shares of
Series B Conversion Stock immediately prior to such Liquidation Event, in
accordance with Section (B)(5)(b) hereof, plus (iii) all declared or accrued but
unpaid dividends on such shares from the applicable Issue Date to the date of
the Liquidation Event, other than dividends payable in Additional Preferred
Stock; or (z) if the total value of the Fully Diluted Shares at the time of the
Liquidation Event is more than the Liquidation Threshold Amount, then the
holders shall be entitled to the amounts represented in subsections (y)(ii) and
(iii) of this Section (B)(3)(b) (such amount in (y) or (z) being sometimes
referred to herein as the "Series B Liquidation Preference"). If the assets of
the Corporation legally available for distribution shall be insufficient to
permit the payment in full to the holders of the Series B Preferred Stock and
the Series B-1 Preferred Stock of the Series B Liquidation Preference, then the
entire assets of the Corporation legally available for distribution shall be
distributed ratably among such holders and all other classes and series of
preferred stock ranking (as to any such distribution) on a parity with the
Series B Preferred Stock and the Series B-1 Preferred Stock.
(c) Any assets remaining after the distributions
pursuant to Section (B)(3)(a) and Subsection (B)(3)(b) above shall be
distributed on a pro rata basis to the holders of Common Stock.
(d) For purposes of this Section (B)(3)(b), a
Liquidation Event shall be deemed to be occasioned by, or to include, the
Corporation's sale of all or substantially all of its assets or the
consolidation or merger of the Corporation with or into any other corporation or
corporations, or the effecting by the Corporation of a transaction or series of
related transactions after the Series B Issue Date in which more than 50% of the
voting power of the Corporation is disposed.
(4) Voting Rights.
(a) Series A Preferred Stock. In addition to the
rights otherwise provided by law or this Certificate of Incorporation, the
holders of Series A Preferred Stock shall be entitled to vote, together with the
holders of Common Stock, as one class on all matters submitted to a vote of
stockholders, in the same manner and with the same effect as the holders of
Common Stock. In any such vote, each share of Series A Preferred Stock shall
entitle the holder thereof to the number of votes per share that equals the
numbers of shares of Common Stock (including fractional shares) into which each
share of Series A Preferred Stock is then convertible, rounded to the nearest
decimal place. The holders of each share of Series A Preferred Stock shall be
entitled to receive notice, together with the holders of each share of Common
Stock, of all stockholder meetings.
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(b) Series B and Series B-1 Preferred Stock.
(i) Except as otherwise provided by law or
by Section (B)(4)(b)(ii) below, the holders of the Series B Preferred
Stock or Series B-1 Preferred Stock, as the case may be, shall be
entitled to vote on all matters submitted to the stockholders for a
vote together with the holders of the Common Stock voting together as a
single class, with each holder of Common Stock entitled to one vote for
each share of Common Stock held by such holder and each holder of
Series B Preferred Stock or Series B-1 Preferred Stock entitled to one
vote for each share of Common Stock issuable upon conversion of the
Series B Preferred Stock or Series B-1 Preferred Stock held by such
holder at the time the vote is taken.
(ii) The holders of the Series B Preferred
Stock or Series B-1 Preferred Stock shall vote as a separate class in
all matters which may impact, in any material adverse respect as a
separate class, the Series B Preferred Stock or Series B-1 Preferred
Stock, including, but not limited to (a) any amendment to the
Certificate of Incorporation or Bylaws, (b) the creation of any new
series of preferred stock or the issuance of additional shares of
capital stock of the Corporation that ranks senior to or on a parity
with the Series B Preferred Stock or Series B-1 Preferred Stock, (c)
the issuance of bank loans or debt securities in excess of $3,000,000,
(d) the declaration and payment of any dividend or distribution or
repurchase of any shares of capital stock of the Corporation (other
than (i) payments in respect of fractional shares, and (ii) from
employees, consultants, directors or parties to acquisitions by the
Corporation pursuant to contractual repurchase upon termination or
indemnification rights in favor of the Corporation), (e) any merger,
combination, recapitalization, reconsolidation, acquisition or sale of
all or substantially all of the assets of the Corporation, and (f) the
issuance of 10% or more of the outstanding capital stock (on a fully
diluted basis) of the Corporation in a single transaction (or a series
of transactions to related individuals or entities) other than pursuant
to a Qualified Series B Public Offering (as defined in Article VIII
hereof).
(5) Conversion.
(a) Series A Preferred Stock. The holders of Series A
Preferred Stock shall have conversion rights as follows (the "Series A
Conversion Rights"):
(i) Right to Convert.
1. Optional Conversion. Each share
of Series A Preferred Stock shall be convertible at the option
of the holder thereof, at any time after the date of issuance
of such shares, at the office of the Corporation or any
transfer agent for Series A Preferred Stock, into one fully
paid and nonassessable share of Common Stock (the "Series A
Conversion Rate"). The initial Series A Conversion Rate shall
be subject to adjustment as set forth below.
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2. Mandatory Conversion. Outstanding
shares of Series A Preferred Stock shall be automatically
converted into shares of Common Stock at the Series A
Conversion Rate (a) upon the consummation of an underwritten
public offering pursuant to an effective registration
statement under the Securities Act of 1933, as amended, by the
Corporation of its Common Stock, pursuant to which Common
Stock is offered to the public at a price of at least $0.75
per share (subject to adjustment for stock splits,
combinations and other similar events) ("Qualified Series A
Public Offering") or (b) immediately prior to the consummation
of a consolidation or merger of the Corporation with or into
another corporation, or any sale or transfer of all or
substantially all of the assets of the Corporation, pursuant
to which the holders of Common Stock (assuming the conversion
of all outstanding Series A Preferred Stock into Common Stock
at the Series A Conversion Rate) will receive cash or
securities or property having a value (as determined by the
Corporation's Board of Directors) of at least $0.75 per share
of Common Stock (subject to adjustment for stock splits,
combinations and other similar events). The holder of any
shares of Series A Preferred Stock converted into Common Stock
in connection with such a public offering or other transaction
shall be entitled to payment of all declared but unpaid
dividends, if any, payable with respect to such shares up to
and including the date of the closing of such public offering
or other transaction.
3. Upon conversion of the Series A
Preferred Stock, the Common Stock so issued shall be duly and
validly issued, fully paid and nonassessable shares of the
Corporation.
(ii) Mechanics of Conversion. No fractional
shares of Common Stock shall be issued upon conversion of
Series A Preferred Stock and the number of shares issuable
upon such conversion shall be calculated to the nearest whole
share. Except as provided in Section (B)(5)(a)(i)(2), before
any holder of Series A Preferred Stock shall be entitled to
convert the same into full shares of Common Stock, such holder
shall surrender the certificate or certificates therefor, duly
endorsed, at the office of the Corporation or of any transfer
agent for the Series A Preferred Stock, and shall give written
notice by mail, postage prepaid, to the Corporation at its
principal corporate office, of the election to convert the
same. The Corporation shall, not later than 45 days
thereafter, issue and deliver at such office to such holder of
Series A Preferred Stock, a certificate or certificates for
the number of shares of Common Stock to which such holder
shall be entitled as aforesaid (after aggregating all shares
of Common Stock issuable to such holder of Series A Preferred
Stock upon conversion of the number of shares of Series A
Preferred Stock at the time being converted) and a check in an
amount equal to accrued but unpaid dividends as to this date
with respect to such shares converted. In addition, if less
than all of the shares represented by such certificates are
surrendered for conversion pursuant to Section
(B)(5)(a)(i)(1), the Corporation shall issue and deliver to
such holder a new certificate for the balance of the shares of
Series A Preferred Stock not so
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converted. Except as provided in Section (B)(5)(a)(i)(2), such
conversion shall be deemed to have been made immediately prior
to the close of business on the date of the surrender of the
shares of such Series A Preferred Stock to be converted, and
the person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of
Common Stock as of such date.
(iii) Adjustments to Series A Conversion
Price.
1. Adjustments for Dividends,
Distributions or Subdivisions. In the event the Corporation
shall issue additional shares of Common Stock pursuant to a
stock dividend, stock distribution or subdivision, the Series
A Conversion Rate in effect immediately prior to such stock
dividend, stock distribution or subdivision shall,
concurrently with such stock dividend, stock distribution or
subdivision, be proportionately increased.
2. Adjustments for Combinations or
Consolidations. In the event the outstanding shares of Common
Stock shall be combined or consolidated, by reclassification
or otherwise, into a lesser number of shares of Common Stock,
the Series A Conversion Rate in effect immediately prior to
such combination or consolidation shall, concurrently with the
effectiveness of such combination or consolidation, be
proportionately decreased.
3. Reorganization; Merger. Upon any
capital reorganization of the Corporation or any
reclassification of outstanding shares of Common Stock, or in
case of any consolidation or merger of the Corporation with or
into another corporation in which the Corporation is not the
surviving corporation, or in case of any sale or transfer of
all or substantially all of the assets of the Corporation,
each share of Series A Preferred Stock then outstanding would,
without consent of any holders of the Series A Preferred
Stock, become convertible only into the current amount of
securities or property or cash receivable upon the capital
reorganization, reclassification, consolidation, merger, sale,
or transfer by a holder of the number of shares of Common
Stock into which such share of Series A Preferred Stock could
have been converted immediately prior thereto.
(iv) No Impairment. The Corporation will
not, by amendment of its Certificate of Incorporation or
through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed
hereunder by the Corporation, but will, at all times in good
faith, assist in the carrying out of all the provisions of
this Section (B)(5) and in the taking of all such action as
may be necessary or appropriate in order to protect the Series
A Conversion Rights of the holders of the Series A Preferred
Stock against impairment.
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(v) Reservation of Common Stock Issuable
Upon Conversion. The Corporation shall, at all times, reserve
and keep available out of its authorized but unissued shares
of Common Stock solely for the purposes of effecting the
conversion of the Series A Preferred Stock, such number of its
shares of Common Stock as shall from time to time be
sufficient to effect the conversion of all outstanding shares
of Series A Preferred Stock; and if at any time the number of
authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all then-outstanding
shares of Series A Preferred Stock, the Corporation will take
such corporate action as may, in the opinion of its counsel,
be necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient
for such purposes.
(vi) Certificate as to Adjustments. Upon the
occurrence of each adjustment or readjustment of the
Conversion Rate pursuant to this Section (B)(5), the
Corporation at its expense shall promptly compute such
adjustment or readjustment in accordance with the terms hereof
and furnish to each holder of Series A Preferred Stock a
certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written
request at any time of any holder of Series A Preferred Stock,
furnish or cause to be furnished to such holder a like
certificate setting forth (a) all such adjustments and
readjustments, (b) the Series A Conversion Rate at the time in
effect, and (c) the number of shares of Common Stock which at
the time would be received upon the conversion of such Series
A Preferred Stock.
(vii) Notices of Record Date. In the event
that the Corporation shall propose at any time:
1. to declare any dividend or
distribution upon the Common Stock, whether in cash, property,
stock or other securities, whether or not a regular cash
dividend and whether or not out of earnings or earned surplus;
or
2. to offer for subscription to the
holders of any class or series of its capital stock any
additional shares of stock of any class or series or any other
rights; or
3. to effect any reclassification or
recapitalization; or
4. to merge or consolidate with or
into any other corporation, to sell, lease or convey all or
substantially all its property or business, or to liquidate,
dissolve or wind up; then, in connection with each such event,
the Corporation shall send to the holders of the Series A
Preferred Stock:
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(i) at least 10 days' prior written notice
of the date on which a record shall be taken for such
dividend, distribution or subscription rights (and specifying
the date on which the holders of Common Stock shall be
entitled thereto) or for determining rights to vote in respect
of the matters referred to in 3. and 4. above; and
(ii) in the case of the matters referred to
in 3. and 4. above, at least 10 days' prior written notice of
the date of a stockholders meeting at which a vote on such
matters shall take place (and specifying the date on which the
holders of Common Stock shall be entitled to exchange their
Common Stock for securities or other property deliverable upon
the occurrence of such event and the amount of securities or
other property deliverable upon such event).
Each such written notice shall be given personally or
by first class mail, postage prepaid, addressed to the holders of Series A
Preferred Stock at the address for each such holder as shown on the books of the
Corporation.
(b) Series B and Series B-1 Preferred Stock.
(i) Conversion Procedure.
1. At any time and from time to
time, any holder of Series B Preferred Stock or
Series B-1 Preferred Stock may convert all or any
portion of such series of stock, including any shares
of Additional Preferred Stock, held by such holder
into a number of shares of Series B Conversion Stock
computed by multiplying the number of shares to be
converted by $1.60 and dividing the result by the
Series B Conversion Price or the Series B-1
Conversion Price, as applicable, (as defined below)
then in effect.
2. Each conversion of Series B
Preferred Stock or Series B-1 Preferred Stock shall
be deemed to have been effected as of the close of
business on the date on which notice of election of
such conversion is delivered to the Corporation by
such holder. Until the certificates representing the
shares of Series B Preferred Stock or Series B- 1
Preferred Stock which are being converted have been
surrendered and new certificates representing shares
of the Series B Conversion Stock shall have been
issued by the Corporation, such certificate(s)
evidencing the shares of Series B Preferred Stock or
Series B-1 Preferred Stock being converted shall be
evidence of the issuance of such shares of Series B
Conversion Stock. At such time as such conversion has
been effected, the rights of the converting holder
shall cease and the Person or Persons in whose name
or names any certificate or certificates for shares
of Series B Conversion Stock are to be issued upon
such conversion shall be deemed
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to have become the holder or holders of record of the
shares of Series B Conversion Stock represented
thereby.
3. Notwithstanding any other
provision hereof, if a conversion of shares is to be
made in connection with a Public Offering, the
conversion of such shares may, at the election of the
holder thereof, be conditioned upon the consummation
of the Public Offering, in which case such conversion
shall not be deemed to be effective until the
consummation of the Public Offering.
4. As soon as practicable after a
conversion has been effected in accordance with
clause 2. above, the Corporation shall deliver, as
soon as practicable, but in no event later than sixty
(60) days after receipt of notice of conversion and
stock certificate(s) from the converting holder, to
the converting holder:
(A) a certificate or
certificates representing, in the aggregate, the
number of shares of Series B Conversion Stock
issuable by reason of such conversion, in the name or
names and in such denomination or denominations as
the converting holder has specified; and
(B) a certificate
representing any shares which were represented by the
certificate or certificates delivered to the
Corporation in connection with such conversion but
which were not converted.
5. The issuance of certificates for
shares of Series B Conversion Stock upon conversion
of Series B Preferred Stock or Series B-1 Preferred
Stock shall be made without charge to the converting
holders for any issuance tax in respect thereof or
other cost incurred by the Corporation in connection
with such conversion and the related issuance of
shares of Series B Conversion Stock, except for any
transfer or similar tax payable as a result of
issuance of a certificate to other than the
registered or beneficial holder of the shares being
converted. Upon conversion of any shares of Series B
Preferred Stock or Series B-1 Preferred Stock, the
Corporation shall use its best efforts to take all
such actions as are necessary in order to insure that
the Series B Conversion Stock issuable with respect
to such conversion shall be validly issued, fully
paid and nonassessable.
6. The Corporation shall not close
its books against the transfer of Series B Preferred
Stock or Series B-1 Preferred Stock or of Series B
Conversion Stock issued or issuable upon conversion
thereof in any manner which interferes with the
timely conversion of such stock. The Corporation
shall assist and cooperate with any converting holder
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required to make any governmental filings or obtain
any governmental approval prior to or in connection
with any conversion of shares hereunder (including,
without limitation, making any filings reasonably
required to be made by the Corporation).
7. No fractional shares of Series B
Conversion Stock or scrip representing fractional
shares shall be issued upon conversion of shares of
Series B Preferred Stock or Series B-1 Preferred
Stock. If more than one share of Series B Preferred
Stock or Series B-1 Preferred Stock shall be
surrendered for conversion at one time by the same
record holder, the number of full shares of Series B
Conversion Stock issuable upon the conversion thereof
shall be computed on the basis of the aggregate
number of shares of Series B Preferred Stock or
Series B-1 Preferred Stock so surrendered by such
record holder. Instead of any fractional share of
Series B Conversion Stock otherwise issuable upon
conversion of any shares of the Series B Preferred
Stock or Series B-1 Preferred Stock, the Corporation
shall pay a cash adjustment in respect of such
fraction in an amount equal to the same fraction of
current per share fair market value of the Series B
Conversion Stock as determined in good faith by the
Board of Directors on such basis as it considers
appropriate.
8. The Corporation shall at all
times reserve and keep available out of its
authorized but unissued shares of Series B Conversion
Stock, solely for the purpose of issuance upon the
conversion of the Series B Preferred Stock or Series
B-1 Preferred Stock, such number of shares of Series
B Conversion Stock as are issuable upon the
conversion of all outstanding Series B Preferred
Stock and Series B-1 Preferred Stock. All shares of
Series B Conversion Stock which are so issuable
shall, when issued, be duly and validly issued, fully
paid and nonassessable and free from all taxes, liens
and charges, other than those created or agreed to by
the holder. The Corporation shall use its best
efforts to take all such actions as may be necessary
to assure that all such shares of Series B Conversion
Stock may be so issued without violation of any
applicable law or governmental regulation or any
requirements of any domestic securities exchange upon
which shares of Series B Conversion Stock may be
listed (except for official notice of issuance which
shall be immediately delivered by the Corporation
upon each such issuance).
(ii) Series B Conversion Price and Series
B-1 Conversion Price.
1. "Series B Conversion Price" and
"Series B-1 Conversion Price" for the Series B
Preferred Stock and the Series B-1 Preferred Stock,
respectively, shall initially mean the Initial Series
B Conversion Price and the Initial Series B-1
Conversion Price, respectively,
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described in this Section (B)(5)(b), as the same may
be subsequently reduced from time to time in
accordance with this Section (B)(5)(b).
2. The "Initial Series B Conversion
Price" and the "Initial Series B-1 Conversion Price"
shall each be $1.60; provided, however, that if the
Corporation:
(A) successfully
consummates an initial Public Offering on or
prior to December 31, 1996, in which the
total value of the Fully Diluted Shares
(assuming that if the initial public
offering price takes into account the
issuance of all Fully Diluted Shares, then
such initial public offering price shall be
the value per share for purposes of
calculating the total value of the Fully
Diluted Shares) is less than or equal to the
Liquidation Threshold Amount, then each of
the Initial Series B Conversion Price and
the Initial Series B-1 Conversion Price
shall, upon consummation of such Public
Offering, be equal to the lesser of (i) the
Series B Conversion Price or the Series B-1
Conversion Price then in effect, as the case
may be, and (ii) the greater of (x) $0.80
and (y) one-half of the initial public
offering price per share; or
(B) successfully
consummates an initial Public Offering after
December 31, 1996 but within one year of the
Series B Issue Date in which the total value
of the Fully Diluted Shares (assuming that
if the initial public offering price takes
into account the issuance of all Fully
Diluted Shares, then such initial public
offering price shall be the value per share
for purposes of calculating the total value
of the Fully Diluted Shares) is less than or
equal to the Liquidation Threshold Amount,
then each of the Initial Series B Conversion
Price and the Initial Series B-1 Conversion
Price shall, upon consummation of such
Public Offering, be equal to the lesser of
(i) the Series B Conversion Price or the
Series B-1 Conversion Price then in effect,
as the case may be, and (ii) one-half the
initial public offering price per share; or
(C) has not successfully
consummated an initial Public Offering
within one year of the Series B Issue Date,
then each of the Initial Series B Conversion
Price and the Initial Series B-1 Conversion
Price shall be equal to $1.35, and, if the
Corporation has net revenues for the fiscal
year ending December 31, 1997 of less than
$9,500,000.00 or a net loss for such fiscal
year of more than $1,500,000, then each of
the Initial Series B Conversion Price and
the Initial Series B-1 Conversion Price
shall not be equal to $1.35, but shall
instead be equal to $1.06.
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3. If and whenever on or after the
Series B Issue Date the Corporation issues or sells,
or in accordance with Section (B)(5)(b)(iii) is
deemed to have issued or sold, any shares of its
Common Stock or other instrument or security
convertible into or exchangeable for Common Stock for
a consideration per share less than the Initial or
applicable Series B Conversion Price (the "Sale
Price"), then forthwith upon such issue or sale the
applicable Series B Conversion Price shall be reduced
to equal the Sale Price.
4. If and whenever on or after the
Series B Issue Date the Corporation issues or sells,
or in accordance with Section (B)(5)(b)(iii) is
deemed to have issued or sold, any shares of its
Common Stock or other instrument or security
convertible into or exchangeable for Common Stock for
a consideration per share less than the Initial or
applicable Series B-1 Conversion Price and at least
one share of Series B-1 Preferred Stock is
outstanding, then forthwith upon such issue or sale
the applicable Series B-1 Conversion Price shall be
recalculated by multiplying the then applicable
Series B-1 Conversion Price by a fraction of which
(x) the numerator shall be (1) the number of shares
of Common Stock Deemed Outstanding immediately prior
to such issue or sale, plus (2) the number of shares
of Common Stock which the aggregate consideration
received or deemed received by the Corporation in
accordance with Section (B)(5)(b)(iii) for the total
number of shares of Common Stock issued and sold or
deemed issued and sold in accordance with Section
(B)(5)(b)(iii) would purchase at such Series B-1
Conversion Price as in effect immediately prior to
such issue and sale, and (y) the denominator shall be
the number of shares of Common Stock Deemed
Outstanding immediately after such issue or sale;
provided, however, the foregoing shall not apply to
the issuance of up to 504,000 shares of Common Stock
to employees, directors or consultants pursuant to
the Corporation's existing or future stock plans.
(iii) Effect on Series B Conversion Price
and the Series B-1 Conversion Price of Certain
Events. For purposes of determining the applicable
adjusted Series B Conversion Price and the Series B-1
Conversion Price under Section (B)(5)(b)(ii), the
following shall be applicable:
1. Issuance of Rights or Options. If
the Corporation in any manner grants any rights or
options to subscribe for or to purchase Common Stock
("Options") or any stock or other securities
convertible into or exchangeable for Common Stock
("Convertible Securities"), and the price per share
for which Common Stock is issuable upon the exercise
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<PAGE>
of such Options or upon conversion or exchange of
such Convertible Securities is less than the
applicable Series B Conversion Price or Series B-1
Conversion Price in effect immediately prior to the
time of the granting of such Options, then the total
maximum number of shares of Common Stock issuable
upon the exercise of such Options or upon conversion
or exchange of the total maximum amount of such
Convertible Securities shall be deemed to be
outstanding and to have been issued and sold by the
Corporation at the time of the granting of such
Options for such price per share. For purposes of
this paragraph, the "price per share for which Common
Stock is issuable" shall be determined by dividing
(A) the total amount, if any, received or receivable
by the Corporation as consideration for the granting
of such Options, plus the minimum aggregate amount of
additional consideration payable to the Corporation
upon exercise of all such Options, plus in the case
of such Options which relate to Convertible
Securities, the minimum aggregate amount of
additional consideration, if any, payable to the
Corporation upon the issuance or sale of such
Convertible Securities and the conversion or exchange
thereof (such amount is the consideration "deemed
received" for purposes of Section (B)(5)(b)(ii)
above), by (B) the total maximum number of shares of
Common Stock issuable upon the exercise of such
Options or upon the conversion or exchange of all
such Convertible Securities issuable upon the
exercise of such Options. Upon the expiration of any
Option or termination of any conversion right of any
Convertible Security issuable upon exercise of any
Option, the issuance of which resulted in an
adjustment of the Series B Conversion Price or the
Series B- 1 Conversion Price, if any such Option
shall expire or conversion right of any Convertible
Security shall terminate and shall not have been
exercised or converted, as applicable, the Series B
Conversion Price or the Series B- 1 Conversion Price,
as applicable, shall be recalculated immediately upon
such expiration and effective immediately upon such
expiration shall be increased to the price it would
have been (but reflecting any other adjustments to
the Series B Conversion Price or the Series B-1
Conversion Price made pursuant to the provisions of
this Section (B)(5)(b) after the issuance of such
Options) had the adjustment of the Series B
Conversion Price or the Series B-1 Conversion Price
made upon the issuance of such Options been made on
the basis of the issuance of only those Options
actually exercised or Convertible Securities issuable
upon exercise of such Options actually converted, as
applicable. No further adjustment of the applicable
Series B Conversion Price or the Series B-1
Conversion Price shall be made when Convertible
Securities are actually issued upon the exercise of
such Options or when Common Stock is actually issued
upon the exercise of such Options or the conversion
or exchange of such Convertible Securities.
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<PAGE>
2. Issuance of Convertible
Securities. If the Corporation in any manner issues
or sells any Convertible Securities and the price per
share for which Common Stock is issuable upon
conversion or exchange thereof is less than the
applicable Series B Conversion Price or the Series
B-1 Conversion Price in effect immediately prior to
the time of such issue or sale, then the maximum
number of shares of Common Stock issuable upon
conversion or exchange of such Convertible Securities
shall be deemed to be outstanding and to have been
issued and sold by the Corporation at the time of the
issuance or sale of such Convertible Securities for
such price per share. For the purposes of this
paragraph, the "price per share for which Common
Stock is issuable" shall be determined by dividing
(A) the total amount received or receivable by the
Corporation as consideration for the issue or sale of
such Convertible Securities, plus the minimum
aggregate amount of additional consideration, if any,
payable to the Corporation upon the conversion or
exchange thereof (such amount is the consideration
"deemed received" for purposes of Section
(B)(5)(b)(ii) above), by (B) the total maximum number
of shares of Common Stock issuable upon the
conversion or exchange of all such Convertible
Securities. Upon the termination of any conversion
right of any Convertible Security, the issuance of
which resulted in an adjustment of the Series B
Conversion Price or the Series B- 1 Conversion Price,
as applicable, if any such conversion right of any
Convertible Security shall terminate and shall not
have been converted, the Series B Conversion Price or
the Series B-1 Conversion Price, as applicable, shall
be recalculated immediately upon such termination and
effective immediately upon such termination shall be
increased to the price it would have been (but
reflecting any other adjustments to the Series B
Conversion Price or the Series B-1 Conversion Price,
as applicable, made pursuant to the provisions of
this Section (B)(5)(b) after the issuance of such
Convertible Securities) had the adjustment of the
Series B Conversion Price or the Series B-1
Conversion Price made upon the issuance of such
Convertible Securities been made on the basis of the
issuance of only those Convertible Securities
actually converted. No further adjustment of the
applicable Series B Conversion Price or the Series
B-1 Conversion Price shall be made when Common Stock
is actually issued upon the conversion or exchange of
such Convertible Securities, and if any such issue or
sale of such Convertible Securities is made upon
exercise of any Options for which adjustments of the
applicable Series B Conversion Price or the Series
B-1 Conversion Price had been or are to be made
pursuant to other provisions of this Section
(B)(5)(b), no further adjustment of the applicable
Series B Conversion Price or the Series B-1
Conversion Price shall be made by reason of such
issue or sale.
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<PAGE>
3. Change in Option Price or
Conversion Rate. If the purchase price provided for
in any Options, the additional consideration, if any,
payable upon the conversion or exchange of any
Convertible Securities, or the rate at which any
Convertible Securities are convertible into or
exchangeable for Common Stock change at any time, the
applicable Series B Conversion Price and the Series
B-1 Conversion Price in effect at the time of such
change shall be readjusted to the applicable Series B
Conversion Price or the Series B-1 Conversion Price,
as applicable, which would have been in effect at
such time had such Options or Convertible Securities
still outstanding provided for such changed purchase
price, additional consideration or changed conversion
rate, as the case may be, at the time initially
granted, issued or sold.
(iv) Subdivision or Combination of Common
Stock. If the Corporation at any time subdivides (by
any stock split, stock dividend, recapitalization or
otherwise) one or more classes of its outstanding
shares of Common Stock into a greater number of
shares, or if the Corporation at any time combines
(by reverse stock split or otherwise) one or more
classes of its outstanding shares of Common Stock
into a smaller number of shares, the applicable
Series B Conversion Price and the Series B-1
Conversion Price in effect immediately prior to such
subdivision or combination shall be proportionately
adjusted.
(v) Reorganization, Reclassification,
Consolidation, Merger or Sale. Any recapitalization,
reorganization, reclassification, consolidation,
merger, sale of all or substantially all of the
Corporation's assets to another Person or other
transaction which is effected in such a manner that
holders of Common Stock are entitled to receive
(either directly or upon subsequent liquidation)
stock, securities or assets with respect to or in
exchange for Common Stock is referred to herein as an
"Organic Change." Prior to the consummation of any
Organic Change, the Corporation shall make
appropriate provisions (in form and substance
reasonably satisfactory to the holders of the
majority of the shares of each class of the Series B
Preferred Stock and Series B-1 Preferred Stock then
outstanding) to insure that each of the holders of
Series B Preferred Stock or Series B-1 Preferred
Stock shall thereafter have the right to acquire and
receive, in lieu of or in addition to (as the case
may be) the shares of Series B Conversion Stock
immediately theretofore acquirable and receivable
upon the conversion of such holder's stock, such
shares of stock, securities or assets as such holder
would have received in connection with such Organic
Change if such holder had converted its Series B
Preferred Stock or Series B-1 Preferred Stock into
Series B Conversion Stock immediately prior to such
Organic Change. In each such case, the Corporation
shall also make appropriate provisions (in form and
substance reasonably
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<PAGE>
satisfactory to the holders of a majority of the
shares of each class of the Series B Preferred Stock
and Series B-1 Preferred Stock then outstanding) to
insure that the provisions of this Section
(b)(5)(b)(v) shall thereafter be applicable to the
Series B Preferred Stock, the Series B-1 Preferred
Stock and to the shares of stock, securities or
assets received by each holder upon such Organic
Change. The Corporation shall not effect any Organic
Change, consolidation, merger or sale unless prior to
the consummation thereof, the successor corporation
(if other than the Corporation) resulting from
consolidation or merger or the corporation purchasing
such assets assumes by written instrument (in form
and substance reasonably satisfactory to the holders
of the majority of the shares of the Series B
Preferred Stock and Series B-1 Preferred Stock then
outstanding) the obligation to deliver to each such
holder such shares of stock, securities or assets as,
in accordance with the foregoing provisions, such
holder may be entitled to acquire.
(vi) Certain Events. If an event not
specifically enumerated in this Section (B)(5)(b)
occurs which has substantially the same economic
effect on the Series B Preferred Stock or Series B-1
Preferred Stock as those specifically enumerated
shall occur, then this Section (B)(5)(b) shall be
construed liberally, mutatis mutandis, in order to
give the Series B Preferred Stock and the Series B-1
Preferred Stock the benefit of the protections
provided under this Section (B)(5)(b). The
Corporation's Board of Directors shall make an
appropriate adjustment in the applicable Series B
Conversion Price and the Series B-1 Conversion Price
so as to protect the rights of the holders of such
stock; provided that no such adjustment shall
increase the applicable Series B Conversion Price or
the Series B-1 Conversion Price as otherwise
determined pursuant to this Section (B)(5)(b) or
decrease the number of shares of Series B Conversion
Stock issuable upon conversion of each share of
Series B Preferred Stock or the Series B-1 Preferred
Stock.
(vii) Notices.
1. Promptly upon any adjustment of
the applicable Series B Conversion Price or the
Series B-1 Conversion Price, the Corporation shall
give written notice thereof to all holders of such
stock, setting forth in reasonable detail and
certifying the calculation of such adjustment.
2. The Corporation shall give
written notice to all holders of Series B Preferred
Stock and Series B-1 Preferred Stock at least 10 days
prior to the date on which the Corporation closes its
books or takes a record (A) with respect to any
dividend or distribution upon Common Stock, (B) with
respect to any pro rata subscription offer to
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<PAGE>
holders of Common Stock, or (C) for determining
rights to vote with respect to any Organic Change,
dissolution or liquidation.
3. The Corporation shall give
written notice to the holders of Series B Preferred
Stock and Series B-1 Preferred Stock at least twenty
(20) days prior to the date on which any Organic
Change shall take place, which notice may be one and
the same as that required by 2. above.
(viii) Mandatory Conversion. All of the
outstanding shares of Series B Preferred Stock and Series B-1
Preferred Stock will be automatically converted in accordance
with the terms of this Section (B)(5)(b) at the closing of a
Series B Qualified Public Offering. Any such mandatory
conversion shall be effected only at the time of and subject
to the closing of the sale of such shares pursuant to such
Public Offering.
(6) Dividends.
(a) Series A Preferred Stock.
(i) Each issued and outstanding share of
Series A Preferred Stock shall entitle the holder of record
thereof to receive out of funds legally available therefor,
cumulative annual dividends at the rate of seven (7%) percent
of the Series A Liquidation Amount per annum, which dividends
shall be payable in shares of Series A Preferred Stock, on the
earlier to occur of (A) a Qualified Series A Public Offering
or (B) a Liquidation Event, and which shall be declared and
set apart or paid before dividends of any kind may be declared
upon the Common Stock and any other series of preferred stock
that are junior to the Series A Preferred Stock (the Common
Stock and any other such series of preferred stock is junior
to the Series A Preferred Stock are sometimes hereinafter
referred to as the "Junior Securities" or a "Junior Security")
and before distributions of any kind may be made upon the
issued and outstanding Junior Securities. Said annual dividend
upon the issued and outstanding Series A Preferred Stock shall
be cumulative and shall be deemed to accrue from and after the
date of issuance, whether earned, or whether there be funds
legally available therefor, or whether said dividends shall
have been declared. The amount of dividends payable for the
initial one year dividend period or any period shorter than a
full dividend period shall be computed on the basis of a
360-day period of twelve 30-day months.
(ii) Only after full dividends upon the
issued and outstanding Series A Preferred Stock as aforesaid
for all past annual dividend periods shall have been paid,
without interest and whenever full dividends upon the issued
and outstanding Series A Preferred Stock as aforesaid for the
then current annual dividend period shall have been declared
and either paid or a sum sufficient for the payment thereof
set aside in full without interest, may the Board of Directors
declare, set aside, or pay any cash dividends, and/or may make
share distributions
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<PAGE>
of the authorized but unissued Common Stock of the Corporation
and/or its treasury Common Stock if any, and/or may make
distributions of bonds or property of the Corporation,
including the shares or bonds of other corporations with
respect to any Junior Securities. Any reference to
"distributions" in this paragraph contained shall not be
deemed to include any distributions made in connection with
any liquidation, dissolution, or winding-up of the
Corporation, whether voluntary or involuntary; nor shall any
such reference to "distributions" in relation to issued and
outstanding shares be deemed to limit, curtail or divest the
authority of the Board of Directors to make any proper
distributions, including distributions of authorized but
unissued Common Stock, in relation to its treasury Common
Stock, if any.
(b) Series B and Series B-1 Preferred Stock.
(i) The holders of Series B Preferred Stock
or Series B-1 Preferred Stock shall be entitled to receive,
when, as and if declared by the Board of Directors out of
funds legally available for the purpose, cumulative dividends
in shares of Series B Preferred Stock or Series B-1 Preferred
Stock, respectively, ("Additional Preferred Stock"). Dividends
on each share of Series B Preferred Stock or Series B-1
Preferred Stock shall accrue at the rate of 7% per annum,
compounded annually, on the Dividend Liquidation Preference
(as defined in Article VIII hereof). Such dividends shall
commence to accrue on each share of Series B Preferred Stock
or Series B-1 Preferred Stock from the applicable Issue Date
whether or not declared by the Board of Directors and whether
or not there shall be capital, surplus or earnings sufficient
to lawfully pay such dividends and shall continue to accrue
thereon until the earlier of (i) the date the Dividend
Liquidation Preference (as defined in Article VIII hereof) is
paid in full in cash with respect to each such share in
accordance with Sections (B)(2)(b) or (B)(3)(b) hereof, and
(ii) the date such share is converted into Common Stock in
accordance with Section (B)(5)(b) hereof.
(ii) Such dividends shall be issued and paid
with respect to a share of Series B Preferred Stock or Series
B-1 Preferred Stock, as the case may be, upon the earliest of
(I) conversion of such share into Series B Conversion Stock,
or (ii) the occurrence of a Liquidation Event (as defined in
Section (B)(3)(b) hereof).
(iii) If at any time the Corporation pays
less than the total amount of dividends then accrued with
respect to the Series B Preferred Stock and the Series B-1
Preferred Stock required to be paid at such time, such payment
shall be distributed ratably among the holders thereof based
upon the aggregate accrued but unpaid dividends on the
relevant Series B Preferred Stock or Series B- 1 Preferred
Stock held by each holder.
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(iv) So long as any shares of Series B
Preferred Stock or Series B-1 Preferred Stock are outstanding,
the Corporation will not declare, pay or set apart for payment
any dividends (except dividends payable in Common Stock of the
Corporation) or make any other distribution on or redeem,
purchase or otherwise acquire any Junior Securities and will
not permit any Subsidiary or other Affiliate (using funds of
the Corporation or any Subsidiary) to redeem, purchase or
otherwise acquire for value, any Junior Securities, except as
permitted in Section (B)(4)(b)(ii)(d) hereof. In addition, so
long as any shares of Series B Preferred Stock or Series B-1
Preferred Stock are outstanding, the Corporation will not
declare, pay or set apart for payment any dividends or make
any other distribution on any Series B Preferred Stock or
Series B-1 Preferred Stock unless such dividends or
distributions are also made on all Series B Preferred Stock
and Series B-1 Preferred Stock ratably. Notwithstanding the
foregoing provisions of this Section (B)(6)(b)(iv), the
Corporation or any Subsidiary may (i) make payments in respect
of fractional shares of Junior Securities and (ii) repurchase,
redeem or otherwise acquire for value any Junior Securities
from any employee or former employee of the Corporation or any
Subsidiary in connection with the termination of employment by
the Corporation or any Subsidiary or by such employee or
former employee, whether by reason of death, disability,
retirement or otherwise.
(7) No Reissuance of Preferred Stock. No share or shares of
Series A Preferred Stock, Series B Preferred Stock or Series B-1
Preferred Stock acquired by the Corporation by reason of purchase,
conversion or otherwise shall be reissued, and all such shares shall be
cancelled, retired and eliminated from the shares which the Corporation
shall be authorized to issue.
(8) Special Mandatory Conversion.
(a) If at any time a holder of Series B Preferred
Stock fails to participate pro rata in a subsequent round of financing
of the Corporation with respect to which the Corporation issues or
sells securities at a price per share which is less than the applicable
Series B Conversion Price then in effect (a "Down Financing"), then all
of the shares of Series B Preferred Stock held by such
non-participating holder shall automatically and without further action
on the part of such holder be converted into an equivalent number of
shares of Series B-1 Preferred Stock effective upon the closing of the
Down Financing.
(b) The holder of any shares of Series B Preferred
Stock converted pursuant to subsection (a) above shall deliver to the
Corporation during regular business hours at the office of any transfer
agent of the Corporation for such series of stock, or at such other
place as may be designated by the Corporation, the certificate or
certificates for the shares so converted, duly endorsed or assigned in
blank to the Corporation. As promptly as practicable thereafter, the
Corporation shall issue and deliver to such holder, at the place
designated by such holder, a certificate or certificates for the number
of full
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shares of the Series B-1 Preferred Stock to which such holder is
entitled. The person in whose name the certificate for such shares of
Series B-1 Preferred Stock is to be issued shall be deemed to have
become a stockholder of record on the closing date of the Down
Financing unless the transfer books of the Corporation are closed on
that date, in which event such person shall be deemed to have become a
shareholder of record on the next succeeding date on which the transfer
books are open.
ARTICLE V
Whenever a compromise or arrangement is proposed between the
Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of the Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for the Corporation under the
provisions of Section 291 of Title 8 of the Delaware Code or on the application
of trustees in dissolution or of any receiver or receivers appointed for the
Corporation under the provisions of Section 279 of Title 8 of the Delaware Code,
order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of the Corporation, as the case may be, to
be summoned in such manner as the said court directs. If a majority in number
representing three-fourths in value of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of the Corporation, as the
case may be, agree to any compromise or arrangement and to any reorganization of
the Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of the Corporation, as the case may be, and also on the
Corporation.
ARTICLE VI
The initial By-laws of the Corporation shall be adopted by the
Directors of the Corporation; thereafter, the By-laws shall be altered or
repealed as provided therein.
ARTICLE VII
To the fullest extent permitted by the General Corporation Law of the
State of Delaware as the same exists or may hereafter be amended, a director of
the Corporation shall not be liable to the Corporation or its stockholders for
monetary damages for breach of fiduciary duly as a director.
ARTICLE VIII
The following terms have the meanings specified below:
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(a) Affiliate. The term "Affiliate" shall mean (i)
any Person directly or indirectly controlling, controlled by or under
direct or indirect common control with the Corporation (or other
specified Person), (ii) any Person who is a beneficial owner of at
least 10% of the then outstanding voting capital stock (or options,
warrants or other securities which, after giving effect to the exercise
thereof, would entitle the holder thereof to hold at least 10% of the
then outstanding voting capital stock) of the Corporation (or other
Specified Person), (iii) any director or executive officer of the
Corporation (or other Specified Person) or Person of which the
Corporation (or other Specified Person) shall, directly or indirectly,
either beneficially or of record, own at least 10% of the then
outstanding equity securities of such Person, and (iv) in the case of
Persons specified above who are individuals, Family Members of such
Person; provided, however, that no holder of Preferred Stock nor any of
their designated members of the Board of Directors shall be an
Affiliate of the Corporation for purposes hereof.
(b) Board of Directors. The term "Board of Directors"
shall mean the Board of Directors of the Corporation.
(c) Common Stock Deemed Outstanding. The term "Common
Stock Deemed Outstanding" shall mean, at any given time, the number of
shares of Common Stock actually outstanding at such time, plus the
number of shares of Common Stock issuable upon conversion of the Series
B Preferred Stock or Series B-1 Preferred Stock, as the case may be,
plus the number of shares of Common Stock deemed to be outstanding with
respect to Options and Convertible Securities pursuant to Section
(B)(5)(b) hereof whether or not the Options or Convertible Securities
are actually exercisable at such time.
(d) Dividend Liquidation Preference. The term
"Dividend Liquidation Preference" shall be an amount per share (as such
amount may be adjusted to reflect subdivisions and combinations of
shares and stock dividends) equal to, with respect to each outstanding
share of Series B Preferred Stock and Series B-1 Preferred Stock,
$1.60, together with all declared or accrued but unpaid dividends with
respect to each such share from the Series B Issue Date or the Series
B-1 Issue Date, as the case may be, to the date each such share
converts into Common Stock.
(e) Family Members. The term "Family Members" shall
mean, as applied to any individual, any spouse, child, grandchild,
parent, brother or sister thereof or any spouse of any of the
foregoing, and each trust created for the benefit of one or more of
such Persons (other than any trust administered by an independent
trustee) and each custodian of property of one or more such Persons.
(f) Fully Diluted Shares. The term "Fully Diluted
Shares" shall mean the 26,084,734 shares of Capital Stock of the
Corporation outstanding, on a fully diluted basis, on the Series B
Issue Date. 26,084,734 was calculated as follows: 14,321,236 shares of
common and preferred stock (9,277,524 shares of common stock
outstanding plus 4,729,559 shares of preferred stock outstanding plus
314,153 shares of
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preferred stock dividends that had accrued but had not yet been paid)
plus 6,121,248 shares issuable pursuant to warrants outstanding
("Warrant Shares") plus 3,186,000 shares issuable or outstanding
pursuant to stock option plans ("Option Shares") plus 268,750 shares
issuable upon conversion of certain convertible debt outstanding plus
2,187,500 shares of Series B Preferred Stock purchased by the investors
on the Series B Issue Date.
(g) Liquidation Threshold Amount. The term
"Liquidation Threshold Amount" shall be equal to $76,209,726 which was
calculated on the Series B Issue Date by (i) multiplying the number of
Fully Diluted Shares, as defined above, by $3.20 ($1.60, the price paid
by the purchasers of the Series B Preferred Stock for each such share,
multiplied by 2), (ii) subtracting $5,509,123, the dollar amount
arrived at by multiplying 6,121,248 the number of outstanding Warrant
Shares, as defined above, on the Series B Issue Date, by $0.90, the
weighted average warrant exercise price on the Series B Issue Date, and
(iii) subtracting $1,752,300, the dollar amount arrived at by
multiplying 3,186,000, the number of outstanding Option Shares, as
defined above, on the Series B Issue Date, by $0.55, the weighted
average option exercise price on the Series B Issue Date.
(h) Person. The term "Person" shall mean an
individual, corporation, partnership, association, trust, joint venture
or unincorporated organization or any government, governmental
department or any agency or political subdivision thereof.
(i) Public Offering. The term "Public Offering" shall
mean any offering by the Corporation of its equity securities to the
public pursuant to an effective registration statement under the
Securities Act or any comparable statement under any similar federal
statute then in force, other than an offering in connection with an
employee benefit plan.
(j) Series B Qualified Public Offering. The term
"Series B Qualified Public Offering" shall mean the consummation of the
Corporation's issuance and sale of its Common Stock in a bona fide firm
commitment underwriting pursuant to a registration statement under the
Securities Act, the public offering price of which is not less than (i)
175% of the Series B Conversion Price, after giving effect to any
adjustment thereto as a result of such offering (or if there is no
Series B Preferred Stock outstanding, then the Series B-1 Conversion
Price, after giving effect to any adjustment thereto as a result of
such offering) per share (appropriately adjusted to reflect subsequent
stock issuances, dividends, stock splits, or recapitalizations) and
(ii) $20,000,000 in the aggregate; provided however, that in the event
that such offering is consummated on or before December 31, 1996, or in
the event that there are no outstanding shares of Series B Preferred
Stock or Series B-1 Preferred Stock, then the per share limitation
shall not apply.
(k) Securities Act. The term "Securities Act" shall
mean the Securities Act of 1933, as amended, or any successor federal
statute, and the rules and regulations of
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the Securities and Exchange Commission promulgated thereunder, all as
the same shall be in effect from time to time.
(l) Series B Conversion Stock. The term "Series B
Conversion Stock" shall mean the shares of Common Stock issuable upon
conversion of shares of Series B Preferred Stock or Series B-1
Preferred Stock, as the case may be; provided that if there is a change
such that the securities issuable upon conversion of the Series B
Preferred Stock or Series B-1 Preferred Stock, as the case may be, are
issued by an entity other than the Corporation or there is a change in
the class of securities so issuable, then the term "Series B Conversion
Stock" shall mean shares of the security issuable upon conversion of
such series of stock if such security is issuable in shares, or shall
mean the smallest unit in which such security is issuable if such
security is not issuable in shares.
(m) Series B Issue Date. The term "Series B Issue
Date" shall mean July 19, 1996.
(n) Series B-1 Issue Date. The term "Series B-1 Issue
Date" shall mean the date on which a share of Series B-1 Preferred
Stock is first issued by the Corporation.
(o) Subsidiary. The term "Subsidiary" shall mean any
Person of which the Corporation shall at the time own, directly or
indirectly through another Subsidiary, 50% or more of the outstanding
voting capital stock (or other shares of beneficial interest with
voting rights), or which the Corporation shall otherwise control.
II. By majority written consent effective September __, 1996, the
necessary number of shares as required by statute were voted in favor of the
above amendment and restatement.
III. The above Amended and Restated Certificate of Incorporation,
herein certified, has been duly adopted in accordance with the provisions of
Sections 228, 242 and 245 of the General Corporation Law of the State of
Delaware. Prompt written notice of the adoption of the amendment and restatement
herein certified has been given to those stockholders who have not consented in
writing thereto, as provided in Section 228 of the General Corporation Law of
the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
executed by its duly authorized officer this ______ day of September, 1996.
UNIVERSITY ONLINE, INC.
BY:_____________________________________
TITLE: __________________________________
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AMENDED AND RESTATED
BYLAWS
OF
UNIVERSITY ONLINE, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
Page
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<S> <C>
ARTICLE I - CORPORATE OFFICES.......................................................................... 1
1.1 REGISTERED OFFICE.................................................................... 1
1.2 OTHER OFFICES........................................................................ 1
ARTICLE II - MEETINGS OF STOCKHOLDERS.................................................................. 1
2.1 PLACE OF MEETINGS.................................................................... 1
2.2 ANNUAL MEETING....................................................................... 1
2.3 SPECIAL MEETING...................................................................... 1
2.4 NOTICE OF STOCKHOLDERS' MEETINGS..................................................... 2
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE......................................... 2
2.6 QUORUM............................................................................... 2
2.7 ADJOURNED MEETING; NOTICE............................................................ 2
2.8 VOTING............................................................................... 3
2.9 WAIVER OF NOTICE..................................................................... 3
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A
MEETING.............................................................................. 3
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING
CONSENTS............................................................................. 4
2.12 PROXIES.............................................................................. 4
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE................................................ 5
2.14 STOCKHOLDER PROPOSALS................................................................ 5
ARTICLE III - DIRECTORS................................................................................ 6
3.1 POWERS............................................................................... 6
3.2 NUMBER OF DIRECTORS.................................................................. 6
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF
DIRECTORS............................................................................ 6
3.4 RESIGNATION AND VACANCIES............................................................ 6
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE............................................. 7
3.6 FIRST MEETINGS....................................................................... 8
3.7 REGULAR MEETINGS..................................................................... 8
3.8 SPECIAL MEETINGS; NOTICE............................................................. 8
3.9 QUORUM............................................................................... 9
3.10 WAIVER OF NOTICE..................................................................... 9
3.11 ADJOURNED MEETING; NOTICE............................................................ 9
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING.................................... 9
3.13 FEES AND COMPENSATION OF DIRECTORS................................................... 9
3.14 APPROVAL OF LOANS TO OFFICERS........................................................ 10
3.15 REMOVAL OF DIRECTORS................................................................. 10
3.16 CHAIRMAN OF THE BOARD OF DIRECTORS................................................... 10
ARTICLE IV - COMMITTEES................................................................................ 10
4.1 COMMITTEES OF DIRECTORS.............................................................. 10
4.2 COMMITTEE MINUTES.................................................................... 11
4.3 MEETINGS AND ACTION OF COMMITTEES.................................................... 11
</TABLE>
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<TABLE>
<S> <C>
ARTICLE V - OFFICERS............................................................................. 12
5.1 OFFICERS....................................................................... 12
5.2 ELECTION OF OFFICERS........................................................... 12
5.3 SUBORDINATE OFFICERS........................................................... 12
5.4 REMOVAL AND RESIGNATION OF OFFICERS............................................ 12
5.5 VACANCIES IN OFFICES........................................................... 13
5.6 CHAIRMAN OF THE BOARD.......................................................... 13
5.7 CHIEF EXECUTIVE OFFICER........................................................ 13
5.8 PRESIDENT...................................................................... 13
5.9 VICE PRESIDENTS................................................................ 13
5.10 SECRETARY...................................................................... 14
5.11 CHIEF FINANCIAL OFFICER........................................................ 14
5.12 ASSISTANT SECRETARY............................................................ 15
5.13 REPRESENTATION OF SHARES OF OTHER CORPORATIONS................................. 15
5.14 AUTHORITY AND DUTIES OF OFFICERS............................................... 15
ARTICLE VI - INDEMNITY........................................................................... 15
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS...................................... 15
6.2 INDEMNIFICATION OF OTHERS...................................................... 16
6.3 INSURANCE...................................................................... 16
ARTICLE VII - RECORDS AND REPORTS................................................................ 16
7.1 MAINTENANCE AND INSPECTION OF RECORDS.......................................... 16
7.2 INSPECTION BY DIRECTORS........................................................ 17
7.3 ANNUAL STATEMENT TO STOCKHOLDERS............................................... 17
ARTICLE VIII - GENERAL MATTERS................................................................... 18
8.1 CHECKS......................................................................... 18
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS............................... 18
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES......................................... 18
8.4 SPECIAL DESIGNATION ON CERTIFICATES............................................ 19
8.5 LOST CERTIFICATES.............................................................. 19
8.6 CONSTRUCTION; DEFINITIONS...................................................... 19
8.7 DIVIDENDS...................................................................... 20
8.8 FISCAL YEAR.................................................................... 20
8.9 SEAL........................................................................... 20
8.10 TRANSFER OF STOCK.............................................................. 20
8.11 STOCK TRANSFER AGREEMENTS...................................................... 20
8.12 REGISTERED STOCKHOLDERS........................................................ 20
ARTICLE IX - AMENDMENTS.......................................................................... 21
ARTICLE X - DISSOLUTION.......................................................................... 21
ARTICLE XI - CUSTODIAN........................................................................... 22
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES.................................... 22
11.2 DUTIES OF CUSTODIAN............................................................ 22
</TABLE>
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<PAGE>
BYLAWS
OF
UNIVERSITY ONLINE, INC.
ARTICLE I
CORPORATE OFFICES
1.1 REGISTERED OFFICE
The registered office of the corporation shall be in the City of
Wilmington, County of New Castle, State of Delaware. The name of the registered
agent of the corporation at such location is The Corporation Trust Company.
1.2 OTHER OFFICES
The board of directors may at any time establish other offices at any
place or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS
Meetings of stockholders shall be held at any place, within or outside
the State of Delaware, designated by the board of directors. In the absence of
any such designation, stockholders' meetings shall be held at the registered
office of the corporation.
2.2 ANNUAL MEETING
The annual meeting of stockholders shall be held each year on a date
and at a time designated by the board of directors. In the absence of such
designation, the annual meeting of stockholders shall be held on the 15th day of
May in each year at 1:00 p.m. However, if such day falls on a legal holiday,
then the meeting shall be held at the same time and place on the next succeeding
full business day. At the meeting, directors shall be elected and any other
proper business may be transacted.
2.3 SPECIAL MEETING
Special meetings of the stockholders may be called, at any time for any
purpose or purposes, by the board of directors or by such person or persons as
may be authorized by the Certificate of Incorporation or these Bylaws, or by
such person or persons duly
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designated by the board of directors whose powers and authority, as expressly
provided in a resolution of the board of directors, include the power to call
such meetings, but such special meetings may not be called by any other person
or persons.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
All notices of meetings with stockholders shall be in writing and shall
be sent or otherwise given in accordance with Section 2.5 of these bylaws not
less than ten (10) nor more than sixty (60) days before the date of the meeting
to each stockholder entitled to vote at such meeting. The notice shall specify
the place, date, and hour of the meeting, and, in the case of a special meeting,
the purpose or purposes for which the meeting is called.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of stockholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation. An
affidavit of the secretary or an assistant secretary or of the transfer agent of
the corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
2.6 QUORUM
The holders of a majority of the stock issued and outstanding and
entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the certificate of
incorporation. If, however, such quorum is not present or represented at any
meeting of the stockholders, then the stockholders entitled to vote thereat,
present in person or represented by proxy, shall have power to adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum is present or represented. At such adjourned meeting at
which a quorum is present or represented, any business may be transacted that
might have been transacted at the meeting as originally noticed.
2.7 ADJOURNED MEETING; NOTICE
When a meeting is adjourned to another time or place, unless these
bylaws otherwise require, notice need not be given of the adjourned meeting if
the time and place thereof are announced at the meeting at which the adjournment
is taken. At the adjourned meeting the corporation may transact any business
that might have been transacted at the original meeting. If the adjournment is
for more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
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2.8 VOTING
The stockholders entitled to vote at any meeting of stockholders shall
be determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners
of stock and to voting trusts and other voting agreements).
Except as otherwise provided in the certificate of incorporation or
these bylaws, each stockholder shall be entitled to one vote for each share of
capital stock held by such stockholder.
2.9 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these bylaws.
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise provided in the certificate of incorporation, any
action required by this chapter to be taken at any annual or special meeting of
stockholders of a corporation, or any action that may be taken at any annual or
special meeting of such stockholders, may be taken without a meeting, without
prior notice, and without a vote if a consent in writing, setting forth the
action so taken, is signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted. Notwithstanding the foregoing, following the effectiveness of
the registration of any class of securities of the corporation pursuant to the
requirements of the Securities Exchange Act of 1934, as amended, no action shall
be taken by the stockholders of the corporation except at an annual or special
meeting of stockholders called in accordance with these bylaws and no action
shall be taken by the stockholders by written consent.
Prompt notice of the taking of the corporate action without a meeting
by less than unanimous written consent shall be given to those stockholders who
have not consented in writing. If the action that is consented to is such as
would have required the
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filing of a certificate under any section of the General Corporation Law of
Delaware if such action had been voted on by stockholders at a meeting thereof,
then the certificate filed under such section shall state, in lieu of any
statement required by such section concerning any vote of stockholders, that
written notice and written consent have been given as provided in Section 228 of
the General Corporation Law of Delaware.
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING
CONSENTS
In order that the corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof, or entitled to express consent to corporate action in writing without a
meeting, or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the board of directors may fix, in advance, a record date that shall not
be more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action.
If the board of directors does not so fix a record date:
(i) The record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held.
(ii) The record date for determining stockholders entitled to
express consent to corporate action in writing without a meeting, when no prior
action by the board of directors is necessary, shall be the day on which the
first written consent is expressed.
(iii) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the board of
directors adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
2.12 PROXIES
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for him by a written proxy, signed by
the stockholder and filed with the secretary of the corporation, but no such
proxy shall be voted or acted upon after three (3) years
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<PAGE>
from its date, unless the proxy provides for a longer period. A proxy shall be
deemed signed if the stockholder's name is placed on the proxy (whether by
manual signature, typewriting, telegraphic transmission or otherwise) by the
stockholder or the stockholder's attorney-in-fact. The revocability of a proxy
that states on its face that it is irrevocable shall be governed by the
provisions of Section 212(c) of the General Corporation Law of Delaware.
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
2.14 STOCKHOLDER PROPOSALS
Any stockholder wishing to bring any other business before a meeting of
stockholders must provide notice to the corporation not more than ninety (90)
and not less than fifty (50) days before the meeting in writing by registered
mail, return receipt requested, of the business to be presented by the
stockholders at the stockholders' meeting. Any such notice shall set forth the
following as to each matter the stockholder proposes to bring before the
meeting: (A) a brief description of the business desired to be brought before
the meeting and the reasons for conducting such business at the meeting and, if
such business includes a proposal to amend the bylaws of the corporation, the
language of the proposed amendment; (B) the name and address, as they appear on
the corporation's books, of the stockholder proposing such business; (C) the
class and number of shares of the corporation which are beneficially owned by
such stockholder; (D) a representation that the stockholder is a holder of
record of stock of the corporation entitled to vote at such meeting and intends
to appear in person or by proxy at the meeting to propose such business; and (E)
any material interest of the stockholder in such business. Notwithstanding the
foregoing provisions of this Section 2.14, a stockholder shall also comply with
all applicable requirements of all applicable laws, rules and regulations,
including, but not limited to, the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder, with respect to the
matters set forth in this section 2.14. In the absence of such notice to the
5
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corporation meeting the above requirements, a stockholder shall not be entitled
to present any business at any meeting of stockholders.
ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the General Corporation Law of Delaware
and any limitations in the certificate of incorporation or these bylaws relating
to action required to be approved by the stockholders or by the outstanding
shares, the business and affairs of the corporation shall be managed and all
corporate powers shall be exercised by or under the direction of the board of
directors.
3.2 NUMBER OF DIRECTORS
The number of directors of the corporation shall be not less than five
(5) nor more than nine (9). The exact number of directors, within such range,
shall be as specified in a resolution duly adopted by the board of directors or
by the stockholders. The authorized range in the number of directors may be
changed, or a definite number may be fixed without provision for an authorized
range, by a duly adopted amendment to the certificate of incorporation or by an
amendment to this bylaw duly adopted by the stockholders or the board of
directors.
No reduction of the authorized number of directors shall have the
effect of removing any director before that director's term of office expires.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
Except as provided in Section 3.4 of these bylaws, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting. Directors need not be stockholders unless so required by the
certificate of incorporation or these bylaws, wherein other qualifications for
directors may be prescribed. Each director, including a director elected to fill
a vacancy, shall hold office until his or her successor is elected and qualified
or until his or her earlier resignation or removal.
Elections of directors need not be by written ballot.
3.4 RESIGNATION AND VACANCIES
Any director may resign at any time upon written notice to the
corporation. When one or more directors so resigns and the resignation is
effective at a future date, a majority of the directors then in office,
including those who have so resigned,
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shall have power to fill such vacancy or vacancies, the vote thereon to take
effect when such resignation or resignations shall become effective, and each
director so chosen shall hold office as provided in this section in the filling
of other vacancies.
Unless otherwise provided in the certificate of incorporation or these
bylaws:
(i) Vacancies and newly created directorships resulting from
any increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(ii) Whenever the holders of any class or classes of stock or
series thereof are entitled to elect one or more directors by the provisions of
the certificate of incorporation, vacancies and newly created directorships of
such class or classes or series may be filled by a majority of the directors
elected by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created
directorship, the directors then in office constitute less than a majority of
the whole board (as constituted immediately prior to any such increase), then
the Court of Chancery may, upon application of any stockholder or stockholders
holding at least ten (10) percent of the total number of the shares at the time
outstanding having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the directors chosen by the directors then in office as aforesaid,
which election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
The board of directors of the corporation may hold meetings, both
regular and special, either within or outside the State of Delaware.
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Unless otherwise restricted by the certificate of incorporation or
these bylaws, members of the board of directors, or any committee designated by
the board of directors, may participate in a meeting of the board of directors,
or any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.6 FIRST MEETINGS
The first meeting of each newly elected board of directors shall be
held at such time and place as shall be fixed by the vote of the stockholders at
the annual meeting and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting, provided a quorum
shall be present. In the event of the failure of the stockholders to fix the
time or place of such first meeting of the newly elected board of directors, or
in the event such meeting is not held at the time and place so fixed by the
stockholders, the meeting may be held at such time and place as shall be
specified in a notice given as hereinafter provided for special meetings of the
board of directors, or as shall be specified in a written waiver signed by all
of the directors.
3.7 REGULAR MEETINGS
Regular meetings of the board of directors may be held without notice
at such time and at such place as shall from time to time be determined by the
board.
3.8 SPECIAL MEETINGS; NOTICE
Special meetings of the board of directors for any purpose or purposes
may be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two (2) directors.
Notice of the time and place of special meetings shall be delivered
either personally or by mail, telex, facsimile or telephone to each director,
addressed to each director at such director's address and/or phone number as it
is shown on the records of the corporation. If the notice is mailed, it shall be
deposited in the United States mail at least four (4) days before the time of
the holding of the meeting. If the notice is delivered personally or by telex,
facsimile or telephone, it shall be delivered by telephone or transmitted at
least forty-eight (48) hours before the time of the holding of the meeting. Any
oral notice given personally or by telephone may be communicated either to the
director or to a person at the office of the director who the person giving the
notice has reason to believe will promptly communicate it to the director. The
notice need not specify the purpose or the place of the meeting, if the meeting
is to be held at the principal executive office of the corporation.
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3.9 QUORUM
At all meetings of the board of directors, a majority of the authorized
number of directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the board of directors, except as may be
otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the board of
directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
3.10 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the directors, or members of a committee of directors, need be specified in
any written waiver of notice unless so required by the certificate of
incorporation or these bylaws.
3.11 ADJOURNED MEETING; NOTICE
If a quorum is not present at any meeting of the board of directors,
then the directors present thereat may adjourn the meeting from time to time,
without notice other than announcement at the meeting, until a quorum is
present.
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise restricted by the certificate of incorporation or
these bylaws, any action required or permitted to be taken at any meeting of the
board of directors, or of any committee thereof, may be taken without a meeting
if all members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee.
3.13 FEES AND COMPENSATION OF DIRECTORS
Unless otherwise restricted by the certificate of incorporation or
these bylaws, the board of directors shall have the authority to fix the
compensation of directors.
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3.14 APPROVAL OF LOANS TO OFFICERS
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
3.15 REMOVAL OF DIRECTORS
Unless otherwise restricted by statute, by the certificate of
incorporation or by these bylaws, any director or the entire board of directors
may be removed, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of directors.
No reduction of the authorized number of directors shall have the
effect of removing any director prior to the expiration of such director's term
of office.
3.16 CHAIRMAN OF THE BOARD OF DIRECTORS
The corporation may also have, at the discretion of the Board of
Directors, a chairman of the Board of Directors who shall not be considered an
officer of the corporation. The Chairman of the Board shall, if such a person is
elected, preside at the meetings of the Board of Directors and exercise and
perform such other powers and duties as may from time to time be assigned to him
or her by the Board of Directors, or as may be prescribed by these bylaws.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The board of directors may, by resolution passed by a majority of the
whole board, designate one or more committees, with each committee to consist of
one or more of the directors of the corporation. The board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a
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quorum, may unanimously appoint another member of the board of directors to act
at the meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the board of directors or
in the bylaws of the corporation, shall have and may exercise all the powers and
authority of the board of directors in the management of the business and
affairs of the corporation, and may authorize the seal of the corporation to be
affixed to all papers that may require it; but no such committee shall have the
power or authority to (i) amend the certificate of incorporation (except that a
committee may, to the extent authorized in the resolution or resolutions
providing for the issuance of shares of stock adopted by the board of directors
as provided in Section 151(a) of the General Corporation Law of Delaware, fix
any of the preferences or rights of such shares relating to dividends,
redemption, dissolution, any distribution of assets of the corporation or the
conversion into, or the exchange of such shares for, shares of any other class
or classes or any other series of the same or any other class or classes of
stock of the corporation), (ii) adopt an agreement of merger or consolidation
under Sections 251 or 252 of the General Corporation Law of Delaware, (iii)
recommend to the stockholders the sale, lease or exchange of all or
substantially all of the corporation's property and assets, (iv) recommend to
the stockholders a dissolution of the corporation or a revocation of a
dissolution, or (v) amend the bylaws of the corporation; and, unless the board
resolution establishing the committee, the bylaws or the certificate of
incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to adopt
a certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware.
4.2 COMMITTEE MINUTES
Each committee shall keep regular minutes of its meetings and report
the same to the board of directors when required.
4.3 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the provisions of Article III of these bylaws, Section
3.5 (place of meetings and meetings by telephone), Section 3.7 (regular
meetings), Section 3.8 (special meetings and notice), Section 3.9 (quorum),
Section 3.10 (waiver of notice), Section 3.11 (adjournment and notice of
adjournment), and Section 3.12 (action without a meeting), with such changes in
the context of those bylaws as are necessary to substitute the committee and its
members for the board of directors and its members; provided, however, that the
time of regular meetings of committees may also be called by resolution of the
board of directors and that notice of special meetings of committees shall also
be given to all alternate members, who shall have the right to attend all
meetings of the committee. The board of directors may adopt rules for the
government of any committee not inconsistent with the provisions of these
bylaws.
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ARTICLE V
OFFICERS
5.1 OFFICERS
The officers of the corporation shall be a chief executive officer, a
president, one or more vice presidents, a secretary, and a chief financial
officer. The corporation may also have, at the discretion of the board of
directors, a chairman of the board, one or more assistant vice presidents,
assistant secretaries, assistant treasurers, and any such other officers as may
be appointed in accordance with the provisions of Section 5.3 of these bylaws.
Any number of offices may be held by the same person.
5.2 ELECTION OF OFFICERS
The officers of the corporation, except such officers as may be
appointed in accordance with the provisions of Sections 5.3 or 5.5 of these
bylaws, shall be chosen by the board of directors, subject to the rights, if
any, of an officer under any contract of employment.
5.3 SUBORDINATE OFFICERS
The board of directors may appoint, or empower the president to
appoint, such other officers and agents as the business of the corporation may
require, each of whom shall hold office for such period, have such authority,
and perform such duties as are provided in these bylaws or as the board of
directors may from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the board of directors at any regular or
special meeting of the board or, except in the case of an officer chosen by the
board of directors, by any officer upon whom such power of removal may be
conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
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5.5 VACANCIES IN OFFICES
Any vacancy occurring in any office of the corporation shall be filled
by the board of directors.
5.6 CHAIRMAN OF THE BOARD
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to him by the
board of directors or as may be prescribed by these bylaws. If there is no
president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of these bylaws.
5.7 CHIEF EXECUTIVE OFFICER
Subject to such supervisory powers, if any, as may be given by the
board of directors to the chairman of the board, the chief executive officer of
the corporation shall, subject to the control of the Board of Directors, have
general supervision, direction and control of the business and the officers of
the corporation. The chief executive officer shall preside at all meetings of
the stockholders and, in the absence or nonexistence of a chairman of the board,
at all meetings of the Board of Directors. The chief executive officer shall
have the general powers and duties of management usually vested in the office of
chief executive officer of a corporation and shall have such other powers and
duties as may be prescribed by the Board of Directors or these bylaws.
5.8 PRESIDENT
Subject to such supervisory powers, if any, as may be given by the
board of directors to the chairman of the board or the chief executive officer,
if there be such officers, the president shall, subject to the control of the
board of directors, have general supervision, direction, and control of the
business and the officers of the corporation. In the absence or nonexistence of
the chief executive officer, he shall preside at all meetings of the
stockholders and, in the absence or nonexistence of a chairman of the board and
chief executive officer, at all meetings of the board of directors. He shall
have the general powers and duties of management usually vested in the office of
president of a corporation and shall have such other powers and duties as may be
prescribed by the board of directors or these bylaws.
5.9 VICE PRESIDENTS
In the absence or disability of the chief executive officer and
president, the vice presidents, if any, in order of their rank as fixed by the
board of directors or, if not ranked, a vice president designated by the board
of directors, shall perform all the duties of the president and when so acting
shall have all the
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powers of, and be subject to all the restrictions upon, the president. The vice
presidents shall have such other powers and perform such other duties as from
time to time may be prescribed for them respectively by the board of directors,
these bylaws, the president or the chairman of the board.
5.10 SECRETARY
The secretary shall keep or cause to be kept, at the principal
executive office of the corporation or such other place as the board of
directors may direct, a book of minutes of all meetings and actions of
directors, committees of directors, and stockholders. The minutes shall show the
time and place of each meeting, whether regular or special (and, if special, how
authorized and the notice given), the names of those present at directors'
meetings or committee meetings, the number of shares present or represented at
stockholders' meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office of the corporation or at the office of the corporation's
transfer agent or registrar, as determined by resolution of the board of
directors, a share register, or a duplicate share register, showing the names of
all stockholders and their addresses, the number and classes of shares held by
each, the number and date of certificates evidencing such shares, and the number
and date of cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings
of the stockholders and of the board of directors required to be given by law or
by these bylaws. The secretary shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the board of directors or by these bylaws.
5.11 CHIEF FINANCIAL OFFICER
The chief financial officer shall keep and maintain, or cause to be
kept and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all money and other valuables
in the name and to the credit of the corporation with such depositaries as may
be designated by the board of directors. The chief financial officer shall
disburse the funds of the corporation as may be ordered by the board of
directors, shall render to the president and directors, whenever they request
it, an account of all of his transactions as treasurer and of the financial
condition of the corporation, and shall have
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such other powers and perform such other duties as may be prescribed by the
board of directors or these bylaws.
5.12 ASSISTANT SECRETARY
The assistant secretary, or, if there is more than one, the assistant
secretaries in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the secretary or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the secretary
and shall perform such other duties and have such other powers as the board of
directors or the stockholders may from time to time prescribe.
5.13 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, the chief executive officer, the president,
any vice president, the chief financial officer, the secretary or assistant
secretary of this corporation, or any other person authorized by the board of
directors or the chief executive officer, president or a vice president, is
authorized to vote, represent, and exercise on behalf of this corporation all
rights incident to any and all shares of any other corporation or corporations
standing in the name of this corporation. The authority granted herein may be
exercised either by such person directly or by any other person authorized to do
so by proxy or power of attorney duly executed by such person having the
authority.
5.14 AUTHORITY AND DUTIES OF OFFICERS
In addition to the foregoing authority and duties, all officers of the
corporation shall respectively have such authority and perform such duties in
the management of the business of the corporation as may be designated from time
to time by the board of directors or the stockholders.
ARTICLE VI
INDEMNITY
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation shall, to the maximum extent and in the manner
permitted by the General Corporation Law of Delaware, indemnify each of its
directors and officers against expenses (including attorneys' fees), judgments,
fines, settlements, and other amounts actually and reasonably incurred in
connection with any proceeding, arising by reason of the fact that such person
is or was an agent of the corporation. For purposes of this Section 6.1, a
"director" or "officer" of the corporation includes any person (i) who is or was
a director or officer of the corporation, (ii) who is or was serving at the
request of the
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corporation as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was a director or officer of a
corporation that was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
6.2 INDEMNIFICATION OF OTHERS
The corporation shall have the power, to the extent and in the manner
permitted by the General Corporation Law of Delaware, to indemnify each of its
employees and agents (other than directors and officers) against expenses
(including attorneys' fees), judgments, fines, settlements, and other amounts
actually and reasonably incurred in connection with any proceeding, arising by
reason of the fact that such person is or was an agent of the corporation. For
purposes of this Section 6.2, an "employee" or "agent" of the corporation (other
than a director or officer) includes any person (i) who is or was an employee or
agent of the corporation, (ii) who is or was serving at the request of the
corporation as an employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was an employee or agent of a
corporation that was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
6.3 INSURANCE
The corporation may purchase and maintain insurance on behalf of any
person who 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 any liability asserted against him and incurred by him
in any such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability under
the provisions of the General Corporation Law of Delaware.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS
The corporation shall, either at its principal executive office or at
such place or places as designated by the board of directors, keep a record of
its stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these bylaws as amended to date,
accounting books, and other records.
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Any stockholder of record, in person or by attorney or other agent,
shall, upon written demand under oath stating the purpose thereof, have the
right during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
7.2 INSPECTION BY DIRECTORS
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his position as a director. The Court of Chancery
is hereby vested with the exclusive jurisdiction to determine whether a director
is entitled to the inspection sought. The Court may summarily order the
corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
The board of directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the corporation.
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ARTICLE VIII
GENERAL MATTERS
8.1 CHECKS
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
The board of directors, except as otherwise provided in these bylaws,
may authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
The shares of a corporation shall be represented by certificates,
provided that the board of directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply to
shares represented by a certificate until such certificate is surrendered to the
corporation. Notwithstanding the adoption of such a resolution by the board of
directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by the chairman or vice-chairman of
the board of directors, or the president or vice-president, and by the treasurer
or an assistant treasurer, or the secretary or an assistant secretary of such
corporation representing the number of shares registered in certificate form.
Any or all of the signatures on the certificate may be a facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate has ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if he were such officer, transfer agent or
registrar at the date of issue.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid
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shares, upon the books and records of the corporation in the case of
uncertificated partly paid shares, the total amount of the consideration to be
paid therefor and the amount paid thereon shall be stated. Upon the declaration
of any dividend on fully paid shares, the corporation shall declare a dividend
upon partly paid shares of the same class, but only upon the basis of the
percentage of the consideration actually paid thereon.
8.4 SPECIAL DESIGNATION ON CERTIFICATES
If the corporation is authorized to issue more than one class of stock
or more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.5 LOST CERTIFICATES
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal representative, to give the corporation a
bond sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate or uncertificated shares.
8.6 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these bylaws. Without limiting the generality of this
provision, the singular number includes the plural, the plural number includes
the singular, and the term "person" includes both a corporation and a natural
person.
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8.7 DIVIDENDS
The directors of the corporation, subject to any restrictions contained
in the certificate of incorporation, may declare and pay dividends upon the
shares of its capital stock pursuant to the General Corporation Law of Delaware.
Dividends may be paid in cash, in property, or in shares of the corporation's
capital stock.
The directors of the corporation may set apart out of any of the funds
of the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
corporation, and meeting contingencies.
8.8 FISCAL YEAR
The fiscal year of the corporation shall be fixed by resolution of the
board of directors and may be changed by the board of directors.
8.9 SEAL
The corporation may adopt a corporate seal which may be altered as
desired, and may use the same by causing it or a facsimile thereof, to be
impressed or affixed or in any other manner reproduced.
8.10 TRANSFER OF STOCK
Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate, and record the transaction in its books.
8.11 STOCK TRANSFER AGREEMENTS
The corporation shall have power to enter into and perform any
agreement with any number of stockholders of any one or more classes of stock of
the corporation to restrict the transfer of shares of stock of the corporation
of any one or more classes owned by such stockholders in any manner not
prohibited by the General Corporation Law of Delaware.
8.12 REGISTERED STOCKHOLDERS
The corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it
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shall have express or other notice thereof, except as otherwise provided by the
laws of Delaware.
ARTICLE IX
AMENDMENTS
The original or other bylaws of the corporation may be adopted, amended
or repealed by the stockholders entitled to vote; provided, however, that the
corporation may, in its certificate of incorporation, confer the power to adopt,
amend or repeal bylaws upon the directors. The fact that such power has been so
conferred upon the directors shall not divest the stockholders of the power, nor
limit their power to adopt, amend or repeal bylaws.
ARTICLE X
DISSOLUTION
If it should be deemed advisable in the judgment of the board of
directors of the corporation that the corporation should be dissolved, the
board, after the adoption of a resolution to that effect by a majority of the
whole board at any meeting called for that purpose, shall cause notice to be
mailed to each stockholder entitled to vote thereon of the adoption of the
resolution and of a meeting of stockholders to take action upon the resolution.
At the meeting a vote shall be taken for and against the proposed
dissolution. If a majority of the outstanding stock of the corporation entitled
to vote thereon votes for the proposed dissolution, then a certificate stating
that the dissolution has been authorized in accordance with the provisions of
Section 275 of the General Corporation Law of Delaware and setting forth the
names and residences of the directors and officers shall be executed,
acknowledged, and filed and shall become effective in accordance with Section
103 of the General Corporation Law of Delaware. Upon such certificate's becoming
effective in accordance with Section 103 of the General Corporation Law of
Delaware, the corporation shall be dissolved.
Whenever all the stockholders entitled to vote on a dissolution consent
in writing, either in person or by duly authorized attorney, to a dissolution,
no meeting of directors or stockholders shall be necessary. The consent shall be
filed and shall become effective in accordance with Section 103 of the General
Corporation Law of Delaware. Upon such consent's becoming effective in
accordance with Section 103 of the General Corporation Law of Delaware, the
corporation shall be dissolved. If the consent is signed by an attorney, then
the original power of attorney or a photocopy thereof shall be attached to and
filed
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with the consent. The consent filed with the Secretary of State shall have
attached to it the affidavit of the secretary or some other officer of the
corporation stating that the consent has been signed by or on behalf of all the
stockholders entitled to vote on a dissolution; in addition, there shall be
attached to the consent a certification by the secretary or some other officer
of the corporation setting forth the names and residences of the directors and
officers of the corporation.
ARTICLE XI
CUSTODIAN
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES
The Court of Chancery, upon application of any stockholder, may appoint
one or more persons to be custodians and, if the corporation is insolvent, to be
receivers, of and for the corporation when:
(i) at any meeting held for the election of directors the
stockholders are so divided that they have failed to elect successors to
directors whose terms have expired or would have expired upon qualification of
their successors; or
(ii) the business of the corporation is suffering or is threatened
with irreparable injury because the directors are so divided respecting the
management of the affairs of the corporation that the required vote for action
by the board of directors cannot be obtained and the stockholders are unable to
terminate this division; or
(iii) the corporation has abandoned its business and has failed
within a reasonable time to take steps to dissolve, liquidate or distribute its
assets.
11.2 DUTIES OF CUSTODIAN
The custodian shall have all the powers and title of a receiver
appointed under Section 291 of the General Corporation Law of Delaware, but the
authority of the custodian shall be to continue the business of the corporation
and not to liquidate its affairs and distribute its assets, except when the
Court of Chancery otherwise orders and except in cases arising under Sections
226(a)(3) or 352(a)(2) of the General Corporation Law of Delaware.
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CERTIFICATE OF ADOPTION OF BYLAWS
OF
UNIVERSITY ONLINE, INC.
Certificate of Adoption by Board of Directors
The undersigned hereby certifies that he is a duly elected, qualified,
and acting officer of University OnLine, Inc. and that the foregoing Bylaws,
comprising twenty-two (22) pages, were adopted as the Bylaws of the corporation
effective ____________, 19___, by the board of directors of the corporation
pursuant to action of the board of directors by unanimous written consent, and
were recorded in the minutes thereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and
affixed the corporate seal this ____ day of __________, 1996.
-------------------------------
Name:
Title:
23
INVESTMENT AGREEMENT
THIS INVESTMENT AGREEMENT is made and entered into as of this 8th day of
October, 1986, by and between IMSATT Corporation, a Delaware corporation, and
INTERSOUTH PARTNERS, a North Carolina limited partnership (the "Investor").
WHEREAS, the Company and the Investor have reached certain agreements with
regard to the purchase of certain securities of the Company by the Investor, all
upon the terms and conditions more particularly described herein; and, inasmuch
as the parties desire to set forth their agreements and understandings in
writing, in consideration of the promises, covenants, matters and things
hereinafter set forth, the parties mutually covenant, contract and agree, each
with the other, as follows:
1. DEFINITIONS.
------------
For the purpose of this Agreement, the following terms shall have the
following meanings:
a) "Investment Agreement" or "Agreement" shall mean and include this
Investment Agreement (including any Exhibits or Schedules hereto) and any
amendments thereto authorized in the manner provided herein.
b) "Controlling Interest" shall mean an interest in at least 50 percent
of the voting capital stock of the Company then outstanding.
c) "Key Employee" shall mean any executive officer of the Company.
d) "Person" shall include both the singular and the plural and shall
mean any individual, partnership, corporation, trust, unincorporated
organization, or government or department or agency thereof.
e) "Unrelated Entity" or "Unrelated Person" shall mean a Person not
related within the second degree to Narasimhan P. or Leslie M. Kannan or a
Person that is not directly or indirectly beneficially owned by Narasimhan P. or
Leslie M. Kannan or any Person related within the second degree to Narasimhan P.
or Leslie M. Kannan.
f) "1933 Act" shall mean the Securities Act of 1933, as amended.
g) "1934 Act" shall mean the Securities Exchange Act of 1934, as
amended.
h) To the extent not specifically defined herein, any accounting term
used herein shall have the meaning ordinarily accorded to it under generally
accepted accounting principles consistently applied.
2. PURCHASE AND SALE OF PREFERRED STOCK.
-------------------------------------
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a) Purchase and Sale of Preferred Stock. Subject to the terms and
conditions hereof, and in reliance on the representations and warranties
contained herein, the Company, in accordance with the provisions of subsection
(b) below, shall issue and sell to the Investor, and the Investor shall purchase
from the Company, at the First Closing, shares of preferred stock, $.01 par
value per share, of the Company (the "Preferred Stock") and, at the option of
the Company, at the Second Closing, additional shares of Preferred Stock, with
such stock having the rights and preferences contained in the certificate of
Amendment to be filed with the Secretary of State of the State of Delaware in
the form of Exhibit A attached hereto.
b) Closing. The purchase and sale or the Preferred Stock shall take
place in a first closing at the offices of Covington 6 Burling, 1201
Pennsylvania Avenue, N.W., Washington, D.C. at 2:00 p.m., Washington time, on
October 8, 1936, or at such later date or other time as may be agreed upon by
the Company and the Investor (the "First Closing"). The Second Closing shall
take place at the option of the Company, at such date, prior to January 15,
1987, and time and place as may be agreed upon by the Company and the Investor
(the "Second Closing"). The Company shall give notice to the Investor of his
intent to have a Second Closing no less than fifteen ( 15) days prior to the
Second closing.
At the First Closing, the Company will deliver to the Investor 37,209
shares Preferred Stock duly registered in the name of the Investor against
payment of $400, 000 (less amounts advanced prior to the First Closing). At the
Company's election, there will be a Second Closing at which the Company will
deliver to the Investor 9,302 shares of Preferred Stock duly registered in the
name of the Investor against payment of $100, 000. The Investor shall pay such
amounts by certified check payable to the order of the Company or by wire
transfer to an account designated in writing by the Company.
c) Exchange of Preferred Stock.
---------------------------
i) Exchange Right. The Investor shall have the right between
February 1 and August 1, 1991, to exchange all, but not less than all, of the
Preferred Stock issued to the Investor in the First and Second Closings, into
nonassessable shares of common stock, $.01 par value per share, of the Company
(the "Common Stock"), on the basis of five shares of Common Stock for each share
of Preferred Stock, with such number of shares of Common Stock subject to
adjustment as specified in paragraph (iii) below.
At any time prior to August 1, 1991, the Preferred Stock shall
be exchanged automatically in accordance with the procedures specified in
paragraph (ii) below upon the consummation of the Company's first registration
under the 1933 Act and sale of Common Stock to the public pursuant to a
registered public offering.
ii) Procedure for Exchange.
----------------------
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<PAGE>
A) In order for the Investor to exercise its exchange right, it must
surrender the Preferred Stock on or before the date on which the exchange right
expires, to the Company at its main office, accompanied by written notice to the
Company that it elects to exchange the Preferred Stock. As promptly as
practicable after the exchange date, the Company shall issue and deliver to the
Investor a certificate for the number of full shares of Common Stock issuable
upon the exchange of the Preferred Stock.
B) No fractional shares shall be issued upon exchange of the Preferred
Stock and any portion of the amount hereof that would otherwise be convertible
into a fractional share shall be paid in cash.
iii) Adjustment of Shares. Adjustments in the number of shares of
Common Stock to be issued upon exchange of the Preferred Stock shall be subject
to adjustment from time to time upon the happening of certain events while this
exchange right remains outstanding, as follows:
A) Effect of "Split -ups" and "Split-downs"; Stock Dividends. If at any
time or from time to time the Company shall subdivide as a whole, by
reclassification, by the issuance of a stock dividend on the Common Stock
payable in Common Stock, or otherwise, or combine as a whole, by
reclassification or otherwise, the number of shares of Common Stock, the number
of shares of Common Stock that may be acquired pursuant to the exchange of the
Preferred Stock shall be increased or decreased proportionately as of the
effective or record date of such action.
B) Effect of Certain Dividends. If on any date the Company makes a
distribution to holders of its Common Stock (including any such distribution
made in connection with a consolidation or merger in which the Company is the
continuing corporation) of evidences of its indebtedness or assets, the number
of shares of Common Stock that may be acquired pursuant to the exchange of the
Preferred Stock shall be adjusted as at the close of business on said date to a
number determined by multiplying the number of shares theretofore that may be
acquired hereunder by a fraction, the numerator of which shall be the market
price immediately prior to such distribution, and the denominator of which shall
be such market price less the fair market value (market price and fair market
value to be determined in good faith by the Board of Directors, whose
determination shall be conclusive) of the portion of the assets or evidence of
indebtedness so to be distributed to one share of Common Stock.
C) Effect of Merger or Consolidation. If the Company shall, while the
Pre ins outstanding, enter into any consolidation with or merge into any other
corporation wherein the Company is not the continuing corporation, or wherein
securities of a corporation other than the Company are distributable to holders
of Common Stock of the Company, or sell or convey its property as an entirety or
substantially as an entirety, and in connection with such consolidation, merger,
sale or conveyance, shares of stock or other securities shall be issuable or
deliverable in
3
<PAGE>
exchange for the Common Stock of the Company, the Investor shall thereafter be
entitled to acquire pursuant to the conversion of the Preferred Stock (in lieu
of the number of shares of Common Stock that the Investor would have been
entitled to acquire immediately before the effective date of such consolidation,
merger, sale or conveyance) the shares of stock or other securities to which
such number of shares of Common Stock would have been entitled at the time of
such consolidation, merger, sale or conveyance, at an aggregate purchase price
equal to that which would have been payable if such number of shares of Common
Stock had been acquired by exchange of the Preferred Stock immediately prior
thereto. In case of any such consolidation, merger, sale or conveyance,
appropriate provision (as determined by a resolution of the Board of Directors
of the Company) shall be made with respect to the rights and interests
thereafter of the Investor, to the end that all the provisions of the Preferred
Stock (including adjustment provisions) shall thereafter be applicable as nearly
as reasonably practicable, in relation to such stock or other securities.
D) Reorganization and Reclassification. In case of any capital
reorganization or REV reification or the capital stock of the Company (except as
provided in paragraph (A) above) while the Preferred Stock remains outstanding,
the Investor shall thereafter be entitled to acquire pursuant to the exchange of
the Preferred Stock (in lieu of the number of shares of Common Stock that the
Investor would have been entitled to acquire immediately before such
reorganization or reclassification) the shares of stock of any class or classes
or other securities or property to which such number of shares of Common Stock
would have been entitled if such shares of Common Stock had been acquired
immediately before such reorganization or reclassification. In case of any such
reorganization or reclassification, appropriate provision (as determined by
resolution of the Board of Directors of the Company) shall be made with respect
to the rights and interest thereafter of the Investor, to the end that all the
provisions of the Preferred Stock (including adjustment provisions) shall
thereafter be applicable, as nearly as reasonably practicable, in relation to
such stock or other securities or property.
(iv) Notice. Whenever the number of shares of Common Stock is adjusted
pursuant to any of the foregoing provisions of paragraph (iii) above, the
Company shall promptly notify the Investor of such adjustments, setting forth
the increased or decreased number of shares or other consideration that may be
acquired upon conversion.
(v) Redemption. Subject to the termination provisions below, on the
fifth anniversary of the date of this Agreement (provided, however, if due to
applicable law, (with which the Company will take all reasonable efforts to
comply) such redemption is not then permitted, such redemption right shall occur
on the thirtieth day after the date that the Company provides the Investor
notice that such redemption is then permitted under applicable law), the
Investor may put (by providing at least ninety days written notice to the
Company prior thereto) or the Company may call (by providing at least sixty days
written notice to the Investor prior thereto), all, but not lens than all, of
the Investor's interest in the Company at the Fair Market Value (as defined in
(B) below) of
4
<PAGE>
the Investor's interest (i.e., the amount of the Preferred Stock or Common Stock
held by the Investor) in the Company;
(A) Such price will be paid pursuant to a promissory note, bearing
interest at the prime rate plus one percentage point of Citibank, with principal
and interest payable as follows:
(x) an amount each year equal to the 17.2% or if the Second Closing did
not occur, 13.7% of the Company's net income (after taxes and extraordinary
items) and in any event with any amounts then owning to the Investor on December
31, 1995 shall be due and payable on such date; or
(y) a level amortization of principal and interest assuming a
promissory note fully amortized over its term with its term maturing on December
31, 1995, with any amounts then owing to the Investor due and payable on the
final maturity of the promissory note's issuance.
In the event of a put, the Company shall elect, each year, to pay the
amount that would be due either under (x) or (y) of this subsection. In the
event of a call, the Investor shall elect, each year, to be paid that amount
that would be due either under (x) or (y) of this subsection.
The Company shall make payments under the promissory note described in
this subsection (v) annually no later than the 15th day of the third month
following each fiscal year end. At its election, the Company may prepay such
note at any time without penalty. The amount due under such note shall be
determined by the Company's auditors, selected pursuant to Section 6(c)(i)
below.
(B) The Fair Market Value of the Investor's interest will be determined
as of a date within six months prior to or subsequent to the fifth anniversary
of the date of the Agreement (the "Valuation Date"), such Valuation Date to be
selected by the Investor. The Fair Market Value of the Investor's interest in
the Company shall be determined pursuant to agreement between the Investor and
the Company; however, if the Investor and the Company are unable to reach an
agreement on such Fair Market Value, then such Fair Market Value shall be
determined by both Arthur Young & Co. (or such other competent appraiser,
selected by the Company, with experience in appraising companies of like nature)
and another competent appraiser selected by the Investor (with experience in
appraising companies of like nature), and the average of the amounts calculated
by such appraisers shall be the Fair Market Value, provided, however, that if
the differential between the two amounts exceeds 10 percent (based on the lower
amount), the two appraisers shall choose a third competent appraiser, with
experience in appraising companies of like nature, which shall determine which
of the two firms' determination to value is the nearest to the fair market value
and the Fair Market Value shall be the average of such value and the value
calculated by the third appraiser to be the fair market value. Each party shall
bear the costs of the appraiser
5
<PAGE>
selected by it and if a third appraisal is necessary, the costs of any such
third appraisal shall be divided equally between the parties.
The put provided for in this Section (v) will terminate with respect to any
portion of the Preferred Stock or the Common Stock not held beneficially and of
record by the Investor and upon the Company's first registration under the 1933
Act and sale of Common Stock to the public.
3. CONDITIONS OF CLOSING.
----------------------
The Investor's obligation to purchase and pay for the Preferred
Stock as set forth under Section 2 hereunder is subject to the satisfaction, on
or before the First Closing of the following conditions:
(a) Consent of Third Parties, Etc. The Company shall have presented
evidence reasonably satisfactory to the Investor and its counsel to the effect
that (i) all consents and waivers required in connection with the consummation
of the transactions related to this investment have been obtained, (ii) the
transactions related to this investment shall not constitute, or trigger the
occurrence of, an event of default with respect to any lease, promissory note,
loan agreement or any other agreement or understanding with respect to which the
Company is a party, and (iii) the Company is not in default under or with
respect to any lease, promissory note, loan agreement or any other agreement or
understanding with respect to which it is a party, except as noted in Schedule
3(a).
(b) Reservation and Issuance of Shares. The Company shall have taken
all necessary actions in order to: (i) authorize and issue the Preferred Stock,
and (ii) reserve for issuance pursuant to the exchange of the Preferred Stock
232,558 shares of Common Stock.
(c) Financial Information. The Company shall have provided the Investor
with such financial information relative to the Company's financial condition
which may be reasonably requested by the Investor, which information shall
include, at a minimum, (i) compiled balance sheet (internally prepared) of the
Company at June 30, 1986, together with compiled statements of income
(internally prepared) for the six month period ended June 30, 1986, and (ii) a
pro forma balance sheet, a pro forma statement of income, and a pro forma cash
flow statement of the Company for the six month period ended June 30, 1986, all
prepared in accordance with the provisions Of subsection 6(c) hereof.
(d) Certain Agreements. The following agreements shall have been
entered Into and shall be in full force and effect:
(i) Employment Agreement between the Company and Narasimhan P.
Kannan in the form of Exhibit B hereto.
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<PAGE>
(ii) Employment Agreements in the form of Exhibit C hereto
between the Company and such of its Key Employees as the Investor shall require.
(iii) Shareholders Agreement Supplement between the Company and
the Investor in the form of Exhibit D hereto, with the Shareholders Agreement
dated as of October 22, 1985 appended thereto.
(iv) Voting Agreement in the form of Exhibit E hereto between
Narasimhan P. and Leslie H. Kannan and the Investor.
e) Life Insurance. The Company shall have procured Key Man life
insurance In an amount not less than Four Hundred Fifty Thousand Dollars
(5450,000) on the life of Narasimhan P. Kannan and John O'Brien, in each case
payable to the Company.
(f) Opinion of Counsel. The Investor shall have received from Covington
& Burling, legal counsel for the Company, a favorable opinion as of the First
Closing date in form and substance satisfactory to the Investor and its special
counsel to the effect that:
(i) The Company is a corporation duly organized and validly
existing under the laws of Delaware and has adequate corporate power to carry on
the businesses in which it is now engaged.
(ii) The Company is duly qualified and in good standing as a
foreign corporation in the Commonwealth of Virginia, the only state in which the
Company has an office or owns or leases real property.
(iii) This Investment Agreement, the Employment Agreement, the
Employment Agreements between the Company and its Key Employees and the
Shareholders Agreement Supplement (as all such terms are defined or referred to
in this Investment Agreement) have been duly authorized by all necessary
corporate action of the Company, have been duly executed and delivered by the
Company and constitute legal, valid and binding agreements of the Company
enforceable against the Company in accordance with their respective terms
subject, as to enforcement of remedies, to applicable bankruptcy, insolvency'
reorganization or similar laws affecting the rights of creditors, and to
equitable principles which may limit the right to specific enforcement of
remedies;
(iv) The Preferred Stock to be purchased by the Investor has
been duly authorized by all necessary corporate action of the Company and has
been duly issued and delivered, and, upon receipt of full consideration therefor
by the Company, will be fully paid and nonassessable. The shares of Common Stock
to be issued upon exchange of the Preferred Stock have been duly authorized, and
when the Investor delivers the Preferred Stock in exchange for such Common Stock
pursuant to the
7
<PAGE>
exchange of such Preferred Stock, such stock will be validly authorized and
issued, fully paid and nonassessable;
(v) To counsel's knowledge, no authorization, approval or
consent of any regulatory body which has not already been obtained is necessary
or required in connection with the lawful execution, delivery and performance of
this Agreement by the Company, or the lawful issuance of the Preferred Stock,
provided no opinion as to any securities laws of any jurisdiction is given
except as set forth in (viii) below;
(vi) The execution, delivery and performance by the Company of
this Agreement, and the issuance and delivery of the Preferred Stock and the
Common Stock to be issued upon exchange of the Preferred Stock, will not
conflict with or result in the breach of any of the provisions of, or cause a
default under, the Articles of Incorporation or Bylaws of the Company or any
applicable law, rule or regulation, or, to counsel's knowledge (after exercising
due diligence), any judgment, order, writ, injunction, decree, rule or
regulation of any court, administrative agency, or other agreement, indenture,
lease or other instrument known to such counsel and by which the Company is
bound and will not result in the creation or imposition of any security
interest, lien, charge or encumbrance on any of the assets of the Company
pursuant to any such known agreement, indenture, lease or other instrument;
(vii) To counsel's knowledge, there are no actions, suits or
proceedings pending or threatened against the Company which might have a
material adverse effect on the financial condition of the Company or its
businesses or continued corporate existence; and
(viii) The issuance by the Company of the Preferred Stock is, and
the issuance by the Company of the Common Stock to be issued upon exchange of
the Preferred Stock provided it Is issued in accordance with the terms of this
Agreement will be exempt from the registration requirements of the 1933 Act and
from the registration requirements of the securities laws Of the State of
Virginia. Counsel, in expressing such Opinion, may rely upon the Investor's
representations Contained in Section 4 of this Agreement.
Such opinion shall be limited to the laws of Virginia and of the United
States. Counsel may also rely as to matters of fact on certificates of public
officials or of officers of the Company.
(g) Election of Certain Board Members. Effective as of the First
Closing, the Board of Directors and the stockholders, if necessary by law, shall
have elected the Investor Representatives, as defined in Section 6(g), to the
Board.
(h) Delivery of Closing Documents. The Investor shall have received the
following documents, in form and substance satisfactory to the Investor and its
counsel:
1. This Investment Agreement.
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<PAGE>
2. Certificate representing the Preferred Stock being purchased by the
Investor at the Closing.
3. True copies of the Employment Agreement by and between the Company
and Narasimhan P. Kannan, the Employment Agreements with Key Employees and the
Shareholders Agreement Supplement all as required by Section 3(d).
4. The opinion of counsel in the form described in Section 3(f) hereof.
5. Certificates of the Secretary of the State of Delaware and the
Commonwealth of Virginia as to the
good standing of the Company as of a recent date.
6. Copies of the Articles of Incorporation and Bylaws of the Company,
as amended to date, certified by the Secretary of the Company to be true and
correct.
7. Copies of resolutions of the Board of Directors of the Company
authorizing the transactions contemplated by this Agreement, and electing
certain directors pursuant to Section 3(g) above, which resolutions shall have
been certified by the Secretary of the Company to be true and correct.
8. A copy or copies of the consents and waivers, if any, to be obtained
by the Company pursuant to the provisions of Section 3(a) hereof, and of the
financial information to be provided by the Company pursuant to the provisions
of Section 3(c) hereof. (The Company hereby represents that there are no
Consents and waivers required to be obtained.)
9. Incumbency Certificates with respect to the Company's officers and
directors.
10. A listing, certified by the Secretary of the Company of all
directors, officers and shareholders (including number of shares owned) of the
Company and of the holders of all outstanding stock options, warrants, calls and
other rights relating to the issuance of shares of the Company's capital stock.
11. Copies of the life insurance policies described in Section 3(e)
hereof, or other proof of insurance coverage as the Investor may reasonably
require.
12. A true copy (or accurate outline of all material terms and
conditions relating thereto) of all employee benefit plans provided by the
Company, stock option plans, and related arrangements reserving shares for
issuance to executives and employees of the Company.
13. A listing of all liabilities of the Company and which would be
disclosed on a balance sheet of the Company as of the date hereof, certified by
the President or Treasurer o-f the Company to be true and correct, which are not
disclosed in the
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financial statements for the period ended June 30, 1986; provided to the
Investor and described in Section 3(c) hereof:
14. A listing of all states in which the Company has qualified to do
business as a foreign corporation.
15. A true copy of all agreements in which the Company has granted or
agreed to grant a security interest, pledge, mortgage, deed of trust,
encumbrance, lien or charge on any of its property or assets, whether now owned
or hereafter acquired.
16. A listing of all "Intellectual Property Rights," as such term is
defined in Section 4(o) hereof, owned or used by the Company in connection with
its business.
17. A true copy of all leases of real and personal property naming the
Company as either lessor or lessee.
18. To the extent not provided for herein, a true copy of all material
contracts to which the Company is a party listed on Schedule 4(i) attached
hereto.
19. The Voting Agreement between the Investor and Narasimhan P. and
Leslie M. Kannan pursuant to which the Kannans agree to vote in favor of the
election of two nominees until the fifth anniversary of the date hereof and one
nominee thereafter of the Investor to the Board of Directors of the Company and
to vote in favor of other nominees for election to the Board of Directors so
that the Board shall consist of at east five persons a majority of which
(including the nominees of the Investor) are Unrelated Persons and persons who
are not employees of the Company.
20. Certificate of Corporate Officer of the Company signed by
Narasimhan P. Kannan, as Chief Executive Officer of the Company on October 8,
1986.
21. Any and all other documents, certificates, and assurances which may
be reasonably requested by the Investor in connection with its commitments as
set forth herein.
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
---------------------------------------------
The Company hereby represents and warrants to the Investor that, as of
the date hereof:
(a) Organization and Good Standing. The Company is a corporation duly
organized and validly existing under the laws of the State of Delaware and is in
good standing under such laws, and is qualified and authorized to do business
in, and in good standing as a foreign corporation in, all other states in which
such qualification or
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authorization is necessary for the conduct of the businesses in which the
Company is now engaged, or, if not so qualified, the Company's failure so to
qualify will not have a material adverse effect on the Company, its financial
condition or operations and will not impair the Company's right to enforce any
material agreement to which it is a party.
(b) Authorized and Issued Capital. The authorized capital stock or the
Company, prior to the consummation of the transactions with the Investor,
consists of (i) 2,000,000 shares of Common Stock, S.O1 par value of which
1,122,536 shares are issued and outstanding, (ii) 500,000 shares of Preferred
Stock, S.O1 par value, of which no shares are issued and outstanding. There are
no further subscriptions, contracts or agreements for the issuance or purchase
of any other or additional shares of the Company's capital stock, either in the
form of stock option or purchase agreements, warrants, calls or convertible
debentures, other than the Options and other arrangements described in Schedule
4(b). Except as disclosed in Schedule 4(b), the number of shares of Common Stock
reserved for issuance as set forth in Schedule 4(b) is not subject to adjustment
by reason of the Issuance of the shares of Common Stock to be issued upon
exchange of the Preferred Stock. Except as disclosed in Schedule 4(b), and other
than the Investor's preemptive rights described herein and the rights provided
signatories to the Shareholders Agreement, there are no preemptive or similar
rights to purchase or otherwise acquire shares of the Company's capital stock
pursuant to any provision of law, the Articles of Incorporation or Bylaws of the
Company, or any agreement to which the Company is a party, or otherwise.
(c) Authorization of Agreements. This Investment Agreement' the
Employment Agreement, the Employment Agreements between the Company and its Key
Employees, and the Shareholders Agreement Supplement have been duly authorized,
executed and delivered by or on behalf of the Company and constitute the legal,
valid and binding obligation of the Company enforceable in accordance with their
terms. Neither the execution and delivery of this Investment Agreement nor the
aforesaid Employment Agreement, the Employment Agreements between the Company
and its Key Employees, and the Shareholders Agreement Supplement will be in
contravention of law, or of any order, rule or regulation applicable to the
Company or of its Articles of Incorporation, Bylaws or any other contract,
agreement or instrument to which the Company may be a party.
(d) Authorization and Legality of the Preferred Stock. The issuance and
sale of the Preferred Stock to the investor pursuant to this Agreement have been
duly authorized by the Board of Directors of the Company. No approval or
authorization of the shareholders of the Company will be required for the
issuance and sale of the Preferred Stock as contemplated herein. Upon exchange
of the Preferred Stock as contemplated hereby, the Company's Common Stock to be
issued to the Investor will be validly issued and outstanding and fully paid and
nonassessable.
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(e) Good Title to All Properties. The Company has good and marketable
title to all the properties and assets used in its businesses or described in
its internal financial records, and to all patents, trademarks, trademark
rights, trade names, copyrights or licenses either developed by or assigned to
the Company for its use, subject to no lien, mortgage, pledge, security
interest, encumbrance or charge of any kind, except for such matters as
described on Schedule 4(e) attached hereto.
(f) Litigation. There is no litigation or any proceeding before any
court, commission or other administrative authority pending, or, to the
knowledge of the Company' threatened, against or affecting the Company or its
Officers or directors which involves the possibility of any Judgment or
liability, not fully covered by insurance, which may materially and adversely
affect any of the property and assets of the Company or the right of the Company
to conduct its business as now engaged. To the knowledge of the Company, -none
of the Company's officers or Key Employees are subject to any contract,
prohibition, noncompete, trade secret or any Other restrictive agreement which
would impair his ability to provide services to the Company. No third party may
assert any valid claim under any agreements or arrangement or any laws governing
unfair competition, trade secrets or proprietary information against the Company
or, to the knowledge of the Company, its Key Employees with respect to the use
in the Company's business presently conducted or proposed to be conducted, of
any information which the Company or any such officer or employee would be
prohibited from using.
(g) Taxes. The Company has filed all Federal, state and local tax
returns which are required by law to be filed as of the date hereof, except for
sales tax, and have paid all taxes which have become due pursuant to such
returns or relating to any assessments, if any, except for sales tax. No federal
income tax returns of the Company have been audited by the Internal Revenue
Service.
(h) Stockholder List. Attached hereto as Schedule 4(h) is a complete
and correct list of the present holders of outstanding shares of Common Stock of
the Company, showing the number of shares by each stockholder.
(i) Other Contracts; Commitments. The Company has previously furnished
or made available to the Investor copies (or descriptions, in the case of oral
arrangements) of all its material leases, franchise and managerial contracts and
agreements, and any and all other of its material contracts and agreements, used
or to be used in connection with the conduct of their respective businesses,
including, but not limited to, any written or oral:
(i) contract with any labor union;
(ii) contract for the future purchase of fixed assets or for
the future purchase of materials, supplies or equipment in excess of normal
operating requirements;
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(iii) contract for the employment of any Key Employee' or other
Person on a full-time basis or any contract With any Person on a consulting
basis;
(iv) bonus, pension, profit-sharing, retirement, Stock
purchase, stock option, hospitalization, medical insurance or similar plan,
contract or understanding in effect with respect to employees or any of them or
the employees of others;
(v) promissory note, agreement or indenture relating to the
borrowing of money or to the mortgaging, Pledging or otherwise placing a lien on
any assets of the Company;
(vi) guaranty of any obligation for borrowed money or
otherwise;
(vii) lease or agreement providing for rental payments in excess
of S12, 000.00 per year under which the Company is lessee of or holds or
operates any property, real or personal, owned by any other party;
(viii) lease or agreement providing for rental payments in excess
of S12, 000.00 per year under which the Company is lessor of or permits any
third party to hold or operate any property, real or personal, owned or
controlled by the Company;
(ix) agreement or other commitment for capital expenditures in
excess of S12,000.00;
(x) contract, agreement or commitment under which the Company
is obligated to pay any broker's fees, finder's fees or any such similar fees to
any third party, except fees to Blake, Brunell 6 Lehman (such contract with
Blake, Brunell and Lehman is attached hereto on Schedule 4(i)); or
(xi) any other contract, agreement, arrangement or
understanding which is material to the business of the Company or which is
material to a prudent investor's understanding of the business of the Company,
all of which are listed on Schedule 4(i) attached hereto.
The Company is not a party to any other contract or agreement
which in the judgment and opinion of the Company may materially or adversely
affect the business, properties, assets or condition of the Company. The Company
is not in default of any such material contracts and agreements.
(j) Articles of Incorporation and Bylaws. The Company's Articles of
Incorporation and Bylaws, copies of which have been furnished to the Investor,
are in full force and effect, without further changes, amendments or
modifications.
(k) Financial Statements. The Company has furnished to the Investor the
financial statements described in Section 3(c) hereof (the "Financial
Statements"). To the best knowledge and belief of the Company, the Financial
Statements are true and correct
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and present fairly the financial position Of the Company, provided, however, the
Investor acknowledges that such statements contain no notes thereto or the
information ordinarily provided therein. Except as set forth on Schedule 4(k)
attached hereto, at June 30, 1986 (i) the Company had no material liabilities of
any nature (matured or unmatured, fixed or contingent) which were not provided
for in the Financial Statements; (ii) all reserves established by the Company
and set forth in the Financial Statements were adequate for the purposes
indicated therein; and (iii) the values attributed to inventories in the
Financial Statements are not in excess of the market values of such inventories
and such inventories represent salable goods. There are no loss contingencies
(as such term is used in Statement of Financial Accounting Standards No. 5
issued by the Financial Accounting standards Board in March 1975) which are not
adequately provided for in the Financial Statements as required by said
Statement No. 5. Attached hereto on Schedule 4(k) is a statement of backlog as
of the date hereof listing its customers and the date of all firm (whether or
not cancellable) orders.
Except as set forth on Schedule 4(k), since June 30, 1986, there has
not been:
(i) any material or adverse change in the financial condition,
results of operations, assets, liabilities or business of the Company
(ii) any borrowing or agreement to borrow any funds or any
material liability or obligation of any nature whatsoever (contingent or
otherwise) incurred by the Company, other than current liabilities or
obligations incurred in the ordinary course of business and other than borrowing
from Narasimhan P. Kannan;
(iii) any asset or property of the Company made subject to a
lien of any kind;
(iv) any waiver of any valuable right of the Company, or the
cancellation of any debt or claim held by the Company;
(v) any payment of dividends on, or other distributions with
respect to, or any direct or indirect redemption or acquisition of, any shares
of the capital stock of the Company, or any agreement or commitment therefor;
(vi) any issuance of any stock, bonds or other securities of
the Company or options, warrants or rights or agreements or commitment to
purchase such securities or grant such options, warrants or rights;
(vii) any mortgage, pledge, sale, assignment or transfer of any
tangible or intangible assets of the Company, except, with respect to tangible
assets, in the ordinary course of business;
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(viii) any loan by the Company to any officer, director, employee
(including any Key Employee) or shareholder of the Company, or any agreement or
commitment therefor;
(ix) any damage, destruction or loss (whether or not covered
by insurance) materially and adversely affecting the assets, property or
business of the Company;
(x) any extraordinary increase, direct or indirect, in the
compensation paid or payable to any officer, director, employee (including any
Key Employee) or agent of the Company; or
(xi) any change in the accounting methods or practices
followed by the Company.
(1) Offering of the Stock. Neither the Company nor any agent acting on
its behalf has taken in the past or in the future will take any action which
would subject the issuance or sale of the Preferred Stock or the Common Stock to
be issued upon exchange thereof pursuant to the terms of this Agreement, to the
provisions of Section 5 of the 1933 Act. The Company has not offered the
Preferred Stock, or any security or securities similar to any thereof, for sale
to, or solicited any offers to buy any of the foregoing from, or otherwise
approached or negotiated in respect thereof, any Person or Persons, such as to
subject the offering of stock to Section 5 of the 1933 Act.
(m) Governmental Approval. No consent, approval or authorization of or
qualification, designation, declaration or filing with any governmental
authority on the part of the Company is required in connection with the
execution, delivery and performance by the Company of this Agreement or the
offer, issue, sale and delivery of the Preferred Stock pursuant hereto or the
consummation of any other transactions contemplated hereby.
(n) Untrue Statements. Neither this Agreement nor any Schedule attached
hereto nor any certificate or document referenced herein or therein and
furnished to the Investor by the Company on its behalf in connection herewith
contains any untrue statement of a material fact, or omits to state a material
fact necessary in order to make the statements contained herein or therein in
light of the circumstances under which they were made, not misleading. Provided,
however, that this representation shall not apply to any Projections or
financial statements furnished to the Investor.
(a) Patents, Licenses, Trademarks, etc. The Company warrants, as
evidenced by the Patents, Licenses, Trademarks, etc. listed on Schedule 4(o)
attached hereto, that:
(i) the Company possesses all necessary patents, licensed
trademarks, trade names, trademark rights and copyrights which are necessary to
conduct its respective businesses as now conducted or as contemplated to be
conducted' without
15
<PAGE>
conflict, to the best of the Company's knowledge' with any patent, license,
trademark, trade name, or copyright of any other Person;
(ii) no employee owns or has rights to any patent, licensee'
trademark, trade name or copyright necessary to conduct the Company's respective
businesses as now conducted or contemplated to be conducted;
(iii) no royalties, honorariums or fees are payable by the
Company to other Persons by reason of the ownership or use of the Intellectual
Property Rights: provided that this provision shall not apply to the payment of
salary to persons in connection with the performance of services to the Company;
(iv) no product manufactured, marketed or sold by the Company
will, to the best knowledge of the Company, violate any license or infringe any
Intellectual Property Rights or assumed name of another. There is no pending or
threatened claim or litigation against the Company (nor, to the best knowledge
of the Company, does there exist any basis therefor) contesting the validity or
right to use any of the foregoing. The Company has not received any notice that
any of the Intellectual Property Rights or the operation or proposed operation
of the Company's business conflicts, or will conflict, with the asserted rights
of others, nor, to the best knowledge of the Company, does there exist any basis
for any such conflict. "Intellectual Property Rights" shall mean all industrial,
commercial and intellectual property rights, including, without limitation,
patents, patent applications, patent rights, trademarks, trade names, service
marks, copyrights, computer programs software designs, source codes and related
material", certificates of public convenience and necessity' franchises,
licenses, trade secrets, proprietary processes and formulae; and
(v) the source code utilized by the Company is being held in
escrow by Covington & Burling, legal counsel to the Company, pursuant to the
Escrow Agreement attached hereto as Exhibit F.
(p) Brokerage Fees. Except with respect to fees owed to Blake, Brunell
& Lehman (which fees the Company hereby represents that it is solely liable),
there are no claims against the Company or any of its respective officers,
directors or Shareholders' for brokerage commissions, finders'- fees, or Other
similar compensation in connection with the transactions contemplated by this
Agreement based on any arrangement or agreement made by or on behalf of the
Company or such officer, director or shareholder.
(q) No Crimes. Neither the Company nor, to the Company's knowledge, any
of its current directors, officers and Key Employees, have been arrested,
indicted for or convicted or any crime, other than minor traffic offenses,
during the past ten years. Neither the Company nor, to the Company's knowledge,
any of its current executive officers, directors or Key Employees have since
January 1, 1981:
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(i) filed a petition, or had a petition filed against it or
them, under the Federal Bankruptcy laws or any state insolvency law, or had a
receiver, fiscal agent or similar officer appointed by a court for its or their
business or property, or for any partnership in which it or they were a general
partner or any corporation or business association of which it or they were an
executive officer at or within two years before such filing;
(ii) been convicted in a criminal proceeding or been named the
subject of a pending criminal proceeding (excluding traffic violations and other
minor offenses);
(iii) been the subject of any order, judgment or decree, not
subsequently reversed, suspended or vacated, of any court of competent
jurisdiction permanently or temporarily enjoining it or them from, or otherwise
limiting the following activities:
(A) acting as an investment advisor, underwriter, broker or dealer in
securities, or as an affiliated person, director or employee of any investment
company, bank, savings and loan association or insurance company, or engaging in
or continuing any conduct or practice in connection with such activity;
(B) engaging in any type of business practice; or
(C) engaging in any activity in connection with the purchase or sale of
any security or in connection with any violation of Federal or State securities
law;
(iv) been the subject of any order, judgment or decree, not
subsequently reversed, suspended or vacated, of any Federal or State authority
barring, suspending or Otherwise limiting for more than sixty (60) days its or
their right to engage in any activity described in (iii) above, or to be
associated with persons engaged in any such activity; or
(v) been found by a court of competent jurisdiction n a civil
action or by the Securities and Exchange Commission (the 'commission') or any
state securities administrator or commissioner to have violated any Federal or
State securities law, and the judgment in such civil action or finding by the
Commission or any state securities administrator or commissioner has not been
subsequently reversed, suspended or vacated.
(r) Compliance with Law. To the best knowledge of the Company, the
Company Is not in violation of any law, regulation, authorization, or order of
any public authority material to the ownership of its properties or the carrying
on of its present or contemplated businesses.
5. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR.
----------------------------------------------
The Investor represents and warrants to the Company as follows:
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(a) In making the purchases contemplated herein, it is specifically
understood and agreed that the Investor is acquiring the Preferred Stock (and in
the event the Preferred Stock is exchanged, the shares of Common Stock issuable
pursuant to the exchange thereof in accordance with the terms of this Agreement)
for the purpose of investment and not with a view towards the sale or
distribution thereof within the meaning of the 1933 Act.
(b) It understands that the Preferred Stock and the shares of Common
Stock to be issued upon exchange of the Preferred Stock will not be registered
under the 1933 Act, by reason of their issuance by the Company in a transaction
exempt from the registration requirements of the 1933 Act; and that it must hold
the Preferred Stock and such shares of Common Stock indefinitely unless a
subsequent disposition thereof is registered under the 1933 Act, is exempt from
registration' or the Preferred Stock or such Common Stock are disposed of
pursuant to this Agreement; and that the Preferred Stock and such Common Stock
will contain appropriate legends restricting them against transfer.
(c) It understands that the exemption from registration afforded by
Rule 144 (the provisions of which are known to the Investor) promulgated by the
Commission under the 1933 Act depends on the satisfaction of various conditions,
including the requirements of Section 13 of the 1933 Act for at least 90 days'
and that, if applicable, Rule 144 affords the basis for sales only in limited
amounts and that the Company does not now qualify under Rule 144 and may not
ever qualify.
(d) It has not employed any broker or finder in connection With the
transactions contemplated by this Agreement.
(e) It has been furnished with or has had access to the information it
has requested from the Company and has had an opportunity to discuss with the
management of the Company the business and financial affairs of the Company and
has generally such knowledge and experience in business and financial matters
and with respect to investments in securities or in privately held companies so
as to enable it to understand and evaluate the risks of such investment and form
an investment decision with respect thereto; provided, however, that the
foregoing shall in no way affect, diminish, or derogate from the representations
and warranties made by the Company hereunder or the right of the Investor to
rely thereon and to seek indemnification hereunder. The Investor is an
"accredited investor" as defined in Rule 501(a) promulgated under the 1933 Act
(and an opinion of counsel of Investor to such effect has been delivered to
counsel for the Company).
(f) The execution and delivery of this Agreement, and the Shareholders'
Agreement have been duly authorized by all necessary action of the Investor, do
not conflict with or result in a breach of any of the Investor's governing
documents or any agreement to which the Investor is a party or is subject or any
judgment, order, writ, injunction, decree, rule or regulation of any court, or
administrative agency, and
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<PAGE>
constitute legal, valid and binding agreements of the Investor enforceable
against it in accordance with their respective terms.
(g) Neither the Investor nor any of its current general or limited
partners and general or limited partners of its general partner has since
January 1, 1981:
(i) filed a petition, or had a petition filed against them,
under the Federal Bankruptcy laws or any state insolvency law, or had a
receiver, fiscal agent or similar officer appointed by a court for their
business or property, or for any partnership in which they were a general
partner or any corporation or business association of which it or they were an
executive officer at or within two years before such filing;
(ii) been convicted in a criminal proceeding or been named the
subject of a pending criminal proceeding (excluding traffic violations and other
minor offenses);
(iii) been the subject of any order, judgment or decree, not
subsequently reversed, suspended or vacated, of any court of competent
jurisdiction permanently or temporarily enjoining them from or otherwise
limiting the following activities:
(A) acting as an investment advisor, underwriter, broker or dealer in
securities, or as an affiliated person, director or employee of any investment
company, bank, savings and loan association or insurance company, or engaging in
or continuing any conduct or practice in connection with such activity;
(B) engaging in any type of business practice; or
(C) engaging in any activity in connection with the purchase or sale of
any security or in connection with any violation of Federal or State securities
law;
(iv) been the subject of any order, judgment or decree, not
subsequently reversed, suspended or vacated, of any Federal or State authority
barring, suspending or otherwise limiting for more than sixty (60) days their
right to engage in any activity described in (iii) above, or to be associated
with persons engaged in any such activity; or
(v) been found by a court of competent jurisdiction in a civil
action or by the Commission or any state securities administrator or
commissioner to have violated any Federal or State securities law, and the
judgment in such civil action or finding by the Commission or state securities
administrator or commissioner has not been subsequently reversed, suspended or
vacated.
(h) Neither this Agreement nor any other agreements or documents
furnished to the Company pursuant to this Section 5 by the Investor or on its
behalf in connection herewith contains any untrue statement of a material fact
or omits to state a material fact necessary in order to brake the statements
contained herein or therein in light of the circumstances in which they were
made not misleading.
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6. GENERAL COVENANTS OF THE COMPANY.
--------------------------------
(a) Expenses of the Investor. The Company will reimburse the Investor
for documented reasonable fees and disbursements of counsel for the Investor in
connection with the negotiation, preparation, execution and performance of this
Agreement, up to a maximum of three thousand dollars (S3,000), and will
reimburse the Investor for reasonable out-of-pocket expenses of the Investor
(not including fees and disbursements of counsel) directly related to the
Investors' investment in the Company as contemplated under Section 2.
(b) Preparation and Approval of Budgets, etc. The Company will, no later than 30
days prior to the end of each of its fiscal years, prepare and submit to its
Board of directors and to the Investor and will obtain the approval of the
Company's Board of Directors with respect to the capital and operating expense
budgets, projections of balance sheets, cash flow and profit and loss
projections, all for each month of such fiscal year, all itemized in reasonable
detail (including itemization of provisions for officers' and Key Employees
compensation). The Investor shall, in addition, be furnished any material
revisions made in the budgets, projections or other information furnished
pursuant to this subsection, within 10 days after the adoption of such revisions
by the Board of Directors, with an explanation of deviations from the latest
budget. All financial statements and reports furnished to the Investor pursuant
to subsection (c) of this Section and the preceding sentence with respect to
which a budget, projections or other information has been submitted shall set
forth, to the extent practicable in comparative form, figures for such budget,
projection or other information for the applicable preceding accounting period.
Furthermore, the Company will provide the Investor with a budget and forecasts
for the consecutive five years following the next year, the first of such years
on a monthly basis, the second of such years on a quarterly basis, and the final
three on an annual basis: such budgets and forecasts will contain balance
sheets, income statements, projections of sources and applications of funds and
cash flow statements.
(c) Accounting and Reports. The Company will furnish to the Investor,
the following reports:
(i) Annual reports. As soon as available and in any event
within 120 days after the end of each fiscal year, consolidated and
consolidating financial statements of the Company including a balance sheet as
at the end of such fiscal year and statements of income and retained earnings
and of sources and applications of funds for such fiscal year, prepared in
reasonable detail and in accordance with generally accepted accounting
principles consistently applied and accompanied by the opinion thereon of either
Arthur Young ~ Co. or of such other recognized firm of independent certified
public accountants as may be selected by the Board of Directors of the Company
and which are reasonably acceptable to the Investor. The Company's chief
financial officer shall supply (or upon request of the
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Investor, the Company shall request its auditor to supply) a report for the
Investor analyzing the Compliance of the Company with this Agreement and any
other material agreements in light of the annual audited report.
(ii) Quarterly reports. As soon as available, and In any event
within 45 days after the end of each quarter, Consolidated and consolidating
financial statements of the Company including a cash flow statement, a balance
sheet as at the end of such accounting period and statements of income and
retained earnings for such accounting period and for the period from the
beginning of such fiscal year to the end of such accounting period, and setting
forth in comparative form the figures for the corresponding periods of the
preceding fiscal year (provided, however that for the first quarterly report
that is provided to the Investor, the comparative figures will not be included)
prepared in reasonable detail and in accordance with generally accepted
accounting principles consistently applied and certified as correct by the
president or chief financial officer of the Company.
(iii) Interim Reports. As soon as available, and in any event
within 30 days after the end of each month, statements of income and cash flow
statements for such accounting period and for the period from the beginning of
such fiscal year to the end of such accounting period.
(iv) Officer's Certificates. There shall be further included
with the Interim Reports an Officer's Certificate from the President of the
Company stating in brief the major operational activities of the Company for the
month and stating further in effect that, to the best of his knowledge and
belief, such financial statements are true and correct and have been prepared in
accordance with generally accepted accounting principles, consistently applied,
subject to changes resulting from year-end adjustments, and that he has reviewed
every obligation of the Company under this Investment Agreement, under any
material agreement and under any related instrument, and to his best knowledge
and belief no breach by the Company of this Investment Agreement or of such
related instrument, has occurred, or through lapse of time will have occurred,
and disclosing any such breach of which he has obtained knowledge and setting
forth what action, if any, has been initiated or taken by the Company towards
the curing of any such breach.
(v) Audit Reports. Promptly upon receipt thereof (and in no
event more than ten days after receipt thereof), copies of all audit reports,
"management letters" and other communications and reports submitted to the
Company by its independent certified public accountants in connection with each
interim or special audit of the books of the Company made by such accountants.
(vi) SEC Filings, Etc. Promptly upon their becoming available
(and in no event later than ten days after preparation) copies (without
duplication) of all financial Statements, reports, press releases, notices and
proxy statements sent by the Company to its security holders and the financial
community and all annual, periodic or special reports or registration statements
filed by the Company with the Commission.
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(vii) Other Reports. Within ten days of preparation or
occurrence, the Company will furnish the Investor with copies or notification of
any report made by an outside consultant for the Company, any reports filed with
state or federal regulatory agencies or securities exchanges by the Company, any
report presented to the Board of Directors, and communications with any person
or persons interested in acquiring the Company. The Company shall promptly
notify the Investor of any event material to the Company performance hereunder.
The Company shall provide the Investor with other operating reports or financial
data as may be reasonably requested by the Investor and other information
necessary for the Investor to comply with any applicable law, rule or regulation
or any governmental authority.
(d) Information and Inspection. The Company will furnish to the
Investor from time to time with reasonable promptness, upon request, full
information pertinent to any covenant, provision, or condition hereof or to any
matter in connection with the business of the Company and, during normal
business hours and as often as the Investor shall reasonably request, permit any
authorized representative-designated by it to visit and inspect any of the
Company's properties, including their respective books, contracts and agreements
(and to make extracts therefrom), and to discuss their respective affairs,
finances and accounts with their respective officers. The Company may, however,
as a condition of furnishing any information or permitting any visit or
inspection pursuant to this such subsection (d), require an undertaking from the
Investor or its representative receiving the same that all information thus
received which is designated by the Company in writing, to be proprietary or
confidential will be kept confidential and not disclosed to others except to
authorized representatives of the Investor.
(e) Additional Advice. The Company shall promptly advise the Investor
of the existence of any breach or a material default or material adverse event
in the performance by the Company under any covenant or agreement contained in
any other material agreement to which it is a party or by which it is bound.
(f) Key Man Life Insurance. The Company will maintain In force a policy
or policies of insurance on the lives of Narasimhan P. Kannan and John O'Brien,
in at least the amount $450,000, with the Company as the owner and beneficiary.
(9) Representation On Board of Directors; Meetings. Provided that
Dennis J. Dougherty and Roy Rodwell (or a substitute general partner(s)
reasonably acceptable to the Company)' are general partners of the Investor:
(i) The Investor shall have the right to nominate for election
no more than two persons mutually acceptable to the Company and the Investor
(the Company and the Investor hereby agree that Dennis J. Dougherty and Roy
Rodwell are mutually acceptable) to the Board of Directors of the Company (the
"Investor Representatives"); provided, however, that after the fifth anniversary
of the date of this Agreement, the Investor shall have the right to nominate for
election no more than one Investor
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Representative. One of the Investor Representatives, if elected to the Board,
shall be appointed to the Executive Committee and the Audit Committee, with the
Investor Representative to be so selected chosen by the Investor, and with the
other members of (and the number of) the Executive Committee and Audit Committee
chosen by the Company.
(ii) The Executive Committee shall have at least the power to
make recommendations to the Board regarding the following transactions:
(A) The acquisition of assets of the Company outside the
ordinary course of business by any Person;
(B) The merger of the Company into another entity or the
merger of another entity into the Company where the Company owns less than 90%
of the voting securities of the entity;
(C) The purchase of the assets of another entity or entities
by the Company outside the ordinary course of business or the purchase of the
capital stock of another entity or entities;
(D) The election by the Company to declare bankruptcy under
any section or sections of the United States Bankruptcy Code or any state
bankruptcy code.
(E) The determination by the Company to engage in an initial
public offering, or sale of shares to a third party;
(F) Any hirings or firings of Key Employees;
and
(G) Any declaration of dividends.
(iii) An Executive Committee meeting will be held each month; the
Company will also have meeting of the Board of Directors and an annual meeting
of its shareholders, all as provided for in the Company's Bylaws; and minutes of
all such meetings shall be prepared and maintained as a part of the permanent
records of the Company. The Company will provide the Investor with written
notice of all proposed agendas (which shall not, however, limit the matters
which may be acted upon in the event a majority of those directors or
shareholders' as appropriate, who are present, vote to discuss or act upon any
other matter) for all meetings of the shareholders at least ten (10) days in
advance and shall give written notice of all proposed agendas for all meetings
of the Executive Committee and the Board of Directors of the Company at least
three (3) business days in advance. The Investor Representative shall be
reimbursed by the Company for reasonable air travel (coach fare) and
out-of-pocket expenses (including reasonable hotel expenses, if necessary)
incurred in attending meetings and in carrying out duties requested by the
Company, provided, however, that nothing contained herein
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<PAGE>
shall preclude meetings by telephone or action taken by unanimous consent as
permitted by applicable law.
(iv) No designee for director shall be named by the Investor or the
Company if such designee has, within five (5) years prior to this proposed
election, been involved in any legal proceedings specified in Section S(g)
hereof or any similar proceeding.
(h) Executive Personnel. The Company will use its best efforts to
retain the same executive personnel and management as it has as of the date
hereof. In addition, the Company will promptly notify the Investor in writing of
any contemplated change in, or additions of, any Key Employee of the Company.
(i) Maintenance of Property, Plant and Equipment. The Company will
maintain its property, plant and equipment in good working order, subject only
to wear and tear and insured casualty losses, and make all necessary repairs and
replacements thereto.
(j) Maintenance of Insurance. The Company will maintain With
financially sound and reputable insurance companies public liability and
worker's compensation insurance and Casualty insurance on tangible real and
personal property in such amounts as is customarily carried by other companies
in similar businesses, owning like properties and operating in similar
locations.
(k) Maintenance of Records. The Company will maintain Correct and
adequate books, records and accounts in accordance with generally accepted
accounting principles consistently applied.
(l) Trade Obligations. The Company will promptly notify the Investor In
writing of receipt by the Company of any notice that its trade obligations have
been referred by any of its trade creditors for collection.
(m) Notification of Litigation. The Company will promptly notify the
Investor in writing of any litigation that has been instituted or is pending, or
to the Company's knowledge threatened, the outcome of which might have a
material or adverse effect on the Company's financial condition, business or
properties.
(n) Source Code. The Company will update the source code quarterly, and
such quarterly updates of the source code will be held in escrow by Covington &
Burling, legal counsel to the Company pursuant to Section 4(o) (v).
7. NEW ISSUANCE OF STOCK OR RIGHTS.
-------------------------------
(a) Rights of First Refusal On Employee Stock. The Company shall enter
into agreements to obtain an assignable right of first refusal with respect to
any proposed sale of the capital stock of the Company held by any employees and
by Narasimhan P. Kannan and John O'Brien should such employees cease employment
or die during the
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term of this Agreement. The Company shall maintain such agreements in full force
and effect until the Investment Agreement is terminated.
(b) Sale of Capital Stock. Except with the consent of the Investor, for
a period of eighteen (18) months from the date of this Agreement, the Company
shall not issue (except in a transaction described in Section 7(e)) shares of
its Common Stock at a price below S2-15 per share or securities convertible into
Common Stock at a conversion price below S2.15 per share (in either event, with
such share price adjusted appropriately for any stock dividends, split-ups,
combinations or the like).
(c) Preemptive Rights. If the Company proposes to issue (except in a
transaction described in Section 7(e)), any capital stock or any security
convertible into or having rights to purchase its capital stock, where the
consideration for such issuance consists solely of cash without material noncash
additional consideration to the Company, the Company shall offer in writing to
sell to the Investor a portion thereof determined as follows:
(i) In the case of issuance of Common Stock or securities
convertible into or having rights to purchase Common Stock, such offer shall be
to the Investor in Proportion to its ownership of Common Stock; or if the
Preferred Stock has not yet been exchanged, in proportion to combinations its
ownership in Common Stock had the Preferred Stock been exchanged' provided such
Preferred Stock is then still exchangeable pursuant to this Agreement.
(ii) Such offer shall describe such securities and specify the
quantity, the price and the payment terms. If, within 30 days after receipt of
such offer, the Investor accepts the same in writing as to the portion referred
to above or any lessor amount, then the Company shall sell such portion of such
securities, or such lesser amount as the Investor may specify, to the Investor
upon the terms specified.
(iii) The rights granted by this Section 7(c) shall terminate
upon the occurrence of any of the following events:
(A) Three years from the date of this Agreement, or
(B) First registration under the 1933 Act and sale of Common
Stock to the public; or
(C) Sale of a Controlling Interest to an Unrelated entity; or
(D) Termination or expiration of the exchange rights contained
herein without the Preferred Stock having been so exchanged.
(d) Sale of Capital Stock. The Company shall be free to sell at any
time prior to 120 days after the date an offer pursuant to subsection 7(c) was
made, all or a portion
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of the quantity of such securities offered to the Investor and not agreed by the
Investor to be purchased by it at a price no less favorable to the Company than
that specified in such offer and on payment terms no less favorable to the
Company than those specified in such offer without again complying with Section
7(c) with respect to such shares. However, if such sale is not consummated
within the time specified in the preceding sentence, the Company shall not sell
such securities Without again complying with this Section 7(c), if applicable.
(e) Excluded Transactions. The following transactions shall be excluded
from the restrictions of Section 7(b) and 7(c):
(i) any issuance to an employee of capital stock of the
Company or rights to purchase capital stock for his own Investment and as part
of a bona fide compensation plan approved by the Board of Directors, provided
that not more than. 17 percent of the capital stock presently outstanding
(adjusted appropriately for any stock dividends, split-ups, combinations or the
like) may be excluded pursuant to this subsection;
(ii) any issuance of capital stock upon the conversion of
convertible notes currently outstanding;
(iii) any issuance of capital stock under existing Options and
warrants and
(iv) any issuance of capital stock pursuant to existing
brokerage agreements.
8. NEGATIVE COVENANTS OF THE COMPANY
---------------------------------
Through the earlier of fifth anniversary of the date hereof or any
earlier termination of this Agreement, the Company covenants and agrees that it
will not, without obtaining the consent of the Investor, issue cash dividends or
other nonstock dividends.
9. REGISTRATION RIGHTS.
--------------------
(a) As used in this Section 9, the term "Restricted Securities" shall
mean all shares of Common Stock that hereafter may be issued upon exchange of
the Preferred Stock pursuant to the terms of this Agreement to the Investor.
(b) Notwithstanding anything herein to the contrary, all rights granted
to the Investor under this Section 9 shall be subject to the registration rights
of Newport News Shipbuilding and Dry Dock Company ("NNS") under that certain
Agreement between NNS and the Company dated as of October 21, 1985.
(c) Incidental Registration. If the Company at, or any time within
three years after, the first registration under the 1933 Act and sale of Common
Stock to the public proposes for any reason to register any of its Common Stock
under the 1933 Act for its own
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<PAGE>
account or along with its shareholders other than holders of Restricted
Securities (other than registration statement statement on Form S-8, S-14 or
S-15 or similar or successor form (the "Excluded Forms")), it shall each such
time promptly give written notice to all holders of the Restricted Securities of
its intention so to do, and, upon the written request, given within thirty (30)
days after receipt of any such notice, of the holders of the Restricted
Securities to register any Restricted Securities (which request shall specify
the Restricted Securities by the Prospective seller), the Company shall use its
best efforts to cause all such Restricted Securities to be registered under the
1933 Act promptly upon receipt of the written request of holder for such
registration, all to the extent requiredto permit the sale or other disposition
(in accordance with the intended methods thereof, as aforesaid) by the
prospective seller or sellers of the Restricted Securities so registered. In the
event that the proposed registration by the Company is an underwritten public
offering of Common Stock of the Company, any request pursuant to this subsection
(c) to register Restricted Securities may specify that such shares are to be
included in the underwriting (a) on the same terms and conditions as the shares
of stock, if any, otherwise being sold through underwriters under such
registration, or (b) on terms and conditions comparable to those normally
applicable to offerings of stock in reasonably similar circumstances in the
event that no shares of stock other than Restricted Securities are being sold
through underwriters under such registration; provided, however, that in
connection with any offering involving an underwriting of shares being issued by
the Company, the Company shall not be required under this subsection (c) to
include any of the holders' Restricted Securities in such underwriting unless
they accept the terms of the underwriting as agreed upon between the Company and
the underwriter selected by it, and then only in such quantity as will not, in
the written opinion of such underwriter, materially adversely affect the
offering by the Company. If the total amount of securities that all holders
(including the holders of the Restricted Securities) request to be included in
such offering exceeds the amount of securities that such underwriter reasonably
believes compatible with the offering, the Company shall only be required to
include in the offering so many of the securities of the selling holders as the
underwriters believe will not materially adversely affect the offering (the
securities so included to be apportioned pro rata among the selling holders
according to the total amount of securities owned by said selling holders, or in
such other proportions as shall mutually be agreed to by such selling holders),
provided that no such reduction shall be made with respect to any securities
offered by the Company for its own account.
(d) Registrations on Form S-3.
(i) For two years after such time as the Company shall have
qualified for the use of Form S-3 (or any similar form or forms promulgated
under the 1933 Act), the holders of the Restricted Securities holding at least
fifty-one percent (51%) of the then outstanding Restricted Securities which have
not previously been registered shall have the right to request an unlimited
number of registrations (but no more than one Such registration per year) on
Form S-3 (which request or requests shall be in writing, shall specify the
Restricted Securities by the holder requesting such registration and Shall
relate to Restricted Securities having a proposed aggregate gross offering price
(before
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<PAGE>
deduction of underwriting discounts and expenses of sale) of at least
$1,000,000), and the Company shall be obligated to use its best efforts to
effect such registration or registrations on Form S-3; provided, however, that
the Company shall not be Obligated to file and cause to become effective more
than one registration on Form S-3 in any one fiscal year.
(ii) Notwithstanding the foregoing provisions of this Section
9(d), (a) the Company shall not be obligated to effect a registration pursuant
to this Section 9(d) during the period starting with the date sixty (60) days
prior to the Company's estimated date of filing of, and ending on a date ninety
(90) days following the effective date of, a registration statement pertaining
to an underwritten public offering of securities for the account of the Company,
provided that the Company is actively employing in good faith all reasonable
efforts to cause such registration statement to become effective and that the
Company's estimate of the date of filing such registration statement is made in
good faith; and (b) if the Company shall furnish to such holders a certificate
signed by the President of the Company stating that in the good faith the Board
of Directors it would be seriously to the Company or its shareholders for a
registration statement to be filed in the near future, then the Company's
obligation to use its best efforts to file a registration statement shall be
deferred for a period not to exceed six (6) months.
(e) Preparation and Filing. If and whenever the Company is under an
obligation pursuant to the provisions of this Section 9 to use its best efforts
to effect the registration of any Restricted Securities, the Company shall as
expeditiously as practicable:
(i) prepare and file with the Commission a registration
statement with respect to such securities and use its best efforts to cause such
registration statement to become and remain effective in accordance with clause
(ii) hereof;
(ii) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
at st nine (9) months and to comply with the provisions of the 1933 Act with
respect to the sale or other disposition of all Restricted Securities covered by
such registration statement;
(iii) furnish to each seller such number of copies of an
Summary prospectus or other prospectus, including a prelimia9ry prospectus' in
conformity with the requirements of the 33 Act, and such other documents as such
seller may reasonably request in order to facilitate the public sale or other
disposition of such Restricted Securities;
(iv) use its best efforts to register or qualify the
Restricted Securities covered by such registration statement under the
securities or "blue sky" laws of such jurisdictions as each such seller shall
reasonably request (provided, however, that, with respect to the incidental
registrations described in subsection (c) and the registrations
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<PAGE>
described in subsection (d) hereof, the Company shall not be required to
register to qualify such shares in any state or jurisdiction where the Company
does not itself propose to register or qualify shares it is selling, if any, nor
shall the Company consent to general service of process for all purposes in any
jurisdiction where it is not then qualified or to register or qualify such
shares in any jurisdiction which imposes an requirement of nontransfer of
promoter or other stock or which imposes any unreasonable burden on the Company
as the condition of such registration or qualification) and do any and all other
acts or things which may be necessary or advisable to enable such seller to
consummate the public sale or other disposition in such jurisdictions of such
securities;
(v) notify each seller of Restricted Securities covered by
such registration statement, at any time when a prospectus relating thereto
covered by such registration statement is required to be delivered under the
1933 Act within the appropriate period mentioned in clause (ii) hereof, of the
happening of any event as a result of which the prospectus included in such
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact in order to make the statements
therein in light of the circumstances under which they were made, not misleading
and at the request of such seller, prepare and furnish to such seller a
reasonable number of copies of a supplement to or an amendment of such
prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such shares, such prospectus shall not include an untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements therein in light of the circumstances under which they were made,
not misleading; and
(vi) furnish, at the request of any holder or holders
requesting registration of Restricted Securities Pursuant to this Section 9, on
the date that such Restricted Securities are delivered to the underwriters for
sale in Connection with a registration pursuant to this Section 9, if such
securities are being sold through underwriters, or, if thick securities are not
being sold through underwriters, on the date that the registration statement
with respect to such securities becomes effective (A) an opinion, dated such
date, of the counsel representing the Company for the purposes of such
registration, in form and substance as is customarily given to underwriters in
an underwritten public offering, addressed to the underwriters, if any, and to
the holder or holders making such request; and (B) a letter dated such date,
from the independent certified public accountants of the Company in form and
substance as is customarily given by independent certified public accountants of
the Company, in form and substance as is customarily given by independent
certified public accountants to underwriters in an underwritten public offering,
addressed to the underwriters, if any, and to the holder or holder making such
request.
(f) Expenses. All expenses incurred by the Company in complying with
Section 9(e), including, without limitation, all registration and filing fees
(including all expenses incident to filing with the National Association of
Securities Dealers, Inc.), fees and expenses, and fees and disbursements of
counsel, including with respect to each registration effected pursuant to
Section 9(c) and other than a registration on Form S-3
29
<PAGE>
filed pursuant to Section 9(d), and of the independent certified public
accountants (but excluding the compensation of regular employees of the Company
which shall be paid in any event by the Company) shall be paid by the Company
and the sellers in proportion to the amount of Common Stock to be registered by
the Company, and the sellers, respectively: provided, however, that with respect
to each registration effected pursuant to Section 9(c), the Company shall bear
the costs that the Company would otherwise incur in effecting such registration
(including the usual and ordinary audit costs with respect to such registration
but not including any costs specifically resulting from inclusion of the
Restricted Securities); provided further that in all events the Company shall
pay any such expenses of the sellers in the same proportion, if any, as any such
expenses were paid for by the Company with respect to any prior or then pending
registration of Common Stock being registered by Narasimhan P. or Leslie M.
Kannan, but provided further that in all events all underwriting discounts and
selling commissions and transfer taxes applicable to the Restricted Securities
covered by registrations effected pursuant to the aforesaid Subsections and all
expenses incurred by the Company in Complying with Section 9(e) (excluding the
costs incurred by the Company that would otherwise have been incurred in
complying with 1934 Act requirements) with respect to each registration effected
pursuant to Section 9(d) shall not be borne by the Company but shall be borne by
the seller or g) Indemnification.
(i) In the event of any registration of any Restricted
Securities under the 1933 Act or registration or qualification of any Restricted
Securities pursuant to this Section 9, the Company shall indemnify and hold
harmless the seller of such securities, each underwriter of such securities, if
any, each broker or any other person acting on behalf of such seller and each
other person, if any, who controls any of the foregoing persons, within the
meaning of the 1933 Act, against any losses, claims, damages or liabilities'
joint or several, to which any of the foregoing parsons may become subject under
the 1933 Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in any
registration statement under which such Restricted Securities were registered
under the 1933 Act, any preliminary prospectus or final prospectus contained
therein, or any amendment or supplement thereto, or any document prepared and/or
furnished by the Company incident to the registration or qualification of any
Restricted Securities pursuant hereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading or,
with respect to any prospectus, necessary to make the statements therein in
light of the circumstances under which they were made, not misleading, or any
violation by the Company of the 1933 Act or state securities or "blue sky" laws
applicable to the Company and relating to action or inaction required of the
Company in connection with such registration or qualification under such state
securities or "blue sky" laws and shall reimburse such seller, underwriter,
broker or other person acting on behalf of such seller and each such controlling
person for any legal or any other expenses reasonably incurred by any of them in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company shall not be liable in
any such case to the extent that any such loss, claim,
30
<PAGE>
damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission in said registration
statement' preliminary prospectus or prospectus or amendment or Supplement or
any document incident to the registration or qualification of any Restricted
Securities pursuant hereto, made in reliance upon and in conformity with written
information furnished to the Company through an instrument duly executed by such
seller or such underwriter specifically for Use in the preparation thereof, and
provided further that the Indemnity agreement contained in this Section (g)(i)
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability, or action if such settlement is effected without the consent of the
Company (which consent Shall not be unreasonably withheld).
(ii) Before Restricted Securities held by any prospective
seller shall be included in any registration pursuant to this subsection, such
prospective seller and any underwriter acting on its behalf shall have agreed to
indemnify and hold harmless (in the same manner and to the same extent as set
forth in the preceding paragraph) the Company, each director of the Company,
each officer of the Company who shall sign such registration statement and any
person who controls the Company within the meaning of the 1933 Act, and each
agent and any underwriter for the Company (within the meaning of the 1933 Act)
against any losses, claims, damages, or liabilities to which the Company or any
such director-officer, controlling person, agent, or underwriter may become
subject, under the 1933 Act or otherwise, insofar as such losses, claims,
damages, or liabilities (or actions in respect thereto) arise out of or are
based upon any untrue statement of any material fact contained in such
registration statement, including any preliminary prospectus or final prospectus
contained therein or any amendments or supplements thereto, or arise out of or
are based upon the omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, in
each case to the extent, but only to the extent, that such untrue statement or
omission was made in such registration statement, preliminary or final
prospectus, or amendments or supplements thereto, in reliance upon and in
conformity with written information furnished by such seller expressly for use
in connection with such registration; and each such seller will reimburse any
legal or other expenses reasonably incurred by the Company or any such director,
officer, controlling person, agent, or underwriter in connection with
investigating or defending any such loss, claim, damage, liability, or action;
provided, however, that the indemnity agreement contained in this Section
(g)(ii) shall not apply to amounts paid in settlement of any such as, claim,
damage, liability, or action if such settlement Is effected without the consent
of such seller (which consent shall not be unreasonably withheld).
(iii) Promptly after receipt by an indemnified party under
this paragraph of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against any indemnifying
party under this paragraph, notify the indemnifying party in writing of the
commencement thereof and the indemnifying party shall have the right to
participate in, and, to the extent the indemnifying party so desires, jointly
with any other indemnifying party similarly noticed, to assume the defense
thereof with Counsel mutually satisfactory to the parties. The failure to notify
an indemnifying party promptly of the commencement of any such
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<PAGE>
action, if prejudicial to his ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this
paragraphs but the omission so to notify the indemnifying party will not relieve
him of any liability that he may have to any indemnified party otherwise than
under this paragraph.
(h) Standoff Agreement. The Investor agrees in connection with any
registration of the Company's securities that, upon the request of the Company
and the underwriters managing any underwritten offering of the Company's
securities, not to sell, make any short sale of, loan, grant any option for the
purchase of, or otherwise dispose of any Restricted Securities (other than those
included in the registration) without the prior written consent of the Company
or such underwriters, as the case may be, for such period of time (not to exceed
one hundred eighty (180) days for the initial public offering by the Company or
ninety (90) days for any other offering) from the effective date of such
registration as the Company and the underwriters may specify.
(i) Certain Limitations in Connection with Future Grants of
Registration Rights. From and after the date of this Agreement, the Company
shall not enter into any agreement with any holder or prospective holder of any
securities of the Company providing for the granting to such holder of
registration rights unless such agreement: (a) includes the equivalent of
Section 9(h) as a term, and (b) includes a provision that, in the case of a
public offering involving an underwritten registered offering under Section 9,
limits the rights granted thereby to sharing pro rata (based upon the number of
shares of the Company that are entitled to registration rights) with the holders
of Restricted Securities in the portion of such offering determined by the
underwriters in the manner described in the proviso to Section 9(c) to be
available for sales by holders other than the Company.
(j) 1933 Act Registration Statements. Except for securities of the
Company registered on Excluded Forms, and provided the Investor is then a
"controlling person" (as such person is defined under the 1933 Act) the Company
shall not file any registration statement under the 1933 Act covering any
securities unless it shall first have given the Investor written notice thereof.
The Company further covenants that the Investor shall have the right, at any
time when they may be deemed to be a controlling person of the Company, to
Participate in the preparation of such registration statement and to request the
insertion therein of material furnished to bee Company in writing which in the
Investor's judgment should e included. In connection with any registration
statement referred to in this subsection, the Company will indemnify, to the
extent permitted by law, the Investor, and its partners and employees' and each
person, if any, who controls the Investor within the meaning of Section 15 of
the 1933 Act, against all losses, claims, damages, liabilities and expenses
caused by any untrue statement or alleged untrue statement of a material fact
contained in any registration statements or prospectus or any preliminary
prospectus or any amendment thereof or supplement thereto or caused by any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein in light of the
circumstances under which they were made not misleading, except insofar as such
losses, claims, damages, liabilities or expenses are caused by any untrue
statement or alleged untrue statement or omission or alleged omission contained
in written information furnished to the Company by the Investor expressly for
use in such registration statement. If, in connection with any such registration
statement, the Investor shall furnish written information to the Company
expressly for use in the registration statement, the Investor will indemnify, to
the extent permitted by law, the Company, its directors, each of its officers
who sign such registration statement and each person, if any, who controls the
Company within the meaning of the 1933 Act against all losses, claims, damages,
liabilities and expenses caused by any untrue statement or
32
<PAGE>
alleged untrue statement of a material fact or any omission or alleged omission
of a material fact required to be stated in the registration statement or
prospectus or any preliminary prospectus or any amendment thereof or supplement
thereto or necessary to make the statements therein in light of the
circumstances under which they were made not misleading, but only to the extent
that such untrue statement or alleged untrue statement or such omission or
alleged omission is contained in information so furnished in writing by the
Investor for use therein. If the Investor sells Restricted Securities in a
registration statement filed by the Company, the Investor shall furnish to the
Company and such other parties as the Company may designate such information and
execute such documents regarding the Restricted Securities held by and to be
sold or otherwise disposed of by the Investor as the Company shall request.
(k) Reports under Securities Exchange Act of 1934. With a view to
making available to the holders of Restricted Securities the benefits of Rule
144 promulgated under the 1933 Act and any other rule or regulation of the
Commission that may at any time permit a holder to sell securities of the
Company to the public without registration, the Company agrees to use its best
efforts to:
(i) make and keep public information available, as those terms
are understood and defined in Rule 144, at all times subsequent to ninety (90)
days after the effective date Of the first registration statement covering an
underwritten Public offering filed by the Company;
(ii) file with the Commission in a timely manner all reports
and other documents required of the Company under the 1933 Act and the 1934 Act:
and
(iii) furnish to any holder so long as such holder owns any of
the Restricted Securities forthwith upon request a written statement by the
Company that it has complied with the reporting requirements of Rule 144 (at any
time after ninety (90) days after the effective date of said first registration
statement filed by the Company), and of the 1933 Act and the 1934 Act (at any
time after it has become subject to such reporting requirements), a copy of the
most recent annual or quarterly report of the Company, and such other reports
and documents of filed by the Company as may be reasonably requested in availing
any holder of any rule or regulation of the commission permitting the selling of
any such securities without registration.
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<PAGE>
Provided, however, that the obligations of the Company under this
subsection 9(k) shall be suspended during any period during which its compliance
with such obligations is not required by Rule 144 to enable the holders of-the
Restricted Securities to sell such Restricted Securities, without limitation on
amount.
10. GENERAL.
-------
As further and special provisions set forth under this Agreement, the
parties hereto further warrant, covenant, contract and agree each with the other
as follows:
(a) Entire Agreement. This Investment Agreement, the Exhibits and
Schedules hereto and other documents referred to herein constitute the entire
understanding among the parties.
(b) Survival of Agreements and Representations and Warranties. All
agreements and all representations and warranties contained herein or made in
writing by the Company In connection herewith, to the extent applicable, shall
Survive the execution and delivery of this Investment Agreement and shall
continue until the obligations of the Company under this Agreement have been
fully satisfied.
(c) No Waiver. No delay by or on behalf of the Investor in exercising
any rights conferred hereunder, and no course of dealing between the Investor
and the Company shall operate as a waiver of any right granted hereunder, unless
expressly waived in writing by the party whose waiver is alleged.
(d) Binding Effect; Assignments. All covenants, representations,
warranties and other stipulations in this Investment Agreement, or in the
Employment Agreement, the Employment Agreements between the Company and its key
Employees, or in the Shareholders Agreement Supplement, given by or on behalf of
any of the parties hereto, shall bind and inure to the benefit of the respective
successors, heirs, personal representatives and assigns of the parties hereto.
Neither this Agreement or any of the rights, privileges or obligations specified
herein may be assigned to any other Person by any party without the express
prior written consent of the other party hereto.
(e) Initial Holder. The Company shall be entitled to treat and deal
with the Investor, and shall not be required to recognize any other Person as
the holder of the Preferred Stock or Common Stock issuable pursuant to the
exchange thereof pursuant to the terms of this Agreement, except after
production of the Preferred Stock or of the Common Stock duly endorsed for
transfer, together with such documentation as the Company may reasonably require
concerning compliance with Federal or State securities laws, or after receipt by
the Company of written notice from the Person theretofore entitled to be treated
as the holder thereof advising the Company of the transfer of such Preferred
Stock pursuant to the terms of this Agreement or Common Stock or any portion
thereof to such other Person and stating the latter's address, together with
such documentation as the Company may reasonably require concerning compliance
with Federal or State securities laws.
<PAGE>
(f) Cumulative Powers. No remedy herein conferred upon one Company, the
Investor or any holder of the Preferred Stock or Common Stock issuable pursuant
to the exchange thereof pursuant to the terms of this Agreement is intended to
be exclusive of any other remedy, and each such remedy shall be cumulative and
in addition to every other remedy given hereunder or now or hereafter existing
at law, or in equity or by statute or otherwise.
(g) Loss of Securities. Upon:
------------------
(i) receipt of evidence satisfactory to the Company of lost, theft,
mutilation or destruction of the Preferred Stock or the certificate(s)
representing the Common Stock Issued upon exchange of the Preferred Stock
pursuant to the terms of this Agreement, and
(ii) in the case of any such loss, theft, or destruction upon
delivery of indemnity in such form and amount as shall be reasonably
satisfactory to the Company, or in the event of such mutilation, upon surrender
and cancellation of the Preferred Stock or such certificates representing such
Common Stock, the Company will make and deliver new certificate(s) representing
such Preferred Stock or Common Stock, in lieu of such lost, stolen, mutilated or
destroyed certificate. In addition, upon request of any holder of Preferred
Stock, the Common Stock or other securities of the Company now or hereafter
issued by the Company to the Investor, and upon surrender of certificates
evidencing such securities to the Company and compliance with any restrictive
legends' the Company will reissue, in lesser denominations to parties designated
by such holder, certificates in the equivalent amounts of such other securities
surrendered.
(h) Communications. All communications and notices provided for
hereunder shall be sent by registered or certified mail, to the Investor and to
the Company at their respective addresses set forth on Schedule 10(h) attached
hereto, or to such other address with respect to any party as such party shall
notify the other party hereto in writing. Any notice required to be given
hereunder by one party to another shall be deemed to have been given when
deposited in certified or registered form in the United States mail, properly
addressed to such other party and with proper first-class postage and postage
for certification or registration affixed thereto. Except as otherwise provided
for herein, all requests for disclosure or other provision of information to be
made or otherwise given by the Company shall be completed no later than ten (10)
business days following the giving of a written request therefor in the manner
described in this subsection.
(i) Governing Law. This Agreement shall be governed in all respects by
the laws of the State of Delaware.
34
<PAGE>
(j) Headings. The descriptive section headings herein have been
inserted for convenience only and shall not be deemed to limit or otherwise
affect the construction of any provisions hereof.
(k) Multiple Originals. The Agreement may be executed simultaneously in
two or more counterparts, each of which shall be deemed an original, and it
shall not be necessary in making proof of this Agreement to produce or account
for more than one such counterpart.
(l) Mutual Cooperation and General Agreements. The parties hereto agree
to take such further act- - -d enter Into such further agreements as may be
reasonably necessary and appropriate to effectuate the intent of the parties
contemplated hereby
(m) Amendment or Waiver. This Agreement may be amended, and the Company
may take any action herein prohibited, or omit to perform any act herein
required to be performed by it, if the Company shall obtain the prior written
consent of the Investor to such amendment, action or omission to act. Any such
consent to any such action or omission to act may be granted prior to or after
such action or omission to act. Each holder of the Preferred Stock or any Common
Stock issuable pursuant to the exchange thereof pursuant to the terms of this
Agreement, at the time or times thereafter outstanding, shall be bound by any
consent authorized by this Section, whether or not the certificates evidencing
such Preferred or Common Stock shall have been marked to indicate such consent.
11. TERMINATION.
-----------
Notwithstanding any provision to the contrary herein, except as
specifically noted under Sections 2(c), 7(b), 7(c), 8, 9(c) and 9(d) of this
Agreement, all rights and privileges of Investor and obligations of the Company
hereunder, shall terminate no later than upon the occurrence of any of the
following events:
(a) The first registration under the 1933 Act and sale of Common Stock
to the public; or
(b) The sale of a Controlling Interest in the Company to an Unrelated
Entity; or
(c) The Investor's interest in the Company being decreased to less than
40 percent of the interest that the Investor initially had in the Company as of
the Second Closing or, if the Second Closing did not occur, as of the First
Closing.
35
<PAGE>
IN WITNESS WHEREOF, the parties have caused this
Agreement to be duly executed and delivered by their respective duly authorized
officers, their respective seals to be hereunto affixed, all by authority of
their respective Board of Directors or general partners, as the case may be, as
of the day and year first above written.
ATTEST: IMSATT CORPORATION
By:
- --------------------------- ------------------------------
Leslie M. Kannan, Narasimhan P. Kannan,
Secretary Chairman of the Board and
Chief Executive Officer
(Corporate Seal)
INTERSOUTH PARTNERS
By: Intersouth Associates,
General Partner
By:
-------------------------------
Dennis J. Dougherty,
General Partner of
Intersouth Associates
WARRANT AGREEMENT dated as of March 22, 1995 between UNIVERSITY
ONLINE, INC., a Delaware corporation (the "Company"), and SPENCER TRASK
SECURITIES INCORPORATED (the "Agent").
W I T N E S S E T H
WHEREAS, the Agent has agreed, pursuant to the
Placement Agency Agreement dated as of November 22, 1994, between the Agent and
the Company (the "Agency Agreement"), to act as the placement agent in
connection with the Company's proposed private placement (the "Offering") of up
to 50 Units (capitalized terms not otherwise defined herein shall be as defined
in the Agency Agreement); and
WHEREAS, the Company is required to issue to the Agent warrants
("Warrants") to purchase a number of shares of Common Stock, par value $.01 per
share, of the Company ("Common Stock"), as set forth below.
NOW, THEREFORE, in consideration of the premises, the payment by
the Agent to the Company of ONE DOLLAR, the agreements herein set forth and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
1. Grant. The Agent is hereby granted the right, as evidenced by
the Warrants, to purchase the number of shares of Common Stock ("Warrant
Shares") equal to ten (10%) percent of the number of shares of Common Stock into
which the shares of Preferred Stock contained in the Units sold in the Offering
are convertible, as such number may be adjusted pursuant hereto at any time from
the date of the Final Closing until 5:30 p.m., New York time, on the later of
(i) the seventh anniversary of the date of Final Closing and (ii) the third
anniversary of the closing date of the Company's initial public offering
occurring within such seven-year period (the "Warrant Exercise Term"), at the
Exercise Price. "Exercise Price" shall initially mean $0.75 per share of Common
Stock as such price may be, from time to time, adjusted pursuant to Section 7
hereof.
2. Warrant Certificates. On each Closing Date, the Company shall
deliver to the Agent or the Agent's designees, warrant certificates (the
"Warrant Certificates") evidencing Warrants to purchase the appropriate number
of Warrant Shares based on the number of Units sold on such Closing Date. Each
Warrant Certificate delivered and to be delivered pursuant to this Agreement
shall be in the form set forth in Exhibit A, attached hereto and made a part
hereof, with such appropriate insertions, omissions, substitutions, and other
variations as required or permitted
<PAGE>
2
by this Agreement and shall be delivered without tax, cost or other expense of
any kind to the Agent.
3. Exercise of Warrant.
3.1 Method of Exercise. A Warrant Certificate may be exercised by
the Agent and/or other registered holders (collectively, the "Holders") thereof
by surrender of such Warrant Certificate with the annexed Form of Election to
Purchase Pursuant to Section 3.1 duly executed, together with payment of the
Exercise Price by certified or official bank check in New York Clearing House
funds for the Warrant Shares purchased, at the Company's principal offices at
105 West Broad Street, Suite 301, Falls Church, Virginia 22046. Warrant
Certificates may be exercised to purchase all or part of the Warrant Shares
covered thereby (but not for fractional shares of Common Stock). In the event
that any Warrant Certificate is exercised to purchase less than all the Warrant
Shares covered thereby, the Company shall cancel said Warrant Certificate upon
the surrender thereof and shall execute and deliver a new Warrant Certificate of
like tenor for the balance of the Warrant Shares.
3.2 Exercise by Surrender of Warrant. Warrants may also be
exercised, in full or in part, without cash payment, at any time after
registration of the Common Stock under the Securities Exchange Act of 1934 (the
"Exchange Act"), by surrendering the Warrant Certificate with the annexed Form
of Election to Purchase Pursuant to Section 3.2 in exchange for the number of
shares of Common Stock equal to the product of (x) the number of shares as to
which the Warrants are being exercised multiplied by (y) a fraction, the
numerator of which is the Market Price (as hereinafter defined) of the Common
Stock minus the Exercise Price and the denominator of which is such Market
Price. For the purposes of this Agreement, the phrase "Market Price" at any date
shall be deemed to be the last reported sale price, or, in case no such reported
sale takes place on such day, the average of the last reported sale prices for
the last five trading days, in either case as officially reported by the
principal securities exchange on which the Common Stock is listed or admitted to
trading, or, if the Common Stock is not listed or admitted to trading on any
national securities exchange, the average closing bid price as furnished by the
National Association of Securities Dealers, Inc. ("NASD") through The Nasdaq
Stock Market ("Nasdaq") or a similar organization if Nasdaq is no longer
reporting such information, or if the Common Stock is not quoted on Nasdaq or
such a similar organization, as determined in good faith by resolution of the
Board of Directors of the Company, based on the best information available to
it.
<PAGE>
3
4. Issuance of Certificates. Upon the exercise of the Warrants,
the issuance of certificates for the Warrant Shares shall be made within five
(5) business days thereafter without charge to the Holder thereof including,
without limitation, any tax which may be payable in respect of the issuance
thereof. Such certificates shall (subject to the provisions of Sections 5 and 6
hereof) be issued in the name of, or in such names as may be directed by, the
Holder thereof; provided, however, that the Company shall not be required to pay
any tax which may be payable in respect of any transfer involved in the issuance
and delivery of any such certificates in a name other than that of the Holder
and the Company shall not be required to issue or deliver such certificates
unless or until the person or persons requesting the issuance thereof shall have
paid to the Company the amount of any such tax or shall have established to the
satisfaction of the Company that such tax is not due or has been paid. The
Warrant Certificates and the certificates representing the Warrant Shares shall
be duly executed on behalf of the Company. Warrant Certificates shall be dated
the date of initial issuance, division, exchange, substitution or transfer.
5. Transfer of Securities. The Holders covenant and agree that
they are acquiring the Warrants and the Warrant Shares (collectively, the
"Warrant Securities") for their own account, for investment, and not with a view
to distribution thereof. Holders of the Warrants or Warrant Shares may transfer
such Warrants or Warrant Shares only in compliance with applicable Federal and
state securities laws. In order for any transferee of any Warrants or Warrant
Shares to receive any of the benefits of this Agreement, the Company must have
received notice of such transfer, at the address in Section 3.1 above, in the
form of assignment attached hereto, accompanied by an opinion of counsel, which
opinion and counsel shall be reasonably acceptable to the Company, that an
exemption from registration of such Warrants or Warrant Shares under the
Securities Act of 1933, as amended, (the "1933 Act") and under any applicable
state securities laws is available. Any transferee must also covenant and agree
that it is acquiring such Warrants or Warrant Shares, as the case may be, as an
investment and not with a view to distribution thereof.
6. Registration.
6.1 No Registration Under the 1933 Act. The Warrant Securities
have not been registered under the 1933 Act or any state securities or "blue
sky" laws and may not be resold except pursuant to an effective registration
statement thereunder or exemption therefrom. The Warrant
<PAGE>
4
Certificates and certificates representing the Warrant Shares shall bear the
legend set forth below:
"The securities represented by this certificate have not been registered
under the Securities Act of 1933 or under any state securities or "blue
sky" laws, and may not be offered or sold except pursuant to (i) an
effective registration statement under such Act and such laws, or (ii)
an opinion of counsel, if such opinion shall be reasonably satisfactory
to the issuer, that an exemption from registration under such Act and
laws is available."
6.2 Piggyback Registration. (a) If, at any time commencing after
the date hereof until the later of the seventh anniversary of the First Closing
or the end of the Warrant Exercise Term, the Company proposes to register any of
its equity securities under the 1933 Act (other than in connection with a merger
or consolidation or pursuant to Form S-8, S-4 or comparable registration
statement) it will give written notice, at least thirty (30) days prior to the
filing of each such registration statement, to all Holders of Warrant Securities
of its intention to do so. If the Holders notify the Company within twenty (20)
days after receipt of any such notice of its or their desire to include any
Warrant Securities (whether issued or issuable) in such proposed registration
statement, the Company shall, subject to the provisions set forth below, afford
such Holders the opportunity to have any such Warrant Securities registered
under such registration statement. If such registration is an underwritten
registration, and the managing underwriters advise the Company in writing that
in their opinion the number of securities requested to be included in such
registration exceeds the number which can be sold in such offering without
adversely affecting such underwriters' ability to effect an orderly distribution
of such securities, the Company will give the requesting Holders notice of such
fact and include in such registration first, the securities proposed to be sold
by the Company and, second, the Warrant Securities requested to be included in
such registration. To the extent that the number of Warrant Securities to be
offered pursuant to such registration is reduced in accordance with the advice
of the underwriters, the Warrant Securities will be offered by the Holders
thereof on a pro rata basis with respect to the aggregate number of Warrant
Securities to be offered. Notwithstanding anything in this Section 6.2(a) to the
contrary, all Warrant Securities requested to be included in such registration
shall be included in such registration statement and may be offered 90 days
following the effective date of the registration statement.
<PAGE>
5
(b) Notwithstanding the provisions of this Section 6.2, the
Company shall have the right at any time after it shall have given written
notice pursuant to this Section 6.2 (irrespective of whether a written request
for inclusion of any such securities shall have been made) to elect not to file
any such proposed registration statement, or to withdraw the same after filing
but prior to the effective date thereof.
6.3 Demand Registration.
So long as the Company shall have any of its securities
registered under the 1933 Act or the Exchange Act, at any time commencing after
the date hereof until the end of the Warrant Exercise Term (except during the
ninety (90) days following the effective date of the registration statement with
respect to the Company's initial public offering), a Majority of Holders (as
defined in Section 6.4(l) below) shall have the right (which right is in
addition to the registration rights under Section 6.2 hereof), exercisable by
written notice to the Company, to have the Company prepare and file with the
Securities and Exchange Commission (the "Commission"), on two occasions, a
registration statement and such other documents, including a prospectus, as may
be necessary in the opinion of both counsel for the Company and counsel for the
Agent, in order to comply with the provisions of the 1933 Act, and all
applicable state securities or "blue sky" laws, so as to permit a public
offering and sale of the Warrant Securities for one hundred twenty (120) days by
such Majority of Holders. The Company shall give notice of such registration
request within ten (10) days of receipt thereof to all other Holders of Warrants
or Warrant Shares and shall include in such registration statement the Warrant
Securities of any such other Holders who notify the Company within ten (10) days
after receiving notice from the Company.
6.4 Covenants of the Company With Respect to Registration. In
connection with any registration of Warrant Securities under Section 6.2 or 6.3
hereof, the Company covenants and agrees as follows:
(a) The Company shall use its best efforts to file a registration
statement within forty-five (45) days of receipt of any appropriate demand
therefor, shall use its best efforts to have any registration statement declared
effective at the earliest possible time but at least within one hundred twenty
(120) days of receipt of such demand, and shall furnish each Holder desiring to
sell Warrant Securities such number of prospectuses as shall be reasonably
requested.
<PAGE>
6
(b) The Company shall pay all costs (excluding fees and expenses
of Holder(s)' counsel and any underwriting or selling commissions or other
charges of any underwriter or broker-dealer acting on behalf of Holder(s)), fees
and expenses in connection with all registration statements filed pursuant to
Sections 6.2 and the first registration statement filed pursuant to Section
6.3(a) hereof including, without limitation, the Company's legal and accounting
fees, printing expenses, blue sky fees and expenses. Notwithstanding the
foregoing, the Holder(s) shall pay all costs, fees and expenses in connection
with the second registration statement filed pursuant to Section 6.3(a) on a pro
rata basis with respect to the number of Warrant Securities in respect of which
they are requesting registration.
(c) The Company shall take all necessary action which may be
required in qualifying or registering the Warrant Securities included in a
registration statement for offering and sale under the securities or blue sky
laws of such states as reasonably are requested by the relevant Holder(s)
thereof, provided that the Company shall not be obligated to execute or file any
general consent to service of process or to qualify as a foreign corporation to
do business under the laws of any such jurisdiction.
(d) The Company shall indemnify the Holder(s) of the Warrant
Securities to be sold pursuant to any registration statement and each person, if
any, who controls such Holders within the meaning of Section 15 of the 1933 Act
or Section 20(a) of the Exchange Act, against any loss, claim, damage, expense
or liability (including all expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which any of them may
become subject to the same extent and with the same effect and subject to the
same qualifications and limitations as the provisions pursuant to which the
Company has agreed to indemnify the Agent contained in Section 7(a) of the
Agency Agreement.
(e) The Holder(s) of the Warrant Securities to be sold pursuant
to a registration statement, and the successors and assigns of such Holder(s),
shall severally, and not jointly, indemnify the Company, its officers and
directors and each person, if any, who controls the Company within the meaning
of Section 15 of the 1933 Act or Section 20(a) of the Exchange Act, against any
loss, claim, damage, expense or liability (including all expenses reasonably
incurred in investigating, preparing or defending against any claim whatsoever)
to which any of them may become subject under the 1933 Act, the Exchange Act or
otherwise, arising from written information furnished by or on behalf
<PAGE>
7
of such Holder(s), or their successors and assigns, for specific inclusion in
such registration statement to the same extent and with the same effect and
subject to same qualifications and limitations as the provisions contained in
Section 7(b) of the Agency Agreement pursuant to which the Agent has agreed to
indemnify the Company.
(f) Nothing contained in this Agreement shall be construed as
requiring the Holder(s) to exercise their Warrants prior to the initial filing
of any registration statement or the effectiveness thereof.
(g) The Company shall not permit any other registration statement
to be filed during the effectiveness of a registration statement filed pursuant
to Section 6.3 hereof (other than a registration statement in connection with a
merger or consolidation or pursuant to Form S-8, S-4 or comparable registration
statement), without the prior written consent of the Holders of a majority of
the Warrant Securities being registered.
(h) The Company shall use its best efforts to cause to be
furnished to each Holder participating in the offering and to each underwriter,
if any, a signed counterpart, addressed to such Holder or underwriter, of (i) an
opinion of counsel to the Company, dated the effective date of such registration
statement (and, if such registration includes an underwritten public offering,
an opinion dated the date of the closing under the underwriting agreement), and
(ii) a "cold comfort" letter dated the effective date of such registration
statement (and, if such registration includes an underwritten public offering, a
letter dated the date of the closing under the underwriting agreement) signed by
the independent public accountants who have issued a report on the Company's
financial statements included in such registration statement, in each case
covering substantially the same matters with respect to such registration
statement (and the prospectus included therein) and, in the case of such
accountants' letter, with respect to events subsequent to the date of such
financial statements, as are customarily covered in opinions of issuer's counsel
and in accountants' letters delivered to underwriters in underwritten public
offerings of securities.
(i) The Company shall as soon as practicable after the effective
date of the registration statement, and in any event within 15 months
thereafter, make "generally available to its security holders" (within the
meaning of Rule 158 under the 1933 Act) an earnings statement (which need not be
audited) complying with Section 11(a) of the 1933 Act and covering a period of
at least twelve (12)
<PAGE>
8
consecutive months beginning after the effective date of the registration
statement.
(j) The Company shall deliver promptly to each Holder
participating in the offering who so requests and to the managing underwriter,
if any, copies of all correspondence between the Commission and the Company, its
counsel or auditors and permit each Holder and underwriter at its own cost and
expense to do such investigation, upon reasonable advance notice, and upon
entering into a confidentiality agreement, in form and substance reasonably
acceptable to the Company, with the Holder and such underwriter, with respect to
information contained in or omitted from the registration statement as it deems
reasonably necessary to comply with applicable securities laws or rules of the
NASD. Such investigation shall include access to books, records and properties
and opportunities to discuss the business of the Company with its officers and
independent auditors, all to such reasonable extent and at such reasonable times
and as often as any such Holder shall reasonably request as it deems necessary
to comply with applicable securities laws or NASD rules.
(k) If requested in connection with any registration under
Section 6.3 hereof, the Company shall enter into an underwriting agreement with
the managing underwriter selected for such underwriting by Holders holding a
majority of the Warrant Securities requested to be included in such underwriting
and reasonably satisfactory to the Company. Such agreement shall be satisfactory
in form and substance to the Company, each Holder and such managing underwriter,
and shall contain such representations, warranties and covenants by the Company
and such other terms as are customarily contained in agreements of that type
used by the managing underwriter. The Holders shall be parties to any
underwriting agreement relating to an underwritten sale of their Warrant
Securities and may, at their option, require that any or all the
representations, warranties and covenants of the Company to or for the benefit
of such underwriter shall also be made to and for the benefit of such Holders.
Such Holders shall not be required to make any representations or warranties to
or agreements with the Company or the underwriter except as they may relate to
such Holders and their intended methods of distribution.
(l) For purposes of this Agreement, the term "Majority of
Holders" shall mean Holders holding in excess of fifty (50%) percent of the then
outstanding Warrant Shares (assuming, for purposes hereof, that all Warrants
have been exercised), that (i) are not held by the Company, an affiliate,
officer, creditor, employee or agent thereof
<PAGE>
9
or any of their respective affiliates, members of their family, persons acting
as nominees or in conjunction therewith; and (ii) have not been resold to the
public pursuant to a registration statement filed with the Commission under the
1933 Act. Notwithstanding the foregoing, subclause (i) above shall not exclude
Warrants held by the Agent or any of the Agent's affiliates.
7. Adjustments to Exercise Price and Number of Securities.
7.1 Computation of Adjusted Exercise Price. Except as hereinafter
provided, in case the Company shall at any time after the date hereof issue or
sell any shares of Common Stock (other than the issuances or sales referred to
in Section 7.7 hereof), including shares held in the Company's treasury and
shares of Common Stock issued upon the exercise of any options, rights or
warrants, to subscribe for shares of Common Stock and shares of Common Stock
issued upon the direct or indirect conversion or exchange of securities for
shares of Common Stock, for a consideration per share less than the Exercise
Price in effect immediately prior to the issuance or sale of such shares or the
Market Price per share of Common Stock on the day immediately prior to such
issuance or without consideration, then forthwith upon such issuance or sale,
the Exercise Price shall (until another such issuance or sale) be reduced to the
lower of the price (calculated to the nearest full cent), determined as follows:
(1) by dividing (i) an amount equal to the sum of (a) the
number of shares of Common Stock outstanding immediately prior to
such issuance or sale multiplied by the then existing Exercise
Price, and (b) the aggregate amount of the consideration, if any,
received by the Company upon such issuance or sale by (ii) the
total number of shares of Common Stock outstanding immediately
after such issuance or sale; and
(2) by multiplying the Exercise Price in effect
immediately prior to such issuance or sale by a fraction, the
numerator of which shall be the sum of (a) the number of shares
of Common Stock outstanding immediately prior to such issuance or
sale multiplied by the Market Price per share of Common Stock on
the day immediately prior to such issuance or sale, plus (b) the
aggregate amount of the consideration received by the Company
upon such issuance or sale, and the denominator of which shall be
the product of (x) the total number
<PAGE>
10
of shares of Common Stock outstanding immediately after such
issuance or sale, multiplied by (y) the Market Price per share of
Common Stock on the day immediately prior to such issuance or
sale.
In no event shall the Exercise Price be adjusted pursuant to this
computation to an amount in excess of the Exercise Price in effect immediately
prior to such computation, except in the case of a combination of outstanding
shares of Common Stock, as provided by Section 7.3 hereof.
For the purposes of any computation to be made in accordance with
this Section 7.1, the following provisions shall be applicable:
(i) In case of the issuance or sale of shares of Common Stock for
a consideration part or all of which shall be cash, the amount of the cash
consideration therefor shall be deemed to be the amount of cash received by the
Company for such shares or, if shares of Common Stock are offered by the Company
for subscription, the subscription price, or, if either of such securities shall
be sold to underwriters or dealers for public offering without a subscription
offering, the initial public offering price, in all cases before deducting
therefrom any compensation paid or discount allowed in the sale, underwriting or
purchase thereof by underwriters or dealers or others performing similar
services, or any expenses incurred in connection therewith but less any amounts
payable to security holders or any affiliate thereof, including without
limitation, in connection with any employment agreement, royalty, consulting
agreement, covenant not to compete, earnout or contingent payment right or
similar arrangement, agreement or understanding, whether oral or written; all
such amounts shall be valued at the aggregate amount payable thereunder whether
such payments are absolute or contingent and irrespective of the period or
uncertainty of payment, the rate of interest, if any, or the contingent nature
thereof.
(ii) In case of the issuance or sale (otherwise than as a dividend
or other distribution on any stock of the Company) of shares of Common Stock for
a consideration part or all of which shall be other than cash, the amount of the
consideration therefor other than cash shall be deemed to be the value of such
consideration as determined in good faith by the Board of Directors of the
Company.
(iii) Shares of Common Stock issuable by way of dividend or other
distribution on any stock of the Company shall be deemed to have been issued
immediately after the
<PAGE>
11
opening of business on the day following the record date for the determination
of stockholders entitled to receive such dividend or other distribution and
shall be deemed to have been issued without consideration.
(iv) The reclassification of securities of the Company, other than
shares of Common Stock, into other securities including shares of Common Stock
shall be deemed to involve the issuance of such shares of Common Stock for a
consideration other than cash immediately prior to the close of business on the
date fixed for the determination of security holders entitled to receive such
shares, and the value of the consideration allocable to such shares of Common
Stock shall be determined as provided in subsection (ii) of this Section 7.1.
(v) The number of shares of Common Stock at any one time
outstanding shall include the aggregate number of shares issued or issuable
(subject to readjustment upon the actual issuance thereof) upon the exercise of
options, rights, warrants and upon the conversion or exchange of convertible or
exchangeable securities.
7.2 Options, Rights, Warrants and Convertible and Exchangeable
Securities.
In case the Company shall at any time after the date hereof issue
options, rights or warrants to subscribe for shares of Common Stock other than
as set forth in Section 7.7, or issue any securities convertible into or
exchangeable for shares of Common Stock, for a consideration per share less than
the Exercise Price or Market Price in effect immediately prior to the issuance
of such options, rights or warrants, or such convertible or exchangeable
securities, or without consideration, the Exercise Price in effect immediately
prior to the issuance of such options, rights or warrants, or such convertible
or exchangeable securities, as the case may be, shall be reduced to a price
determined by making a computation in accordance with the provisions of Section
7.1 hereof, provided that:
(a) The aggregate maximum number of shares of Common Stock, as
the case may be, issuable under such options, rights or warrants shall be deemed
to be issued and outstanding at the time such options, rights or warrants were
issued, and for a consideration equal to the minimum purchase price per share
provided for in such options, rights or warrants at the time of issuance, plus
the consideration (determined in the same manner as consideration received on
the issue or sale of shares in accordance
<PAGE>
12
with the terms of the Warrants), if any, received by the Company for such
options, rights or warrants.
(b) The aggregate maximum number of shares of Common Stock
issuable upon conversion or exchange of any convertible or exchangeable
securities shall be deemed to be issued and outstanding at the time of issuance
of such securities, and for a consideration equal to the consideration
(determined in the same manner as consideration received on the issue or sale of
shares of Common Stock in accordance with the terms of the Warrants) received by
the Company for such securities, plus the minimum consideration, if any,
receivable by the Company upon the conversion or exchange thereof.
(c) If any change shall occur in the price per share provided for
in any of the options, rights or warrants referred to in subsection (a) of this
Section 7.2, or in the price per share at which the securities referred to in
subsection (b) of this Section 7.2 are convertible or exchangeable, such
options, rights or warrants or conversion or exchange rights, as the case may
be, shall be deemed to have expired or terminated on the date when such price
change became effective in respect of shares not theretofore issued pursuant to
the exercise or conversion or exchange thereof, and the Company shall be deemed
to have issued upon such date new options, rights or warrants or convertible or
exchangeable securities at the new price in respect of the number of shares
issuable upon the exercise of such options, rights or warrants or the conversion
or exchange of such convertible or exchangeable securities.
7.3 Subdivision and Combination. In case the Company shall at any
time subdivide or combine the outstanding shares of Common Stock, the Exercise
Price shall forthwith be proportionately decreased in the case of subdivision or
increased in the case of combination.
7.4 Adjustment in Number of Shares. Upon each adjustment of the
Exercise Price pursuant to the provisions of this Section 7, the number of
Warrant Shares issuable upon exercise of the Warrants shall be adjusted to the
nearest full amount by multiplying a number equal to the Exercise Price in
effect immediately prior to such adjustment by the number of Warrant Shares
issuable upon exercise of the Warrants immediately prior to such adjustment and
dividing the product so obtained by the adjusted Exercise Price.
7.5 Definition of Common Stock. For the purpose of this
Agreement, the term "Common Stock" shall mean (i) the class of stock designated
as Common Stock in the Certif-
<PAGE>
13
icate of Incorporation of the Company as such Certificate of Incorporation may
be amended as of the date hereof, or (ii) any other class of stock resulting
from successive changes or reclassifications of such Common Stock consisting
solely of changes in par value, or from par value to no par value, or from no
par value to par value.
7.6 Merger or Consolidation. In case of any consolidation of the
Company with, or merger of the Company with, or merger of the Company into,
another corporation (other than a consolidation or merger which does not result
in any reclassification or change of the outstanding Common Stock), the
corporation formed by such consolidation or merger shall execute and deliver to
each Holder a supplemental warrant agreement providing that the Holder of each
Warrant then outstanding or to be outstanding shall have the right thereafter
(until the expiration of such Warrant) to receive, upon exercise of such
Warrant, the kind and amount of shares of stock and other securities and
property receivable upon such consolidation or merger, by a holder of the number
of shares of Common Stock of the Company for which such Warrant might have been
exercised immediately prior to such consolidation or merger. Such supplemental
warrant agreement shall provide for adjustments which shall be identical to the
adjustments provided in this Section 7. The above provision of this subsection
7.6 shall similarly apply to successive consolidations or mergers.
7.7 No Adjustment of Exercise Price in Certain Cases. No
adjustment of the Exercise Price shall be made:
(a) Upon the issuance and sale of Preferred Stock pursuant to the
offering to which the Agency Agreement relates or the shares of Common Stock
issuable upon conversion of such Preferred Stock.
(b) Upon the issuance or sale of the Warrants or the Warrant
Shares issuable upon the exercise of the Warrants or any options or warrants
outstanding on the date hereof or reserved for issuance under the Company's
Employee Stock Ownership Plan as of the date hereof.
(c) If the amount of said adjustment shall be less than $.02 per
Warrant Share; provided, however, that in such case any adjustment that would
otherwise be required then to be made shall be carried forward and shall be made
at the time of and together with the next subsequent adjustment which, together
with any adjustment so carried forward, shall amount to at least $.02 per
Warrant Share.
<PAGE>
14
7.8 Dividends and Other Distributions. In the event that the
Company shall at any time prior to the exercise of all Warrants declare a
dividend (other than a dividend consisting solely of shares of Common Stock) or
otherwise distribute to its stockholders any assets, property, rights, evidences
of indebtedness, securities (other than shares of Common Stock), whether issued
by the Company or by another, or any other thing of value, the Holders of the
unexercised Warrants shall thereafter be entitled, in addition to the shares of
Common Stock or other securities and property receivable upon the exercise
thereof, to receive, upon the exercise of such Warrants, the same property,
assets, rights, evidences of indebtedness, securities or any other thing of
value that they would have been entitled to receive at the time of such dividend
or distribution as if the Warrants had been exercised immediately prior to such
dividend or distribution. At the time of any such dividend or distribution, the
Company shall make appropriate reserves to ensure the timely performance of the
provisions of this Subsection 7.8.
8. Exchange and Replacement of Warrant Certificates.
(a) Each Warrant Certificate shall be exchangeable, upon the
surrender thereof by the registered Holder at the principal office of the
Company and reimbursement to the Company of all reasonable expenses incidental
thereto, for a new Warrant Certificate of like tenor and date representing in
the aggregate the right to purchase the same number of Warrant Shares in such
denominations as shall be designated by the Holder thereof at the time of such
surrender.
(b) Upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of any Warrant
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it, and reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation of
the Warrant Certificate, if mutilated, the Company shall make and deliver a new
Warrant Certificate of like tenor, in lieu thereof.
9. Elimination of Fractional Interests. The Company shall not be
required to issue certificates representing fractions of shares of Common Stock
upon the exercise of the Warrants, nor shall it be required to issue scrip or
pay cash in lieu of fractional interests, it being the intent of the parties
that all fractional interests shall be eliminated by rounding any fraction to
the nearest
<PAGE>
15
whole number of shares of Common Stock or other securities, properties or
rights.
10. Reservation of Securities. The Company shall at all times
reserve and keep available out of its authorized shares of Common Stock, solely
for the purpose of issuance upon the exercise of the Warrants, such number of
shares of Common Stock or other securities, properties or rights as shall be
issuable upon the exercise thereof. The Company covenants and agrees that, upon
exercise of the Warrants and payment of the Exercise Price therefor, all shares
of Common Stock and other securities issuable upon such exercise shall be duly
and validly issued, fully paid, non-assessable and not subject to the preemptive
rights of any stockholder.
11. Notices to Warrant Holders. Nothing contained in this
Agreement shall be construed as conferring upon the Holders the right to vote
for, consent to or receive notice as a stockholder in respect of, any meetings
of stockholders for the election of directors or any other matter, or to confer
upon the Holders any rights whatsoever as a stockholder of the Company. If,
however, at any time prior to the expiration of the Warrants and their exercise,
any of the following events shall occur:
(a) the Company intends to declare a dividend (other than a
dividend consisting solely of shares of Common Stock) or otherwise distribute to
its stockholders any assets (other than shares of Common Stock), whether issued
by the Company or by another, or any other thing of value; or
(b) the Company shall take a record of the holders of its shares
of Common Stock for the purpose of entitling them to receive a dividend or
distribution payable otherwise than in cash, or a cash dividend or distribution
payable otherwise than out of current or retained earnings, as indicated by the
accounting treatment of such dividend or distribution on the books of the
Company; or
(c) the Company shall offer to all the holders of its Common
Stock any additional shares of capital stock of the Company or securities
convertible into or exchangeable for shares of capital stock of the Company, or
any option right or warrant to subscribe therefor; or
(d) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation or merger) or a sale of all or
substantially all of its
<PAGE>
16
property, assets and business as an entirety shall be proposed; then, in any one
or more of said events, the Company shall give written notice of such event at
least fifteen (15) days prior to the date fixed as a record date or the date of
closing the transfer books for the determination of the stockholders entitled to
such dividend, distribution, convertible or exchangeable securities or
subscription rights, or entitled to vote on such proposed dissolution,
liquidation, winding up or sale. Such notice shall specify such record date or
the date of closing the transfer books, as the case may be. Failure to give such
notice or any defect therein shall not affect the validity of any action taken
in connection with the declaration or payment of any such dividend, or the
issuance of any convertible or exchangeable securities, or subscription rights,
options or warrants, or any proposed dissolution, liquidation, winding up or
sale.
12. Notices. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed to have been
duly made when delivered, or mailed by registered or certified mail, return
receipt requested:
(a) If to a registered Holder of Warrants, to the address of such
Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 3.1
hereof or to such other address as the Company may designate by notice to the
Holders; or
(c) If to the Agent, to 535 Madison Avenue, 18th Floor, New York,
New York 10022.
13. Supplements and Amendments. The Company and the Agent may
from time to time supplement or amend this Agreement without the approval of any
Holders of Warrant Certificates (other than the Agent) in order to cure any
ambiguity, to correct or supplement any provision contained herein which may be
defective or inconsistent with any provision herein, or to make any other
provisions in regard to matters or questions arising hereunder which the Company
and the Agent may deem necessary or desirable and which the Company and the
Agent deem shall not adversely affect the interests of the Holders of Warrant
Certificates. Other amendments to this Agreement may be made only with the
written consent of the Holders of a majority of the Warrant Securities.
<PAGE>
17
14. Successors. All the covenants and provisions of this
Agreement shall be binding upon and inure to the benefit of the Company, and the
Holders and their respective successors and assigns hereunder.
15. Termination. This Agreement shall terminate on the eighth
anniversary of the First Closing. Notwith- standing the foregoing, the
indemnification provisions of Section 6 hereof shall survive such termination
until the expiration of the applicable statute of limitations.
16. Governing Law: Submission to Jurisdiction. This Agreement and
each Warrant Certificate issued hereunder shall be deemed to be a contract made
under the laws of the State of New York and for all purposes shall be construed
in accordance with the laws of said State without giving effect to the rules of
said State governing the conflicts of laws.
The Company and the Holders, by accepting Warrants issued
pursuant to this Agreement, hereby agree that any action, proceeding or claim
against it or them arising out of, or relating in any way to, this Agreement
shall be brought and enforced in the courts of the United States and the State
of New York, located in the City of New York, and shall be irrevocably submitted
to such jurisdiction, which jurisdiction shall be exclusive. The Company and the
Holders hereby irrevocably waive any objection to such exclusive jurisdiction or
inconvenient forum. Any process or summons to be served upon any of the Company
and the Holders (at the option of the party bringing such action, proceeding or
claim) may be served by transmitting a copy thereof, by registered or certified
mail, return receipt requested, postage prepaid, addressed to it at the address
as set forth in Section 12 hereof. Such mailing shall be deemed personal service
and shall be legal and binding upon the party so served in any action,
proceeding or claim. The Company and the Holders agree that the prevailing
party(ies) in any such action or proceeding shall be entitled to recover from
the other party(ies) all of its/their reasonable legal costs and expenses
relating to such action or proceeding and/or incurred in connection with the
preparation therefor.
<PAGE>
18
17. Entire Agreement; Modification. This Agreement (including the
Agency Agreement to the extent portions thereof are referred to herein) contains
the entire understanding between the parties hereto with respect to the subject
matter hereof and may not be modified or amended except as provided in Section
13 hereof or by a writing duly signed by the party against whom enforcement of
the modification or amendment is sought.
18. Severability. If any provision of this Agreement shall be
held to be invalid and unenforceable, such invalidity or unenforceability shall
not affect any other provision of this Agreement.
19. Captions. The caption headings of the Sections of this
Agreement are for convenience of reference only and are not intended, nor should
they be construed as, a part of this Agreement and shall be given no substantive
effect.
20. Benefits of this Agreement. Nothing in this Agreement shall
be construed to give to any person or corporation other than the Company and the
Agent and any other registered Holder(s) of the Warrants or Warrant Securities
any legal or equitable right, remedy or claim under this Agreement; and this
Agreement shall be for the sole and exclusive benefit of the Company and the
Agent and any other Holder(s) of the Warrants or Warrant Securities.
21. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed, as of the day and year first above written.
UNIVERSITY ONLINE, INC.
By
-------------------------------
Title:
----------------------------
SPENCER TRASK SECURITIES
INCORPORATED
By
-------------------------------
Title:
----------------------------
<PAGE>
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
THE SECURITIES REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
OR UNDER ANY STATE SECURITIES OR "BLUE SKY" LAWS, AND MAY NOT BE OFFERED OR SOLD
EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR
SUCH LAWS (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR
RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN
OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO THE
ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND LAWS IS
AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
No. W- _________ Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that _____________ is the
registered holder of ______________ Warrants each to purchase initially, at any
time after the date hereof until 5:30 p.m. New York time on the later of (i) the
seventh anniversary of the Final Closing and (ii) the third anniversary of the
closing date of the initial public offering of University Online, Inc. (the
"Company") occurring within such seven-year period (the "Expiration Date"), one
fully paid and non-assessable share of Common Stock, par value $.01 per share
("Common Stock"), of the Company at the initial exercise price, subject to
adjustment in certain events (the "Exercise Price"), of $0.75 per share upon
surrender of this Warrant Certificate and payment of the Exercise Price at an
office or agency of the Company, or by surrender of this Warrant Certificate in
lieu of cash payment, but subject to the conditions set forth herein and in the
Warrant Agreement dated as of March ___, 1995 between the Company and Spencer
Trask Securities Incorporated (the "Warrant Agreement"). Capitalized terms not
otherwise defined herein shall have the meanings ascribed to them in the Warrant
Agreement. Payment of the Exercise Price shall be made by certified or official
bank check in New York Clearing House funds payable to the order of the Company.
A-1
<PAGE>
No Warrant may be exercised after 5:30 p.m., New York time, on
the Expiration Date, at which time all Warrants evidenced hereby, unless
exercised prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a
duly authorized issue of Warrants issued pursuant to the Warrant Agreement,
which Warrant Agreement is hereby incorporated by reference in, and made a part
of, this instrument and is hereby referred to for a description of the rights,
limitation of rights, obligations, duties and immunities thereunder of the
Company, the Agent and the holders (the words "holders" or "holder" meaning the
registered holder or registered holders) of the Warrants.
The Warrant Agreement provides that upon the occurrence of
certain events the Exercise Price and the type and/or number of the Company's
securities issuable thereupon may, subject to certain conditions, be adjusted.
In such event, the Company will, at the request of the holder, issue a new
Warrant Certificate evidencing the adjustment in the Exercise Price and the
number and/or type of securities issuable upon the exercise of the Warrants;
provided, however, that the failure of the Company to issue such new Warrant
Certificates shall not in any way change, alter, or otherwise impair, the rights
of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate in accordance with the Warrant Agreement at an office or agency of
the Company, a new Warrant Certificate or Warrant Certificates of like tenor and
evidencing in the aggregate a like number of Warrants shall be issued to the
transferee(s) in exchange for this Warrant Certificate, subject to the
limitations provided herein and in the Warrant Agreement, without any charge
except for any tax or other governmental charge imposed in connection with such
transfer or as provided in the Warrant Agreement.
Upon the exercise of less than all of the Warrants evidenced by
this Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as
the absolute owner(s) of this Warrant Certificate (notwithstanding any notation
of ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
A-2
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.
Dated as of , 1995
UNIVERSITY ONLINE, INC.
By
-------------------------------
Title:
----------------------------
Attest:
--------------------------
Title:
----------------------------
A-3
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.1]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase ____________ shares of
Common Stock.
In accordance with the terms of Section 3.1 of the Warrant
Agreement dated as of , 1995 between University Online, Inc. and Spencer Trask
Securities Incorporated, the undersigned requests that a certificate for such
securities be registered in the name of ________________________________________
whose address is _______________________________________________________________
_________________________________________________ and that such Certificate be
delivered to ____________________ whose address is _____________________________
___________________________________.
Dated: , 199
Signature _____________________________________________
(Signature must conform in all respects to name of holder
as specified on the face of the Warrant Certificate.)
___________________________________
(Insert Social Security or Other Identifying
Number of Holder)
<PAGE>
[FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.2]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase the number shares of Common
Stock calculated in accordance with the terms of Section 3.2 of the Warrant
Agreement dated as of , 1995 between Imsatt University Online, Inc. and Spencer
Trask Securities Incorporated. The undersigned requests that a certificate for
such securities be registered in the name of ___________________________________
whose address is _______________________________________________________________
and that such Certificate be delivered to ____________________ whose address is
__________________________________.
Dated: , 199
Signature ________________________________________________
(Signature must conform in all respects to name of holder
as specified on the face of the Warrant Certificate.)
____________________________________
(Insert Social Security or Other Identifying
Number of Holder)
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED _______________________ hereby sells, assigns and
transfers unto ________________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint _____________________
Attorney, to transfer the within Warrant Certificate on the books of the
within-named Company, with full power of substitution.
Dated: , 1996
Signature _________________________________________
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant
Certificate.)
_________________________________
(Insert Social Security or Other Identifying Number of
Holder)
<PAGE>
THE WARRANT REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
(ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR SIMILAR RULE UNDER
SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), or (iii) AN OPINION OF
COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE SUBSCRIPTION AGREEMENT REFERRED TO HEREIN.
_______ Warrants
FORM OF
WARRANT CERTIFICATE
This Warrant Certificate certifies that _____________________________
________________, or its registered assigns, is the registered holder of _______
Warrants to purchase initially, at any time after the date hereof until 5:30
p.m. New York time on _______, ____ ("Expiration Date"), up to _______ fully
paid and non-assessable shares of common stock, $.01 par value ("Common Stock")
of University On-Line, Inc., a Delaware corporation (the "Company"), at the
initial exercise price, subject to adjustment in certain events (the "Exercise
Price"), of $___ upon surrender of this Warrant Certificate and payment of the
Exercise Price at an office or agency of the Company. Payment of the Exercise
Price shall be made by certified or official bank check in New York Clearing
House funds payable to the order of the Company.
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, hereby shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the _________ (the "Subscription
Agreement") and the __________ Letter Agreement dated March 4, 1996 between the
Company and Austin O. Furst, Jr. (the "Letter Agreement"), and the Letter
Agreement and numbered paragraphs one through six of which Subscription
Agreement are hereby incorporated by reference in and made a part of this
instrument and are hereby referred to for a description of certain rights,
limitations of rights, obligations, duties and immunities thereunder of the
Company and the holders (the words "holders" or "holder" meaning the registered
holder or registered holders) of the Warrants;
1
<PAGE>
provided, however, that (i) the initial exercise price of an aggregate of
1,200,000 of the 2,400,000 of the Warrants provided for in the Subscription
Agreement has been reduced to $.75 per share, each as adjusted for the Company's
November 1994 four-for-one stock split, (ii) the holders of the shares of Common
Stock issuable upon exercise of the Warrants or the Notes (as hereinafter
defined) together with the other Furst Securities (as defined in the Letter
Agreement) are entitled to certain additional rights, including demand
registration rights, as described herein, and (iii) in the event of any conflict
between the Subscription Agreement and this Warrant Certificate, the terms of
this Warrant Certificate (as modified by the Letter Agreement) shall be
controlling. Without limiting the generality of the foregoing, all of the Furst
Securities are entitled to the registration rights that are granted in the
Subscription Agreement (which registration rights are exercisable without cost
to the holders, except for fees and expenses of their counsel and any
underwriting or selling commissions or discounts), and the Company agrees to
give the holders of the Furst Securities written notice by registered mail at
least 30 days prior to the filing of each such registration statement with
respect to which such rights apply. Nothing in this Warrant Certificate shall be
construed as requiring any holder of Warrants or Notes to exercise such Warrants
or Notes prior to the effective date of a registration statement in order to
have the securities received upon exercise included therein.
Subject only to the Company then having any of its securities
registered under the Securities Exchange Act of 1934, the holders of a Majority
(as hereinafter defined) of the Warrants, the Notes, the Shares of Common Stock
issued upon the exercise of the Warrants or Notes and the other Furst Securities
shall have the right, exercisable by written notice to the Company, to twice
require the Company prepare and file with the Securities and Exchange Commission
(the "Commission"), a registration statement and such other documents, including
a prospectus, as may be necessary, in the opinion of counsel for the Company, in
order to comply with the provisions of the Act so as to permit a public offering
and sale, by such holders and any other holders of Furst Securities who notify
the Company within ten (10) days after receiving notice from the Company of such
request, of their respective Furst Securities for a period of 120 days. The
first notice of exercise of the registration rights provided for the preceding
sentence (the "Demand Registration Rights") may be given after the first
anniversary of the Public Offering, but only with respect to Furst Securities
representing a maximum of 50% of the maximum number of shares of Common Stock
included in, or issuable upon exercise or conversion of the Furst Securities
(with the number of Furst Securities to be registered on behalf of each
participating holder being reduced pro rata to the extent necessary), and the
second notice of exercise may be given after the second anniversary of the
Public Offering. For purposes of the Demand Registration Rights, the term
"Majority" in reference to holders of Furst Securities shall mean that number of
Furst Securities representing (assuming the exercise of all Warrants and the
conversion of all Notes and Preferred Stock included therein) more than 50% of
the aggregate number of shares of Common Stock included in the Furst Securities
issued or issuable upon exercise or conversion of the Furst Securities.
The Company covenants and agrees to give written notice of any
registration request under the Demand Registration Rights by any holder or
holders of Furst Securities to all other holders of Furst Securities within ten
(10) business days from the date of the receipt of any such registration
request.
2
<PAGE>
All expenses (other than underwriting discounts and commissions)
incurred in connection with registration, filing or qualification of any Furst
Securities pursuant to exercise of the Demand Registration Rights, including,
without limitation, all registration, listing, filing, and qualification fees,
printers and accounting fees and fees and disbursements of counsel for the
Company shall be borne by the Company. Any such registration and offering shall
be conducted on the same terms as are provided in Sections 6.4 of the Warrant
Agreement dated as of March 22, 1995 between the Company and Spencer Trask
Securities, Incorporated ("Spencer Trask"), (excluding Subsections 6.4(b)
thereof) with respect to the registration of Warrant Shares (as defined therein)
under such Warrant Agreement.
The Subscription Agreement provides that upon the occurrence of certain
events, the Exercise Price and the type and/or number of the Company's
securities issuable thereupon may, subject to certain conditions, be adjusted.
In such event, the Company will, at the request of the holder, issue a new
Warrant Certificate evidencing the adjustment in the Exercise Price and the
number and/or type of securities issuable upon the exercise of the Warrants;
provided, however, that the failure of the Company to issue such new Warrant
Certificates shall not in any way change, alter, or otherwise impair, the rights
of the holder as set forth in the Subscription Agreement and herein.
Notwithstanding anything contained herein to the contrary, if there has
been an adjustment downward to the $.75 per share exercise price of the Warrants
issued to Spencer Trask pursuant to the Warrant Agreement referred to above (the
"Placement Agent Warrants"), or any such downward adjustment hereinafter occurs
at any time, the exercise price of the Warrants represented by this Warrant
Certificate shall also automatically be adjusted at such time by the amount of
the adjustment made to the exercise price of the Placement Agent Warrants, and
the number of Securities thereafter issuable upon exercise of each Warrant shall
be adjusted by multiplying a number equal to the Exercise Price in effect
immediately prior to such adjustment by the number of Securities issuable upon
exercise of the Warrants and dividing the product so obtained by the adjusted
Exercise Price.
Upon due presentment for registration of transfer of this Warrant
Certificate and duly executed form of assignment at an office or agency of the
Company, a new Warrant Certificate or Warrant Certificates of like tenor and
evidencing in the aggregate a like number of Warrants shall be issued to the
transferee(s) in exchange for this Warrant Certificate, subject to the
limitations provided herein and in the Subscription Agreement, without any
charge except for any tax or other governmental charge imposed in connection
with such transfer.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
3
<PAGE>
All terms used in this Warrant Certificate which are defined in the
Subscription Agreement or the Letter Agreement and not otherwise defined herein
shall have the meanings assigned to them in the Subscription Agreement or the
Letter Agreement, as the case may be.
The holder of this Warrant Certificate shall be entitled to receive
from the Company upon exercise of Warrants and the payment of the Exercise Price
therefore, in lieu of acquiring securities, a five-year convertible promissory
note ("Note") of the Company, in the form attached hereto as Exhibit A, in an
aggregate principal amount equal to the aggregate Exercise Price paid, bearing
interest at the then five year treasury rate per annum as published by the Wall
Street Journal. The Note shall be convertible, into the aggregate number of
Securities for which the Warrants were otherwise exercisable on the date of
exercise, subject to adjustment upon any reclassification, stock split, reverse
stock split, stock dividend, capital reorganization, consolidation, merger or
other change of outstanding
4
<PAGE>
shares of Common Stock of the Company or the sale of substantially all of the
Company's property as an entirety, as provided for in the Note after the date of
exercise.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed under its corporate seal.
Dated as of _______, ____
UNIVERSITY ON-LINE, INC.
[SEAL]
By:
----------------------------------------
Nat Kannan, Chief Executive Officer
ATTEST:
- ---------------------------------
Secretary
5
<PAGE>
THE WARRANT REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
(ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR SIMILAR RULE UNDER
SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), or (iii) AN OPINION OF
COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE SUBSCRIPTION AGREEMENT REFERRED TO HEREIN.
400,000 Warrants
AMENDED WARRANT CERTIFICATE
This Warrant Certificate in replacement of a Warrant Certificate issued
to Elizabeth K. Furst 1994 Trust dated October 31, 1994 certifies that Elizabeth
K. Furst 1994 Trust, or its registered assigns, is the registered holder of
400,000 Warrants to purchase initially, at any time after the date hereof until
5:30 p.m. New York time on March 4, 2001 ("Expiration Date"), up to 400,000
fully paid and non-assessable shares of common stock, $.01 par value ("Common
Stock") of University On-Line, Inc., a Delaware corporation (the "Company"), at
the initial exercise price, subject to adjustment in certain events (the
"Exercise Price"), of $.75 upon surrender of this Warrant Certificate and
payment of the Exercise Price at an office or agency of the Company. Payment of
the Exercise Price shall be made by certified or official bank check in New York
Clearing House funds payable to the order of the Company.
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, hereby shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are in replacement
for those Warrants evidenced by the Warrant Certificate dated October 31, 1994
issued to Susan C. Furst 1994 Trust and are part of a duly authorized issue of
Warrants issued pursuant to the Subscription Agreement dated as of October 31,
1994 between the Company and Austin O. Furst, Jr., the Elizabeth K. Furst 1994
Trust, the Catherine T. Furst 1994 Trust, and/or the Susan C. Furst 1994 Trust
(said trusts being hereinafter collectively referred to as the "Trusts") (the
"Subscription Agreement") and the Letter Agreement dated March 4, 1996 between
the Company and Austin O. Furst, Jr. (the "Letter Agreement"), and the Letter
Agreement and numbered paragraphs one through six of which Subscription
Agreement are hereby incorporated by reference in and made a part of this
instrument and are hereby referred to for a description of certain rights,
limitations of rights, obligations, duties and
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<PAGE>
THE WARRANT REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
(ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR SIMILAR RULE UNDER
SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), or (iii) AN OPINION OF
COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE SUBSCRIPTION AGREEMENT REFERRED TO HEREIN.
400,000 Warrants
AMENDED WARRANT CERTIFICATE
This Warrant Certificate in replacement of a Warrant Certificate issued
to Catherine T. Furst 1994 Trust dated October 31, 1994 certifies that Catherine
T. Furst 1994 Trust, or its registered assigns, is the registered holder of
400,000 Warrants to purchase initially, at any time after the date hereof until
5:30 p.m. New York time on March 4, 2001 ("Expiration Date"), up to 400,000
fully paid and non-assessable shares of common stock, $.01 par value ("Common
Stock") of University On-Line, Inc., a Delaware corporation (the "Company"), at
the initial exercise price, subject to adjustment in certain events (the
"Exercise Price"), of $.75 upon surrender of this Warrant Certificate and
payment of the Exercise Price at an office or agency of the Company. Payment of
the Exercise Price shall be made by certified or official bank check in New York
Clearing House funds payable to the order of the Company.
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, hereby shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are in replacement
for those Warrants evidenced by the Warrant Certificate dated October 31, 1994
issued to Susan C. Furst 1994 Trust and are part of a duly authorized issue of
Warrants issued pursuant to the Subscription Agreement dated as of October 31,
1994 between the Company and Austin O. Furst, Jr., the Elizabeth K. Furst 1994
Trust, the Catherine T. Furst 1994 Trust, and/or the Susan C. Furst 1994 Trust
(said trusts being hereinafter collectively referred to as the "Trusts") (the
"Subscription Agreement") and the Letter Agreement dated March 4, 1996 between
the Company and Austin O. Furst, Jr. (the "Letter Agreement"), and the Letter
Agreement and numbered paragraphs one through six of which Subscription
Agreement are hereby incorporated by reference in and made a part of this
instrument and are hereby referred to for a description of certain rights,
limitations of rights, obligations, duties and
2
<PAGE>
THE WARRANT REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
(ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR SIMILAR RULE UNDER
SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), or (iii) AN OPINION OF
COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE SUBSCRIPTION AGREEMENT REFERRED TO HEREIN.
400,000 Warrants
AMENDED WARRANT CERTIFICATE
This Warrant Certificate in replacement of a Warrant Certificate issued
to Susan C. Furst 1994 Trust dated October 31, 1994 certifies that Susan C.
Furst 1994 Trust, or its registered assigns, is the registered holder of 400,000
Warrants to purchase initially, at any time after the date hereof until 5:30
p.m. New York time on March 4, 2001, up to 400,000 fully paid and non-assessable
shares of common stock, $.01 par value ("Common Stock") of University On-Line,
Inc., a Delaware corporation (the "Company"), at the initial exercise price,
subject to adjustment in certain events (the "Exercise Price"), of $1.50 upon
surrender of this Warrant Certificate and payment of the Exercise Price at an
office or agency of the Company. Payment of the Exercise Price shall be made by
certified or official bank check in New York Clearing House funds payable to the
order of the Company.
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, hereby shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are in replacement
for those Warrants evidenced by the Warrant Certificate dated October 31, 1994
issued to Susan C. Furst 1994 Trust and are part of a duly authorized issue of
Warrants issued pursuant to the Subscription Agreement dated as of October 31,
1994 between the Company and Austin O. Furst, Jr., the Elizabeth K. Furst 1994
Trust, the Catherine T. Furst 1994 Trust, and/or the Susan C. Furst 1994 Trust
(said trusts being hereinafter collectively referred to as the "Trusts") (the
"Subscription Agreement") and the Letter Agreement dated March 4, 1996 between
the Company and Austin O. Furst, Jr. (the "Letter Agreement"), and the Letter
Agreement and numbered paragraphs one through six of which Subscription
Agreement are hereby incorporated by reference in and made a part of this
instrument and are hereby referred to for a description of certain rights,
limitations of
1
<PAGE>
rights, obligations, duties and immunities thereunder of the Company and the
holders (the words "holders" or "holder" meaning the registered holder or
registered holders) of the Warrants; provided, however, that (i) the initial
exercise price of an aggregate of 1,200,000 of the 2,400,000 of the Warrants
provided for in the Subscription Agreement has been reduced to $1.50 per share,
each as adjusted for the Company's November 1994 four-for-one stock split, (ii)
the holders of the shares of Common Stock issuable upon exercise of the Warrants
or the Notes (as hereinafter defined) together with the other Furst Securities
(as defined in the Letter Agreement) are entitled to certain additional rights,
including demand registration rights, as described herein, and (iii) in the
event of any conflict between the Subscription Agreement and this Warrant
Certificate, the terms of this Warrant Certificate (as modified by the Letter
Agreement) shall be controlling. Without limiting the generality of the
foregoing, all of the Furst Securities are entitled to the registration rights
that are granted in the Subscription Agreement (which registration rights are
exercisable without cost to the holders, except for fees and expenses of their
counsel and any underwriting or selling commissions or discounts), and the
Company agrees to give the holders of the Furst Securities written notice by
registered mail at least 30 days prior to the filing of each such registration
statement with respect to which such rights apply. Nothing in this Warrant
Certificate shall be construed as requiring any holder of Warrants or Notes to
exercise such Warrants or Notes prior to the effective date of a registration
statement in order to have the securities received upon exercise included
therein.
Subject only to the Company then having any of its securities
registered under the Securities Exchange Act of 1934, the holders of a Majority
(as hereinafter defined) of the Warrants, the Notes, the Shares of Common Stock
issued upon the exercise of the Warrants or Notes and the other Furst Securities
shall have the right, exercisable by written notice to the Company, to twice
require the Company prepare and file with the Securities and Exchange Commission
(the "Commission"), a registration statement and such other documents, including
a prospectus, as may be necessary, in the opinion of counsel for the Company, in
order to comply with the provisions of the Act so as to permit a public offering
and sale, by such holders and any other holders of Furst Securities who notify
the Company within ten (10) days after receiving notice from the Company of such
request, of their respective Furst Securities for a period of 120 days. The
first notice of exercise of the registration rights provided for the preceding
sentence (the "Demand Registration Rights") may be given after the first
anniversary of the Public Offering, but only with respect to Furst Securities
representing a maximum of 50% of the maximum number of shares of Common Stock
included in, or issuable upon exercise or conversion of the Furst Securities
(with the number of Furst Securities to be registered on behalf of each
participating holder being reduced pro rata to the extent necessary), and the
second notice of exercise may be given after the second anniversary of the
Public Offering. For purposes of the Demand Registration Rights, the term
"Majority" in reference to holders of Furst Securities shall mean that number of
Furst Securities representing (assuming the exercise of all Warrants and the
conversion of all Notes and Preferred Stock included therein) more than 50% of
the aggregate number of shares of Common Stock issued or issuable upon exercise
or conversion of the Furst Securities.
The Company covenants and agrees to give written notice of any
registration request under the Demand Registration Rights by any holder or
holders of Furst Securities to all other holders of Furst Securities within ten
(10) business days from the date of the receipt of any such registration
request.
2
<PAGE>
All expenses (other than underwriting discounts and commissions)
incurred in connection with registration, filing or qualification of any Furst
Securities pursuant to exercise of the Demand Registration Rights, including,
without limitation, all registration, listing, filing, and qualification fees,
printers and accounting fees and fees and disbursements of counsel for the
Company shall be borne by the Company. Any such registration and offering shall
be conducted on the same terms as are provided in Sections 6.4 of the Warrant
Agreement dated as of March 22, 1995 between the Company and Spencer Trask
Securities, Incorporated ("Spencer Trask"), (excluding Subsections 6.4(b)
thereof) with respect to the registration of Warrant Shares (as defined therein)
under such Warrant Agreement.
The Subscription Agreement provides that upon the occurrence of certain
events, the Exercise Price and the type and/or number of the Company's
securities issuable thereupon may, subject to certain conditions, be adjusted.
In such event, the Company will, at the request of the holder, issue a new
Warrant Certificate evidencing the adjustment in the Exercise Price and the
number and/or type of securities issuable upon the exercise of the Warrants;
provided, however, that the failure of the Company to issue such new Warrant
Certificates shall not in any way change, alter, or otherwise impair, the rights
of the holder as set forth in the Subscription Agreement and herein.
Notwithstanding anything contained herein to the contrary, if there has
been an adjustment downward to the $.75 per share exercise price of the Warrants
issued to Spencer Trask pursuant to the Warrant Agreement referred to above (the
"Placement Agent Warrants"), or any such downward adjustment hereinafter occurs
at any time, the exercise price of the Warrants represented by this Warrant
Certificate shall also automatically be adjusted at such time by twice the
amount of the adjustment made to the exercise price of the Placement Agent
Warrants, and the number of Securities thereafter issuable upon exercise of each
Warrant shall be adjusted by multiplying a number equal to the Exercise Price in
effect immediately prior to such adjustment by the number of Securities issuable
upon exercise of the Warrants and dividing the product so obtained by the
adjusted Exercise Price.
Upon due presentment for registration of transfer of this Warrant
Certificate and duly executed form of assignment at an office or agency of the
Company, a new Warrant Certificate or Warrant Certificates of like tenor and
evidencing in the aggregate a like number of Warrants shall be issued to the
transferee(s) in exchange for this Warrant Certificate, subject to the
limitations provided herein and in the Subscription Agreement, without any
charge except for any tax or other governmental charge imposed in connection
with such transfer.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
3
<PAGE>
All terms used in this Warrant Certificate which are defined in the
Subscription Agreement or the Letter Agreement and not otherwise defined herein
shall have the meanings assigned to them in the Subscription Agreement or the
Letter Agreement, as the case may be.
So long as Austin O. Furst and/or the Trusts hold a majority of the
Warrants, the Notes and the shares of Common Stock issued upon the exercise of
the Warrants or the conversion of the Notes (collectively, the "Warrant
Securities"), Mr. Furst shall have the right to receive all information with
respect to the Company and its affairs that would be entitled to receive if he
were a director of the Company. In the event that Warrants having an aggregate
exercise price of at least $400,000 have been exercised by Austin O. Furst
and/or the Trusts, Mr. Furst shall have the right to designate that number of
members of the Board of Directors (rounded to the nearest whole number) as
represents the same percentage of the entire Board of Directors as the aggregate
number of shares of Common Stock included in the Furst Securities or issuable
upon exercise or conversion of the Furst Securities represents of the aggregate
outstanding shares of Common Stock (counting shares issuable upon the conversion
of the Notes and the $300,000 convertible promissory note referred to in the
Letter Agreement and the outstanding shares of the Company's Preferred Stock as
outstanding); provided, however, that Mr. Furst shall in any event be entitled
to designate at least one director (whether or not such $400,000 of Warrants are
exercised) so long as the aggregate number of Furst Securities is not less than
the aggregate number of Furst Securities as of the First Closing of this Private
Placement. The Company shall take all actions as may be necessary to cause the
individuals designated by Mr. Furst pursuant to the preceding sentence promptly
to be elected or appointed to the Company's Board of Directors. Mr. Furst's
right to appoint as directors pursuant hereto shall not be deemed to entitle Mr.
Furst to designate any additional director or directors if he has otherwise
designated the number of directors provided for herein pursuant to the Notes;
provided, however, that upon the termination of any such other right or Mr.
Furst to appoint any director, the rights provided for herein shall apply.
The holder of this Warrant Certificate shall be entitled to receive
from the Company upon exercise of Warrants and the payment of the Exercise Price
therefore, in lieu of acquiring securities, a five-year convertible promissory
note ("Note") of the Company, in the form attached hereto as Exhibit A, in an
aggregate principal amount equal to the aggregate Exercise Price paid, bearing
interest at the then five year treasury rate per annum as published by the Wall
Street Journal. The Note shall be convertible, into the aggregate number of
Securities for which the Warrants were otherwise exercisable on the date of
exercise, subject to adjustment upon any reclassification, stock split, reverse
stock split, stock dividend, capital reorganization, consolidation, merger or
other change of outstanding
4
<PAGE>
shares of Common Stock of the Company or the sale of substantially all of the
Company's property as an entirety, as provided for in the Note after the date of
exercise.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed under its corporate seal.
Dated as of March 4, 1996
UNIVERSITY ON-LINE, INC.
[SEAL]
By:
---------------------------------------
Nat Kannan, Chief Executive Officer
ATTEST:
- ----------------------------
Secretary
5
<PAGE>
THE WARRANT REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
(ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR SIMILAR RULE UNDER
SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), or (iii) AN OPINION OF
COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE SUBSCRIPTION AGREEMENT REFERRED TO HEREIN.
400,000 Warrants
AMENDED WARRANT CERTIFICATE
This Warrant Certificate in replacement of a Warrant Certificate issued
to Elizabeth K. Trust dated October 31, 1994 certifies that Elizabeth K. Furst
1994 Trust, or its registered assigns, is the registered holder of 400,000
Warrants to purchase initially, at any time after the date hereof until 5:30
p.m. New York time on March 4, 2001, up to 400,000 fully paid and non-assessable
shares of common stock, $.01 par value ("Common Stock") of University On-Line,
Inc., a Delaware corporation (the "Company"), at the initial exercise price,
subject to adjustment in certain events (the "Exercise Price"), of $1.50 upon
surrender of this Warrant Certificate and payment of the Exercise Price at an
office or agency of the Company. Payment of the Exercise Price shall be made by
certified or official bank check in New York Clearing House funds payable to the
order of the Company.
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, hereby shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are in replacement
for those Warrants evidenced by the Warrant Certificate dated October 31, 1994
issued to Susan C. Furst 1994 Trust and are part of a duly authorized issue of
Warrants issued pursuant to the Subscription Agreement dated as of October 31,
1994 between the Company and Austin O. Furst, Jr., the Elizabeth K. Furst 1994
Trust, the Catherine T. Furst 1994 Trust, and/or the Susan C. Furst 1994 Trust
(said trusts being hereinafter collectively referred to as the "Trusts") (the
"Subscription Agreement") and the Letter Agreement dated March 4, 1996 between
the Company and Austin O. Furst, Jr. (the "Letter Agreement"), and the Letter
Agreement and numbered paragraphs one through six of which Subscription
Agreement are hereby incorporated by reference in and made a part of this
instrument and are hereby referred to for a description of certain rights,
limitations of rights, obligations, duties and
<PAGE>
THE WARRANT REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
(ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR SIMILAR RULE UNDER
SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), or (iii) AN OPINION OF
COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE SUBSCRIPTION AGREEMENT REFERRED TO HEREIN.
400,000 Warrants
AMENDED WARRANT CERTIFICATE
This Warrant Certificate in replacement of a Warrant Certificate issued
to Catherine T. Furst 1994 Trust dated October 31, 1994 certifies that Catherine
T. Furst 1994 Trust, or its registered assigns, is the registered holder of
400,000 Warrants to purchase initially, at any time after the date hereof until
5:30 p.m. New York time on March 4, 2001, up to 400,000 fully paid and
non-assessable shares of common stock, $.01 par value ("Common Stock") of
University On-Line, Inc., a Delaware corporation (the "Company"), at the initial
exercise price, subject to adjustment in certain events (the "Exercise Price"),
of $1.50 upon surrender of this Warrant Certificate and payment of the Exercise
Price at an office or agency of the Company. Payment of the Exercise Price shall
be made by certified or official bank check in New York Clearing House funds
payable to the order of the Company.
No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, hereby shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are in replacement
for those Warrants evidenced by the Warrant Certificate dated October 31, 1994
issued to Susan C. Furst 1994 Trust and are part of a duly authorized issue of
Warrants issued pursuant to the Subscription Agreement dated as of October 31,
1994 between the Company and Austin O. Furst, Jr., the Elizabeth K. Furst 1994
Trust, the Catherine T. Furst 1994 Trust, and/or the Susan C. Furst 1994 Trust
(said trusts being hereinafter collectively referred to as the "Trusts") (the
"Subscription Agreement") and the Letter Agreement dated March 4, 1996 between
the Company and Austin O. Furst, Jr. (the "Letter Agreement"), and the Letter
Agreement and numbered paragraphs one through six of which Subscription
Agreement are hereby incorporated by reference in and made a part of this
instrument and are hereby referred to for a description of certain rights,
limitations of rights, obligations, duties and
THIS NOTE HAS BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY AND MAY NOT BE
TRANSFERRED UNTIL (i) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT") SHALL HAVE BECOME EFFECTIVE WITH RESPECT THERETO OR (ii)
RECEIPT BY THE ISSUER OF AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
ISSUER TO THE EFFECT THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED IN
CONNECTION WITH SUCH PROPOSED TRANSFER NOR IS IN VIOLATION OF ANY APPLICABLE
STATE SECURITIES LAWS. THIS LEGEND SHALL BE ENDORSED UPON ANY NOTE ISSUED IN
EXCHANGE FOR THIS NOTE.
UNIVERSITY ON-LINE, INC.
$
-----------
FORM OF
PROMISSORY NOTE
University On-Line, Inc., a Delaware corporation (the
"Company"), for value received, hereby promises to pay to
----------------------
or registered assigns (the "Payee") on [the fifth anniversary of
----------------
the date of issuance](the "Maturity Date"), at the offices of the Company, 105
West Broad St., Suite 310, Falls Church, VA 22046, the principal amount of
($ ), plus interest at the five-year treasury rate per annum as
- ------- ---------
published by the Wall Street Journal per annum payable annually on each
anniversary hereof through the Maturity Date, in such coin or currency of the
United States of America as at the time of payment shall be legal tender for the
payment of public and private debts.
This Note is issued in connection with certain Warrants to
purchase Common Stock of the Company represented by Warrant Certificates dated
as of _______, ____ (the "Warrants"). This Note is one of a series of Notes (the
"Notes") in the aggregate principal amount of $ __________.
1. Covenants of Company
--------------------
The Company covenants and agrees that, so long as this Note
shall be outstanding, it will:
(i) Promptly pay and discharge, and cause each of its
subsidiaries, as such term is defined in Rule 405 of the Securities Act of 1933
(each, a "Subsidiary"), to pay
1
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and discharge, all lawful taxes, assessments, and governmental charges or levies
imposed upon the Company or upon its income and profits, or upon any of its
property, before the same shall become in default, as well as all lawful claims
for labor, materials and supplies which, if unpaid, might become a lien or
charge upon such properties or any part thereof; provided, however, that the
Company or any Subsidiary shall not be required to pay and discharge any such
tax, assessment, charge, levy or claim so long as the validity thereof shall be
contested in good faith by appropriate proceedings and the Company or such
Subsidiary shall set aside on its books adequate reserves in accordance with
generally accepted accounting principles with respect to any such tax,
assessment, charge, levy or claim so contested;
(ii) Do or cause to be done and cause each Subsidiary to do,
or cause to be done, all things reasonably necessary to preserve and keep in
full force and effect its corporate existence, rights and franchises and comply
with all laws applicable to the Company or such Subsidiary, except where the
failure to comply would not have a material adverse effect on the Company and
the Subsidiaries, taken as a whole;
(iii) At all times reasonably maintain, preserve, protect and
keep, and cause each Subsidiary to maintain, preserve, protect and keep its
property used or useful in the conduct of its business in good repair, working
order and condition, and from time to time make all needful and proper repairs,
renewals, replacements, betterments and improvements thereto as shall be
reasonably required in the conduct of its business;
(iv) To the extent necessary for the operation of its business
and the businesses of its Subsidiaries, keep adequately insured by all
financially sound reputable insurers, all property of a character usually
insured by similar corporations and carry such other insurance as is usually
carried by similar corporations; and
(v) At all times keep, and cause each Subsidiary to keep, true
and correct books, records and accounts.
(vi) Except for the incurrence of any indebtedness (including
without limitation, the incurrence of any guarantee or contingent payment
obligation with respect thereto) secured by a lien, mortgage or guarantee on the
property (whether real or personal) or equipment of the Company or such
Subsidiary and any refinancings or replacements thereto or trade debt incurred
in the ordinary course of business, not incur and will not permit any Subsidiary
to incur, any indebtedness whatsoever which indebtedness does not expressly
provide that it is wholly subordinated in right of payment to the indebtedness
evidenced by this Note and any identical series of Notes.
(vii) not engage in and will not permit any Subsidiary to
engage in, any business activity other than those described or contemplated in
the Private Placement Memorandum or which directly relate to the Company's
current business;
(viii) not create, incur, assume or suffer to exist or
otherwise become or be liable in respect of, or permit any Subsidiary to create,
incur, assume or suffer to exist or otherwise become or be liable for, any
indebtedness for borrowed money, purchase money indebtedness or capitalized
lease obligations if, after taking such additional indebtedness into
2
<PAGE>
account, the aggregate amount of such indebtedness of the Company and the
Subsidiaries would exceed $3,000,000; provided, however, that no such
indebtedness may be incurred if there is an existing default hereunder;
(ix) not and will not permit any Subsidiary to liquidate or
dissolve, consolidate with or merge into or with any other corporation,
partnership or other legal entity, provided, however, that this provisions shall
not prohibit the Merger of Subsidiaries into the Company or with or into another
Subsidiary or the dissolution of any Subsidiary without assets;
(x) not and will not permit any Subsidiary to purchase, or
otherwise acquire all or substantially all of the assets of any person (or any
division thereof) (collectively, an "Acquisition"), except, for so long as there
is no default hereunder, the Company or any of the Subsidiaries may make an
Acquisition if (i) immediately after such Acquisition, no default or event of
default exists and the Company and the Subsidiaries would be in compliance with
the preceding clauses of this Section 1 (assuming, for purposes hereof, that any
indebtedness of any acquired person or any indebtedness assumed by the Company
or any Subsidiary was incurred on the date of the Acquisition); (ii) if all
Company debt incurred in connection with the Acquisition is subordinated to this
Note; (iii) if the Company reasonably and in good faith believes such
Acquisition will not result in the Company's insolvency, and (iv) the
consolidated cash flow of the Company and the Subsidiaries after such
Acquisition on a pro forma basis would not have resulted in the Company and the
Subsidiaries experiencing a negative cash flow (or, if applicable, an increase
in the negative cash flow) for the four most recently completed fiscal quarters,
and at the time of such Acquisition the Company does not contemplate that such
Acquisition will result in such effect on the Company's cash flow during the
twelve months following such Acquisition; and
(xi) will not sell, transfer, lease, contribute or otherwise
convey, all or any material portion of its assets, except if such assets have
become obsolete.
2. Events of Default
A. This Note shall become and be due and payable upon written
demand made by the holder hereof (except that no such demand shall be required
in the case of any event if default described in clauses (vii) (viii), (ix), (x)
or (xi) if one or more of the following events, herein called events of default,
shall happen and be continuing:
(i) Default in the payment of the principal and accrued
interest on any of the Notes when and as the same shall become due and payable,
whether by acceleration or otherwise;
(ii) Default in the due observance or performance of any
material covenant, condition or agreement on the part of the Company to be
observed or performed pursuant to the terms hereof and such default shall
continue uncured for thirty (30) days after written notice thereof shall have
been given to the Company by the holder of the Note;
(iii) Default in the payment of any outstanding indebtedness
in excess of $25,000 principal amount or in the due observance or performance of
any material
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covenant, condition or agreement on the part of the Company with respect to any
outstanding indebtedness with the result that such outstanding indebtedness
shall become due and payable prior to the due date otherwise specified therefor
and such default shall continue uncured or such acceleration shall not be
rescinded or annulled within the earlier to occur of (x) thirty (30) days after
written notice thereof to the Company from the holder of this Note or (y) the
exercise of any remedies by the holder of such indebtedness;
(iv) Application for, or consent to, the appointment of a
receiver, trustee or liquidator of the Company or of its property;
(v) Admission in writing of the Company's inability to pay its
debts as they mature;
(vi) General assignment by the Company for the benefit of
creditors;
(vii) Filing by the Company of a voluntary petition in
bankruptcy a petition or an answer seeking reorganization, or an arrangement
with creditors; or
(viii) Entering against the Company of a court order approving
a petition filed against it under the Federal bankruptcy laws, which order shall
not have been vacated or set aside or otherwise terminated within sixty (60)
days.
B. The Company agrees that notice of the occurrence of any
event of default will be promptly given to the holder at his or her registered
address by certified mail.
C. In case any one or more of the events of default specified
above shall happen and be continuing, the holder of this Note may proceed to
protect and enforce his rights by suit for the specific performance of any
covenant or agreement contained in this Note or in aid of the exercise of any
power granted in this Note or may proceed to enforce the payment of this Note or
to enforce any other legal or equitable rights as such holder.
3. Conversion
A. Payee may from time to time prior to payment of the
principal amount of this Note convert all, or any portion, of the outstanding
principal amount and accrued interest on this Note into shares of Common Stock
of the Company. The initial conversion price is $ per share [equal to the
current exercise price of the Warrants], subject to adjustment upon the
happening of certain events as provided in Section 3.C. below ("Conversion
Price"). The number of shares to be issued upon the conversion of this Note
shall be determined by dividing the principal amount and accrued interest to be
converted by the Conversion Price in effect on the date of conversion. The
Company will deliver a check for any fractional shares.
B. To convert this Note the Payee must (1) complete and sign
the conversion notice attached hereto, (2) surrender the Note to the Company,
(3) furnish appropriate endorsements and transfer documents if required and (4)
pay any transfer or similar tax, if required. The Company will deliver to Payee
in the event of a partial conversion of this Note, a new Note for the balance of
the principal of this Note not converted.
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C. The Conversion Price in effect at any time and the number
and kind of securities purchasable upon the conversion of this Note shall be
subject to adjustment from time to time upon the happening of certain events as
follows:
(1) In case the Company shall (i) declare a dividend or make a
distribution on its outstanding shares of Common Stock in shares of Common
Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock into
a greater number of shares, or (iii) combine or reclassify its outstanding
shares of Common Stock into a smaller number of shares, the Conversion Price in
effect at the time of the record date for such dividend or distribution or of
the effective date of such subdivision, combination or reclassification shall be
adjusted so that it shall equal the price determined by multiplying the
Conversion Price by a fraction, the denominator of which shall be the number of
shares of Common Stock outstanding after giving effect to such action, and the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such action. Such adjustment shall be made successively
whenever any event listed above shall occur.
(2) In the case of any reclassification, capital
reorganization or other change of outstanding shares of Common Stock of the
Company, or in the case of any consolidation or merger of the Company with or
into another corporation or the conveyance of all or substantially all of the
assets of the Company to another corporation (other than a merger with a
subsidiary in which merger the Company is the continuing corporation and which
does not result in any reclassification, capital reorganization or other change
of outstanding shares of Common Stock of the class issuable upon conversion of
this Note), this Note shall thereafter be convertible at the Conversion Price in
effect on the day immediately preceding such reclassification, reorganization,
merger or consolidation into the number of shares of stock or other securities
or property to which a holder of the number of shares of Common Stock of the
Company deliverable upon conversion of this Note would have been entitled upon
such reclassification, change, consolidation, merger or conveyance; and, in any
such case, appropriate adjustment (as determined in good faith by the Board of
Directors) shall be made in the application of the provisions herein set forth
with respect to the rights and interests thereafter of the holder of this Note,
to the end that the provisions set forth herein (including provisions with
respect to changes in and other adjustments of the Conversion Price) shall
thereafter be applicable, as nearly as reasonably may be, in relation to any
shares of stock or other property thereafter deliverable upon the conversion of
this Note. The foregoing provisions of this subsection C shall similarly apply
to successive reclassification, capital reorganizations and changes of shares of
Common Stock and to successive consolidations, mergers, sales or conveyances.
4. Miscellaneous
A. This Note has been issued by the Company pursuant to
authorization of the Board of Directors of the Company.
B. The Company may consider and treat the person in whose name
this Note shall be registered as the absolute owner thereof for all purposes
whatsoever (whether or not this Note shall be overdue) and the Company shall not
be affected by any notice to the contrary. The registered owner of this Note
shall have the right to transfer it by assignment
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<PAGE>
(subject to the limitations on transfer contained in the Subscription Agreement)
and the transferee thereof shall, upon his registration as owner of this Note,
become vested with all the powers and rights of the transferor. Registration of
any new owner shall take place upon presentation of this Note to the Company at
its offices, 105 West Broad St., Suite 310, Falls Church, VA 22046, together
with a duly authenticated assignment. In case of transfer by operation of law,
the transferee agrees to notify the Company of such transfer and of his address,
and to submit appropriate evidence regarding the transfer so that this Note may
be registered in the name of the transferee. This Note is transferable only on
the books of the Company by the holder hereof, in person or by attorney, on the
surrender hereof, duly endorsed. Communications sent to any registered owner
shall be effective as against all holders or transferees of the Note not
registered at the time of sending the communication.
C. Payments of interest shall be made as specified above to
the registered owner of this Note. Payment of principal and interest shall be
made to the registered owner of this Note upon presentation of this Note upon or
after the Maturity Date.
D. The securities issuable upon conversion of this Note are
included in those securities with respect to which registration rights have been
granted pursuant to the Subscription Agreement and the Company agrees to give
the registered owner of this Note written notice by registered mail at least 30
days prior to the filing of each registration statement to which such rights
apply.
E. This Note shall be construed and enforced in accordance
with the laws of the State of New York.
F. Demand, present, notice, notice of demand, notice of
payment, protest and notice of dishonor are hereby waived by the Company.
G. No delay or omission by the Payee in exercising any of its
rights will operate as a waiver of its rights. A waiver in writing on one
occasion will not be construed as a consent to or a waiver of any of the Payee's
right or remedy on any future occasion.
H. Should the indebtedness evidenced by this Note or any part
hereof be collected at law or in equity or in bankruptcy, receivership or other
court proceedings, or this Note placed in the hands of attorneys for collection,
the Company agrees to pay, in addition to principal and interest due and payable
hereon, all costs of collection, including attorneys' fees, incurred by the
Payee in collecting or enforcing this Note.
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Note to be
signed in its name by its Chief Executive Officer.
UNIVERSITY ON-LINE, INC.
By:
______________________________________
Nat Kannan, Chief Executive Officer
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<PAGE>
ASSIGNMENT FORM
To assign this Note, fill in the form below:
(I) or (we) assign and transfer this Note to
(Print or type assignee's name, address and zip code)
_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________ (Insert
assignee's social sec. or tax I.D. no.)
and irrevocably appoint_________________________________________________________
agent to transfer this Note on the books of the Company.The agent may substitute
another to act for him.
Date:________________________
Your Signature:___________________________________
(Sign exactly as your name appears on the face of
this Note)
Signature Guarantee*
___________________________________
* Signature(s) must be guaranteed by an eligible guarantor institution
which is a member of a recognized signature guarantee program, i.e.,
Securities Transfer Agents Medallion Program (STAMP), Stock Exchanges
Medallion Program (SEMP) or New York Stock Exchange Medallion Signature
Program (MSP).
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<PAGE>
CONVERSION FORM
To convert this Note into shares of Common Stock of the Company, check
this box: |_|
If you want common stock certificate, if any, made out in another
person's name, fill in the form below:
________________________________________________________ (Print
or type assignee's name, address and zip code)
________________________________________________________
________________________________________________________
________________________________________________________ (insert
assignee's social sec. or tax I.D. no.)
Date:______________________
Your Signature: _____________________________
(Sign exactly as your name appears on the face of
this Note)
Signature Guarantee*
__________________________________
* Signature(s) must be guaranteed by an eligible guarantor institution
which is a member of a recognized signature guarantee program, i.e.,
Securities Transfer Agents Medallion Program (STAMP), Stock Exchanges
Medallion Program (SEMP) or New York Stock Exchange Medallion Signature
Program (MSP).
9
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made
by and among University Online, Inc. (the "Company"), and each investor
executing a copy hereof (collectively, the "Investors," each an "Investor").
WHEREAS, the Investors desire to purchase from the Company,
and the Company desires to issue and sell to the Investors, up to an aggregate
of 50 Units (plus up to an additional 7.5 Units solely to cover
over-subscriptions, if any), each Unit consisting of 133,334 shares of the
Company's Convertible Preferred Stock, par value $.01 per share (the "Preferred
Stock"), each share of Preferred Stock convertible into one share of the
Company's Common Stock, par value $.01 per share (the "Common Stock"), all upon
the terms set forth in the Company's Confidential Private Placement Memorandum
dated November 22, 1994 (the "Memorandum"); and
WHEREAS, to induce the Investors to purchase Units, the
Company has undertaken to register, on the third anniversary of the initial
closing (the "Initial Closing") of the Company's offering of the Units (the
"Offering"), the Common Stock issuable upon conversion of the Preferred Stock
contained in the Units to be purchased by the Investors under the Securities Act
of 1933, as amended, and the rules and regulations thereunder (the "Securities
Act").
NOW, THEREFORE, the Company and the Investors hereby covenant
and agree as follows:
1. Definitions. For purposes of this Agreement:
(a) The terms "register", "registered" and "registration"
refer to a registration effected by preparing and filing a registration
statement or statements or similar documents in compliance with the
Securities Act and the declaration or ordering of effectiveness of such
registration statement or document by the Securities and Exchange
Commission (the "SEC");
(b) The term "Registrable Securities" means (i) the Common
Stock of the Company issuable upon conversion of the Preferred Stock
contained in the Units purchased by the Investors, and (ii) any Common
Stock of the Company issued as a dividend or other distribution with
respect to, or in exchange for or in replacement of such Preferred
Stock or Common Stock, excluding in all cases, however, any shares of
Common Stock satisfying (i) or (ii) above but which shares are sold by
an Investor in a transaction in which such Investor's registration
rights under this Agreement are not assigned; and
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(c) Capitalized terms not defined herein shall have the
meanings set forth in the Memorandum.
2. Registration.
(a) At any time, commencing three years from the date of the
Initial Closing, the holders of a majority of the Preferred Stock
issued in connection with the Private Placement may upon written
request to the Company demand registration of the underlying Common
Stock issuable upon conversion of the Preferred Stock. In accordance
with the terms hereof, the Company shall use its best efforts to effect
such registration under the Securities Act of all Registrable
Securities; provided, however, that an Investor may inform the Company
in writing that it wishes to exclude all or a portion of its
Registrable Securities from such registration. Any Investor electing to
exclude its Registrable Securities from such registration will have no
further rights to have such Registrable Securities registered by the
Company.
(b) The holders of a majority in interest of the Registrable
Securities shall have the right to select the managing underwriters, if
any, for such registration, subject to the approval of the Company,
which shall not be unreasonably withheld.
(c) The Company is obligated to effect only two registrations
pursuant to this Agreement.
(d) The right of the Investors to demand registration shall be
subject to customary delays of up to 90 days if the Company is in the
process of a public offering of its securities.
3. Obligations of the Company.
When required under this Agreement to effect the registration
of the Registrable Securities, the Company shall, as expeditiously as reasonably
possible:
(a) Prepare and file with the SEC a registration statement or
similar documents (the "Registration Statement") with respect to all
Registrable Securities, other than any Registrable Securities excluded
by Investors pursuant to Section 2(a), and use its best efforts to
cause the Registration Statement to become effective, and keep the
Registration Statement effective pursuant to Rule 415 under the
Securities Act for 180 days, which Registration Statement (including
any amendments or supplements thereto and prospectuses contained
therein) shall not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein, or
necessary to make the statements therein, in light of the circumstances
in which they were made, not misleading.
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<PAGE>
(b) Prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to the Registration
Statement and the prospectus used in connection with the Registration
Statement as may be necessary to keep the Registration Statement
effective at all times for a period of 180 days and to comply with the
provisions of the Securities Act with respect to the disposition of the
Registrable Securities covered by the Registration Statement.
(c) Furnish promptly to the Investors such numbers of copies
of a prospectus, including a preliminary prospectus, and all amendments
and supplements thereto, in conformity with the requirements of the
Securities Act, and such other documents as the Investors may
reasonably request in writing in order to facilitate the disposition of
the Registrable Securities.
(d) Use its best efforts to register and qualify the
Registrable Securities covered by the Registration Statement under such
other securities or "Blue Sky" laws of such jurisdictions as shall be
reasonably requested by the Investors for whom such Registrable
Securities are registered or are to be registered, and to prepare and
file in those jurisdictions such amendments (including post-effective
amendments) and supplements and to take such other actions as may be
necessary to maintain such registration and qualification in effect at
all times for a period of 180 days, and to take all other actions
necessary or advisable to enable the disposition of such securities in
such jurisdictions; provided, however, that the Company shall not be
required in connection therewith or as a condition thereto to qualify
to do business or to file a general consent to service of process in
any such jurisdictions, if such filing could result in a material
adverse effect on the Company, as determined in good faith by the Board
of Directors of the Company, or to provide any undertaking or make any
change in its charter or bylaws which the Board of Directors of the
Company determines to be contrary to the best interests of the Company
and its stockholders.
(e) In the event the holders of a majority in interest of the
Registrable Securities select underwriters for the offering, enter into
and perform its obligations under an underwriting agreement, in usual
and customary form, including, without limitation, customary
indemnificationand contribution obligations, with the managing
underwriter of such offering. The Investors hereby agree to enter into
and perform their customary obligations under any such agreement
including, without limitation, customary indemnification and
contribution obligations.
(f) Notify the Investors for whom such Registrable Securities
are registered or are to be registered, at any time when a prospectus
relating to Registrable Securities covered by the Registration
Statement is required to be delivered under the Securities Act, of the
happening of any event as a result of
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<PAGE>
which the prospectus included in the Registration Statement, as then in
effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to
make the statements therein not misleading in light of the
circumstances then existing. The Company shall promptly amend or
supplement the Registration Statement to correct any such untrue
statement or omission.
(g) Notify the Investors for whom such Registrable Securities
are registered or are to be registered of the issuance by the SEC of
any stop order suspending the effectiveness of the Registration
Statement or the initiation of any proceedings for that purpose. The
Company shall make every reasonable effort to prevent the issuance of
any stop order and, if any stop order is issued, to obtain the lifting
thereof at the earliest possible time.
(h) Permit a single firm of counsel designated as selling
stockholders' counsel by the holders of a majority in interest of the
Registrable Securities to review the Registration Statement and all
amendments and supplements thereto for a reasonable period of time
prior to their filing. The Company shall not file any document in a
form to which such counsel reasonably objects.
(i) Make generally available to its security holders as soon
as practicable, but not later than 90 days after the close of the
period covered thereby, an earnings statement (in form complying with
the provisions of Rule 158 under the Securities Act) covering a
12-month period beginning not later than the first day of the Company's
next fiscal quarter following the effective date of the Registration
Statement.
(j) At the request of the Investors for whom such Registrable
Securities are registered or are to be registered, furnish on the date
that Registrable Securities are delivered to the underwriters for sale
in connection with a registration pursuant to this Agreement (i) an
opinion, dated as of such date, of the counsel representing the Company
for the purposes of such registration, in form and substance as is
customarily given to underwriters in an underwritten public offering,
addressed to the underwriters and (ii) a letter dated as of such date,
from the independent certified public accountants of the Company, in
form and substance as is customarily given by independent certified
public accountants to underwriters in an underwritten public offering,
addressed to the underwriters.
(k) Make available for inspection by the Investors for whom
such Registrable Securities are registered or are to be registered, any
underwriters participating in the offering pursuant to the registration
and the counsel, accountants or other agents retained by the Investors
or any such underwriters, all pertinent financial and other records,
corporate documents and properties of the Company, and cause the
Company's officers, directors and employees to supply
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<PAGE>
all information reasonably requested by the Investors or any such
underwriters in connection with the registration.
(l) If the Common Stock is then listed on a national
securities exchange, use its best efforts to cause the Registrable
Securities to be listed on such exchange. If the Common Stock is not
then listed on a national securities exchange, use its best efforts to
facilitate the reporting of the Common Stock on The Nasdaq Stock
Market.
(m) Provide a transfer agent and registrar, which may be a
single entity, for the Registrable Securities not later than the
effective date of the Registration Statement.
(n) Take all actions reasonably necessary to facilitate the
timely preparation and delivery of certificates (not bearing any legend
restricting the sale or transfer of such securities) representing the
Registrable Securities to be sold pursuant to the Registration
Statement and to enable such certificates to be in such denominations
and registered in such names as the Investors or any underwriters may
reasonably request.
(o) Take all other reasonable actions necessary to expedite
and facilitate the registration of the Registrable Securities pursuant
to the Registration Statement.
4. Furnish Information.
It shall be a condition precedent to the obligations of the
Company to take any action pursuant to this Agreement with respect to
each Investor for whom such Registrable Securities are registered or
are to be registered that such Investor shall furnish to the Company
such information regarding itself, the Registrable Securities held by
it, and the intended method of disposition of such securities as shall
be reasonably required to effect the registration of the Registrable
Securities, and that such Investor shall execute such documents in
connection with such registration as the Company may reasonably
request.
5. Expenses of Registration.
All expenses, other than underwriting discounts and
commissions, incurred in connection with the first requested
registration, filings and/or qualifications undertaken pursuant to
Sections 2 and 3 hereof, including, without limitation, all
registration, listing, filing and qualification fees, printers and
accounting fees, the fees and disbursements of counsel for the Company
and the reasonable fees and disbursements of the selling stockholders'
counsel, shall be borne by the Company. All such expenses incurred in
connection with the second
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<PAGE>
requested registration shall be borne, pro rata, by the Investors
participating in such registration.
6. Indemnification. In the event any Registrable Securities are
included in a Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company shall
indemnify and hold harmless each Investor, the directors, if any, of
such Investor, the officers, if any, of such Investor who sign the
Registration Statement, each person, if any, who controls such
Investor, any underwriter (as defined in the Securities Act) for the
Investor and each person, if any, who controls any such underwriter
within the meaning of the Securities Act or the Securities Exchange Act
of 1934, as amended (the "1934 Act"), against any losses, claims,
damages, expenses or liabilities (joint or several) to which any of
them many become subject under the Securities Act, the 1934 Act or
otherwise, insofar as such losses, claims, damages, expenses or
liabilities (or actions or proceedings, whether commenced or
threatened, in respect thereof) arise out of or are based upon any of
the following statements, omissions or violations (collectively, a
"Violation"): (i) any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement, including any
preliminary prospectus or final prospectus contained therein or any
amendments or supplements thereof, (ii) the omission or alleged
omission to state therein a material fact required to be stated
therein, or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading or (iii) any
Violation or alleged Violation by the Company of the Securities Act,
any state securities law or any rule or regulation promulgated under
the Securities Act, or any state securities law, and the Company shall
reimburse the Investors and each such underwriter or controlling person
for any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim,
damage, liability, action or proceeding promptly as such expenses are
incurred; provided, however, that the indemnity agreement contained in
this subsection 6(a) shall not apply to amounts paid in settlement of
any such loss, claim, damage, liability or action if such settlement is
effected without the consent of the Company, which consent shall not be
unreasonably withheld, nor shall the Company be liable in any such case
for any such loss, claim, damage, liability or action to the extent
that it arises out of or is based upon a Violation which occurs in
reliance upon and in conformity with written information furnished
expressly for use in connection with such registration by the Investor,
directors and officers of the Investor or any such underwriter or
controlling person, as the case may be. Such indemnity shall remain in
full force and effect regardless of any investigation made by or on
behalf of the Investors or any such underwriter or controlling person
or the Company and shall survive the transfer of the Registrable
Securities by Investors.
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<PAGE>
(b) To the extent permitted by law, each Investor, severally
and not jointly, shall indemnify and hold harmless the Company, each of
its directors, each of its officers who have signed the Registration
Statement, each person, if any, who controls the Company within the
meaning of the Securities Act or the 1934 Act, any underwriter and any
other stockholder selling securities pursuant to the Registration
Statement or any of its directors or officers or any person who
controls such holder or underwriter, against any losses, claims,
damages or liabilities (jointly or severally) to which any of them may
become subject, under the Securities Act, the 1934 Act or other Federal
or state law, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon any
Violation, in each case to the extent (and only to the extent) that
such Violation occurs in reliance upon and in conformity with written
information furnished by such Investor expressly for use in connection
with such registration; and such Investor shall reimburse any legal or
other expense reasonably incurred by any of such parties in connection
with investigating or defending any such loss, claim, damage, liability
or action; provided, however, that the indemnity agreement contained in
this subsection 6(b) shall not apply to amounts paid in settlement of
any such loss, claim, damage, liability or action if such settlement is
effected without the consent of such Investor, which consent shall not
be unreasonably withheld, conditioned or delayed; and provided further,
that the Investor shall be liable under this subsection for only that
amount of losses, claims, damages and liabilities as does not exceed
the proceeds to such Investor as a result of the sale of Registrable
Securities pursuant to such registration.
(c) Promptly after receipt by an indemnified party under this
Section 6 of notice of the commencement of any action (including any
governmental action), such indemnified party shall, if a claim in
respect thereof is to be made against any indemnifying party under this
Section 6, deliver to the indemnifying party a written notice of the
commencement thereof and the indemnifying party shall have the right to
participate in, and, to the extent that the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed,
to assume control of the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified
party shall have the right to retain its own counsel, with the fees and
expenses to be paid by the indemnifying party, if, in the reasonable
opinion of counsel for the indemnifying party, representation of such
indemnified party by such counsel would be inappropriate due to actual
or potential conflicting interests between such indemnified party and
any other party represented by such counsel in such proceeding. The
failure to deliver written notice to the indemnifying party within a
reasonable time of the commencement of any such action shall relieve
such indemnifying party of any liability to the indemnified party under
this Section 6 only to the extent prejudicial to its ability to defend
such action, but the omission to so deliver written notice to the
indemnifying party will not relieve it of any liability that it may
have to any
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<PAGE>
indemnified party otherwise than under this Section 6. The
indemnification required by this Section 6 shall be made by periodic
payments of the amount thereof during the course of the investigation
or defense, promptly as such expense, loss, damage or liability is
incurred, and upon receipt by the indemnifying party of such
documentation as it may reasonably request.
(d) To the extent any indemnification by an indemnifying party
is prohibited or limited by law, the indemnifying party agrees to make
the maximum contribution with respect to any amounts for which it would
otherwise be liable under this Section 6 to the extent permitted by
law, provided that (i) no contribution shall be made under
circumstances where the maker would not have been liable for
indemnification under the fault standards set forth in this Section 6,
(ii) no seller of Registrable Securities guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any seller of
Registrable Securities who was not guilty of such fraudulent
misrepresentation and (iii) contribution by any seller of Registrable
Securities shall be limited in amount to the net amount of proceeds
received by such seller from the sale of such Registrable Securities.
7. Reports Under the 1934 Act. With a view to making available to
the Investors the benefits of Rule 144 promulgated under the Securities
Act ("Rule 144"), and any other rule or regulation of the SEC that may
at any time permit the Investors to sell securities of the Company to
the public without registration, the Company agrees to:
(a) Make and keep current public information available, as is
described in Rule 144, at all times for 90 days after the effective
date of the first registration statement filed by the Company declared
effective for the offering of its securities to the general public;
(b) File with the SEC in a timely manner all reports and other
documents required to be filed by the Company under the Securities Act
and the 1934 Act; and
(c) Furnish to each Investor, so long as such Investor shall
own any Registrable Securities, promptly upon request (i) a written
statement by the Company that it has complied with the reporting
requirements of Rule 144 (at any time for 90 days after the effective
date of the first registration statement filed by the Company), the
Securities Act and the 1934 Act (at any time after it has become
subject to such reporting requirements), (ii) a copy of the most recent
annual or quarterly report of the Company and such other reports and
documents so filed by the Company and (iii) such other information as
may be reasonably requested in availing the Investors of any rule or
regulation of the SEC which permits the selling of any such securities
without registration.
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8. Assignment of Registration Rights. The rights to have the
Company register Registrable Securities pursuant to this Agreement may
be assigned by the Investors to transferees or assignees of such
securities; provided that the Company is, within reasonable time after
such transfers, furnished with written notice of the name and address
of such transferee or assignee and the securities with respect to which
such registration rights are being assigned. The term "Investors" as
used in this Agreement shall include such permitted assignees.
9. Miscellaneous.
(a) Notices required or permitted to be given hereunder shall
be in writing and shall be deemed to be sufficiently given when
personally delivered or sent by registered mail, return receipt
requested, addressed (i) if to the Company, at Imsatt Corporation, 105
West Broad Street, Suite 301, Falls Church, Virginia 22046, Attention:
President and (ii) if to an Investor, at the address set forth under
his name in the Subscription Agreement, or at such other address as
each such party furnishes by notice given in accordance with this
Section 9(a).
(b) Failure of any party to exercise any right or remedy under
this Agreement or otherwise, or delay by a party in exercising such
right or remedy, shall not operate as a waiver thereof. No waiver shall
be effective unless and until it is in writing and signed by the party
granting the waiver.
(c) This Agreement shall be enforced, governed and construed
in all respects in accordance with the laws of the State of New York,
as such laws are applied by New York courts to agreements entered into
and to be performed in New York by and between residents of New York.
In the event that any provision of this Agreement shall be invalid or
unenforceable under any applicable statute or rule of law, then such
provision shall be deemed inoperative to the extent that it may
conflict therewith and shall be deemed modified to conform with such
statute or rule of law. Any provision hereof which may prove invalid or
unenforceable under any law shall not affect the validity or
enforceability of any other provision hereof.
(d) This Agreement shall constitute the entire agreement
between the parties hereto with respect to the subject matter hereof
and may be amended only by a writing executed by the Company and the
holders of a majority in interest of the Registrable Securities.
9
<PAGE>
SIGNATURE PAGE
IN WITNESS WHEREOF, the undersigned has executed this
Registration Agreement this day of ,199 .
--- ----- ---
If the Holder is an INDIVIDUAL:
--------------------------
Print Name
--------------------------
Signature of Purchaser
--------------------------
Address
If the Holder is a PARTNERSHIP, CORPORATION OR TRUST:
--------------------------
Name of Partnership, Corporation or
Trust
By:
-----------------------
Name:
Title:
--------------------------
Address
ACCEPTED AND AGREED
this day of , 199
---- ----- ---
UNIVERSITY ONLINE, INC.
By:
-----------------------
Name:
Title:
10
<PAGE>
AMENDMENT NO. 1 TO REGISTRATION RIGHTS AGREEMENT
A. The Registration Rights Agreement shall be revised to reflect the
change to the registration rights referred to in the Supplement to Private
Placement Memorandum dated March 17, 1995. Paragraphs (b) through (d) of Section
2 of the Registration Rights Agreement will be renumbered to Paragraphs (c)
through (e), respectively, and the following paragraph will be added as new
paragraph (b):
(b) In the event that the Company completes an initial public offering
of its securities, the Company shall prepare and file no later than 180 days
after completion of the initial public offering, if any, a registration
statement under the Securities Act to permit resales of all Registrable
Securities; provided, however that an Investor may inform the Company in writing
that it wishes to exclude all or a portion of its Registrable Securities from
such registration. Any Investor electing to exclude its Registrable Securities
from such registration will have no further rights to have such Registrable
Securities registered by the Company.
B. Paragraph (a) of Section 3 of the Registration Rights
Agreement will be deleted in its entirety and replaced as
follows:
(a) prepare and file with SEC a registration statement or similar
documents (the "Registration Statement") with respect to all Registrable
Securities, other than any Registrable Securities excluded by Investors pursuant
to Section 2(a), and use its best efforts to keep the Registration Statement
effective at all times for a period of six months from the effective date of the
Registration Statement, which Registration Statement (including any amendments
or supplements thereto and prospectuses contained therein) shall not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein, or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading.
C. Section 5 of the Registration Rights Agreement will be
deleted in its entirety and replaced as follows:
All expenses, other than underwriting discounts, commissions and
transfer taxes, incurred in connection with the first requested registration,
filings and/or qualifications undertaken pursuant to Sections 2 and 3 hereof,
including, without limitation, all registration, listing, filing and
qualification fees, printers and accounting fees, the fees and disbursements of
counsel for the Company and the reasonable fees and disbursements of the selling
stockholders' counsel, shall be borne by the Company.
<PAGE>
AMENDMENT NO. 2
TO REGISTRATION RIGHTS AGREEMENT
This Amendment No. 2 to Registration Rights Agreement (the "Amendment")
is made and entered into effective as of the 12th day of August 1996, by and
among University Online, Inc., a Delaware corporation (the "Company") and the
Investors (as defined herein).
WHEREAS, pursuant to that certain Company Registration Rights Agreement,
as amended pursuant to the Supplement to Private Placement Memorandum and
Amendment to Registration Rights Agreement dated March 17, 1995, a copy of which
is attached hereto as Exhibit A (the "Registration Rights Agreement"), by and
among the Company and certain holders of the Company's Series A Preferred Stock,
such stockholders (the "Investors") have registration rights with respect to
such shares;
WHEREAS, the Company wishes to proceed with its initial public offering
("IPO"), and the Company and the Investors agree that this Amendment will make
an IPO more feasible, which is of material benefit to the Investors; and
WHEREAS, the Company and the Investors therefore desire to amend certain
terms and conditions of the Registration Rights Agreement;
NOW, THEREFORE, in consideration of the foregoing premises and other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agrees as follows:
1. Section 2 of the Registration Rights Agreement is hereby deleted in
its entirety.
2. As provided in Section 9(d) of the Registration Rights Agreement,
upon the execution hereof by the Company and Investors holding a majority in
interest of the Registrable Securities, this Amendment shall be effective as of
the date first written above.
3. Except as specifically amended or modified by this Amendment, the
terms and conditions of the Registration Rights Agreement shall remain
unimpaired, unaffected and unchanged in every particular as set forth in the
Registration Rights Agreement.
4. Capitalized terms used herein, unless otherwise defined herein, shall
have the meanings assigned to such terms in the Registration Rights Agreement.
5. This Amendment may be executed in any number of counterparts, each of
which shall be an original, but all of which together shall constitute one
instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment No.
2 to Registration Rights Agreement under seal effective as of the day and year
first above written.
COMPANY:
UNIVERSITY ONLINE, INC.
- -----------------------------------------
By: (SEAL)
--------------------------------------
Title:
-----------------------------------
INVESTORS:
(Printed or Typed Name)
- -----------------------------------------
By: (SEAL)
--------------------------------------
Title:
-----------------------------------
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this
"Agreement") dated as of July 19, 1996, by and among University Online, Inc., a
Delaware corporation (the "Company"), and Wheatley Partners, L.P. and certain
other investors signatory hereto (each an "Investor," collectively the
"Investors").
W I T N E S S E T H:
WHEREAS, pursuant to the terms of, and in order to induce
the Investors to enter into that certain Series B Preferred Stock Purchase
Agreement of even date herewith among the Company and the Investors (as amended
and in effect from time to time, the "Stock Purchase Agreement"), the parties
hereto have agreed to provide for the registration rights set forth in this
Agreement.
NOW, THEREFORE, the parties to this Agreement hereby agree
as follows:
1. Definitions. For all purposes of this Agreement, the
following terms shall have the meanings set forth below (capitalized terms used
herein and not otherwise defined herein shall have the meaning set forth in the
Stock Purchase Agreement for such term):
Commission means the Securities and Exchange
Commission, or any successor agency.
Common Stock means (a) the Common Stock (as
defined in the Stock Purchase Agreement), and (b) any shares of
any other class of capital stock of the Company hereafter issued
which is (i) not preferred in the Company's Amended and Restated
Certificate of Incorporation (the "Certificate") as to dividends
or to assets upon liquidation, dissolution or winding up of the
Company over any other class of stock of the Company, (ii) not
subject to redemption in the Certificate, or (iii) issued to the
holders of shares of Common Stock upon any reclassification
thereof.
Demand Registration means any request by the
Stockholders to register the Registrable Securities pursuant to
Section 2(a)(i).
indemnified party and indemnifying party. As
defined in Section 8(c).
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<PAGE>
Instrument of Accession means an Instrument of
Accession in the form of Exhibit A hereto.
Piggyback Registration. As defined in Section
3(a)(i).
Preferred Stock means the Series B Convertible
Preferred Stock and the Series B-1 Convertible Preferred Stock,
$.01 par value per share, of the Company (the "Series B Preferred
Stock"), including any Additional Preferred Stock (as defined in
the Stock Purchase Agreement) that is or is required to be issued
in payment of accrued dividends on the Preferred Stock.
Public Sale means any sale of Registrable
Securities to the public pursuant to a public offering registered
under the Securities Act or to the public through a broker or
market-maker pursuant to the provisions of Rule 144 (or any
successor rule) adopted under the Securities Act or any other
public offering not required to be registered under the Securities
Act.
Qualified Public Offering has the meaning
assigned to the term "Qualified Series B Public Offering" in the
Certificate.
Registration Expenses. As defined in Section
7(a).
Registered and registration mean a registration
effected by preparing and filing a registration statement in
compliance with the Securities Act and the declaration or ordering
by the Commission of the effectiveness of such registration
statement.
Registrable Securities means at any particular
time all of the Company's then outstanding shares of Common Stock
into which the Preferred Stock has been converted, that have not
been sold in a Public Sale, less those shares held by Stockholders
whose entire holdings of such shares are eligible for resale
without registration under Rule 144 in any three month period.
Securities Act means the Securities Act of 1933,
as amended, or any successor federal statute, and the rules and
regulations of the Securities and
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<PAGE>
Exchange Commission promulgated thereunder, all as the same shall
be in effect from time to time.
Stockholders means, initially, the Investors and,
thereafter, any Person who becomes a party to this Agreement by
executing an Instrument of Accession in connection with the
transfer to or acquisition by such Person of any Registrable
Securities from any Investor or any subsequent transferee of an
Investor; provided, that the term "Stockholder" shall not include
any Person who has sold, transferred or otherwise disposed of all
of such Person's Registrable Securities.
Underwriters' Maximum Number means, for any
Piggyback Registration, Demand Registration or other registration
which is an underwritten registration, that number of securities
to which such registration should, in the opinion of the managing
underwriters of such registration in the light of marketing
factors, be limited.
2. Stockholder Demand Registration.
(a) Request for Demand Registration.
(i) Subject to the limitations contained in the
following paragraphs of this Section 2, the holders of 50% or more
of the Registrable Securities then outstanding may at any time on
or after 180-days after the effective date of the registration
statement of the Company's Qualified Public Offering, provided,
however, such 180-day period may be extended up to one year after
the anniversary of the effective date of such registration
statement if in the opinion of the managing underwriters currently
negotiating with the Company on the date of this Agreement such
180-day period would affect the marketability of the shares being
offered thereby, give to the Company, pursuant to this clause (i),
a written request to register the Registrable Securities. Within
10 days after the receipt by the Company of any such written
request, the Company will give written notice of such registration
request to all Stockholders.
(ii) Subject to the limitations contained in the
following paragraphs of this Section 2, after the receipt of such
written request for a Demand Registration, (A) the Company will be
obligated and required to include in such Demand Registration all
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<PAGE>
Registrable Securities with respect to which the Company shall
receive from Stockholders, within 30 days after the date on which
the Company shall have given to all Stockholders a written notice
of registration request pursuant to Section 2(a)(i) hereof, the
written requests of such Stockholders for inclusion of their
respective shares of Registrable Securities in such Demand
Registration, and (B) the Company will use its best efforts to
prepare and file with the Commission a registration statement
under the Securities Act on any appropriate form promulgated by
the Commission and reasonably acceptable to the Stockholders
requesting such Demand Registration pursuant to clause (i) above
covering all such Registrable Securities and shall use its best
efforts to cause such registration statement to become effective
under the Securities Act. All written requests made by
Stockholders pursuant to this clause (ii) will specify the number
of shares of Registrable Securities to be registered and will also
specify the intended method of disposition thereof. Such method of
disposition shall, in any case, be an underwritten offering if an
underwritten offering is requested by the Demanding Stockholders
(as defined in Section 2(c) hereof) holding 51% or more of the
Registrable Securities to be included in such Demand Registration
by all of the Demanding Stockholders.
(iii) The Stockholders shall be permitted to withdraw
all or any part of the Registrable Securities of such Stockholders
from any Demand Registration at any time prior to the effective
date of such Demand Registration but, in the case of an
underwritten public offering, only if such Stockholders are
permitted to do so by the managing underwriters or pursuant to any
agreement therewith.
(b) Limitations on Demand Registration.
(i) The holders of Series B Preferred Stock shall
not be entitled to require the Company to effect, pursuant to
Section 2(a) hereof, more than two Demand Registrations but shall
be entitled to unlimited additional Demand Registrations if such
additional Demand Registrations would be eligible for registration
on Form S-3 (after the Company qualifies for Form S-3, provided
that in the case of any such Demand Registration the aggregate
gross proceeds from such S-3 Demand Registration would exceed
$500,000, if all registered shares thereunder were sold).
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<PAGE>
(ii) Any registration initiated pursuant to Section
2(a) hereof shall not count as a Demand Registration for purposes
of Section 2(a) hereof unless and until such registration shall
have become effective and seventy-five percent (75%) of the number
of shares initially included in the first filing by the Company
with the Commission, but not withdrawn under Section 2(a)(iii)
above, shall have been actually sold (unless the requesting
Stockholders withdraw all their Registrable Securities and the
Company has performed its obligations hereunder in all material
respects, in which case such demand will count as a Demand
Registration unless the requesting Stockholders pay all
Registration Expenses in connection with the withdrawn
registration).
(iii) The Company shall not be obligated or required to
effect the Demand Registration of any Registrable Securities
pursuant to Section 2(a) hereof during (a) the period commencing
on the date falling 45 days prior to the Company's estimated date
of filing (as notified to the Stockholders in writing) of, and
ending on the date 60 days following the effective date of, any
registration statement pertaining to any firm commitment
underwritten registration of the Company's equity securities (x)
initiated by the Company, and solely for the account of the
Company (other than any registration by the Company on Form S-8 or
similar form or dividend reinvestment plan) or (y) initiated
pursuant to Section 2(a)(i) hereof or (b) the 180-day period after
the commencement by the Company of any activity (a "Material
Activity") that, in the good faith business judgment of the
Company's Board of Directors, would be materially and adversely
affected to the detriment of the Company by the requested Demand
Registration (provided that (x) the Demand Registration may only
be deferred if the Material Activity was commenced prior to
receipt by the Company of the request for the Demand Registration,
and (y) no more than one deferral may be effected pursuant to
clause (a) or (b) during any 360-day period). A deferral of a
Demand Registration pursuant to this Section 2(b)(iii) shall be
lifted, and, unless the Demand Registration request has been
withdrawn as contemplated below, the requested registration
statement shall be filed forthwith, if, in the case of a deferral
pursuant to clause (a) of the preceding sentence, the proposed
registration for the Company's account is abandoned or not
declared effective within 90 days from the filing
-5-
<PAGE>
date, or in the case of a deferral pursuant to clause (b) of the
preceding sentence, the Company ceases to be engaged in a Material
Activity (and the Board of Directors shall immediately notify the
Stockholders if, in their good faith determination, such activity
has ceased). In order to defer the filing of a registration
statement pursuant to this Section 2(b)(iii), the Company shall
promptly (but in any event within 10 days), upon determining to
effect such deferral, deliver to each Stockholder a certificate
signed by an executive officer of the Company, on behalf of the
Board of Directors, stating that the Company is deferring such
filing pursuant to this Section 2(b)(iii) and setting forth the
anticipated deferral period. Within 20 days after receiving such
certificate, the holders of a majority of the Registrable
Securities owned by the Stockholders and for which registration
was previously requested may withdraw such Demand Registration
request by giving notice to the Company; if withdrawn, the Demand
Registration request shall be deemed not to have been made for all
purposes of this Agreement. If the Demand Registration is not
withdrawn and any deferral is lifted as provided above, prompt
notice thereof shall be given in writing to the Stockholders
requesting Demand Registration who thereafter shall be entitled to
deliver a new request. This Section 2(b)(iii) shall not prohibit
the Stockholders from exercising any "piggyback" registration
rights to which they would otherwise be entitled pursuant to
Section 3. The Company shall not be required to maintain the
effectiveness of any Demand Registration beyond the earlier to
occur of (i) the consummation of the distribution by Stockholders
of the Registrable Securities included therein or (ii) 180 days
after the effective date thereof, unless such registration is a
"shelf registration" in which case the Company will be required to
maintain such effectiveness until the earlier to occur of (i) 270
days from the effectiveness thereof or (ii) the date on which the
last security registered thereunder is sold.
(c) Priority on Demand Registrations. If the
managing underwriters in any Demand Registration pursuant to this Section 2
shall give written advice to the Company and the Stockholders that, in their
opinion, there is an Underwriters' Maximum Number of shares of Registrable
Securities that may successfully be included in such registration, then: (i) if
the Underwriters' Maximum Number
-6-
<PAGE>
is less than the number of shares of Registrable Securities requested to be
included in such registration, the Company will be obligated and required to
include in such registration that number of shares of Registrable Securities
which does not exceed the Underwriters' Maximum Number, and such number of
shares of Registrable Securities shall be allocated (A) first, pro rata among
the Stockholders of the class or classes of securities which initiated the
Demand Registration pursuant to this Section 2 (such Stockholders being referred
to herein as the "Demanding Stockholders") on the basis of the number of shares
of Registrable Securities requested to be included therein by each such
Demanding Stockholder, up to the Underwriters' Maximum Number, before any other
securities are included therein, and (B) next, pro rata among the Stockholders
(other than the Demanding Stockholders) on the basis of the number of shares of
Registrable Securities requested to be included therein by each such
Stockholder, up to the number of securities which they requested to include in
such registration which does not exceed the difference between the Underwriters'
Maximum Number and that number of securities included in such registration
pursuant to clause (A) of this sentence; and (ii) if the Underwriters' Maximum
Number exceeds the number of shares of Registrable Securities requested to be
included in such registration, then the Company will be entitled to include in
such registration that number of securities which shall have been requested by
the Company or by other securityholders of the Company to be included in such
registration for the account of the Company or such other securityholders and
which shall not be greater than such excess. Neither the Company nor any of its
securityholders shall be entitled to include any securities in any underwritten
Demand Registration unless the Company or such securityholders (as the case may
be) shall have agreed to such inclusion and unless the Company and such other
securityholders shall have agreed in writing to sell such securities on the same
terms and conditions as shall apply to the Registrable Securities to be included
in such Demand Registration.
(d) Selection of Underwriters. If any Demand
Registration or any registration effected pursuant to Section 2 hereof is a firm
commitment underwritten offering, or a best efforts underwritten offering, the
investment bankers and managing underwriters in such registration will be
selected by the Company, subject to the approval of the Demanding Stockholders
holding 51% or more of the Registrable Securities to be included in such
registration
-7-
<PAGE>
by all of the Demanding Stockholders (which approval shall not be unreasonably
withheld).
3. Piggyback Registrations.
(a) Rights to Piggyback.
(i) If (and on each occasion that) the Company
proposes to register any of its equity securities or any other
securities convertible into equity securities under the Securities
Act for its own account or for the account of any other Person
(other than pursuant to Section 2(a) hereof)(each such
registration not withdrawn or abandoned prior to the effective
date thereof being herein called a "Piggyback Registration"), the
Company will give written notice to all Stockholders of such
proposal not later than 30 days prior to the anticipated filing
date of such Piggyback Registration.
(ii) Subject to the provisions contained in paragraphs
(b) and (c) of this Section 3 and in the last two sentences of
this clause (ii), (A) the Company will be obligated and required
to include in each Piggyback Registration all Registrable
Securities with respect to which the Company shall receive from
Stockholders, within 15 days after the date on which the Company
shall have given written notice of such Piggyback Registration to
all Stockholders pursuant to Section 3(a)(i) hereof, the written
requests of such Stockholders for inclusion in such Piggyback
Registration, and (B) the Company will use its best efforts to
promptly file with the Commission a registration statement under
the Securities Act covering all such Registrable Securities and
shall use its best efforts to cause such registration statement to
become effective under the Securities Act. The Stockholders shall
be permitted to withdraw all or any part of the Registrable
Securities of such Stockholders from any Piggyback Registration at
any time prior to the effective date of such Piggyback
Registration but only in the case of an underwritten offering if
such Stockholders are permitted to do so by the managing
underwriters or pursuant to any agreement therewith. The Company
will not be obligated or required to give notice of any proposed
registration or include any Registrable Securities in any
registration effected solely to implement an employee, consultant
or director benefit plan or a transaction to which Rule 145 of the
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<PAGE>
Commission is applicable. The Stockholders shall not be entitled
to include Registrable Securities in a Piggyback Registration
unless the Stockholders shall have agreed in writing to sell such
securities on the same terms and conditions as shall apply to the
securities (other than Registrable Securities) being included in
such registration. The Company shall not be required to maintain
the effectiveness of any Piggyback Registration beyond the earlier
to occur of (i) the consummation of the distribution by holders of
Registrable Securities included in such Piggyback Registration or
(ii) 120 days after the effective date thereof.
(b) Priority on Piggyback Registrations. If
in connection with any Piggyback Registration, the managing underwriters shall
give written advice to the Company that, in their opinion, there is an
Underwriters' Maximum Number of securities that may successfully be included in
such registration, then: (i) the Company shall be entitled to include in such
registration that number of securities which the Company proposes to offer and
sell for its own account in such registration and which does not exceed the
Underwriters' Maximum Number; and (ii) the Company will be obligated and
required to include in such registration that number of shares of Registrable
Securities which shall have been requested by the Stockholders to be included in
such registration, on a pro rata basis with the requested shares of other
securityholders of the Company with similar rights, and which does not exceed
the difference between the Underwriters' Maximum Number and that number of
securities which the Company is entitled to include therein pursuant to clause
(i) above and such number of shares of Registrable Securities shall be allocated
pro rata among each such Stockholder, on the basis of the number of shares of
Registrable Securities requested to be included therein by each such Stockholder
and, if the total of such securities and such Registrable Securities which the
Company is entitled to include pursuant to clause (i) above is less than the
Underwriters' Maximum Number, the Company may include shares requested to be
included by other securityholders of the Company.
(c) Selection of Underwriters. In any Piggyback
Registration, the Company shall (unless the Company shall otherwise agree) have
the right to select the investment bankers and managing underwriters in such
registration.
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<PAGE>
4. Lockup Agreement.
(a) Restrictions on Public Sale by Stockholders.
Each Stockholder, if the Company or the managing underwriters so request in
connection with any registration, will not, without the prior written consent of
the Company or such underwriters, effect any public sale or other distribution
of any equity securities of the Company, including any sale pursuant to Rule
144, during the period required by the managing underwriters; provided, however,
that such period of time shall not exceed that applicable to all the Company's
executive officers and directors.
(b) Restrictions on Public Sale by the Company.
The Company agrees, unless it obtains the consent of the managing underwriter(s)
of any underwritten offering of Registrable Securities pursuant to Sections 2 or
3 hereof, not to effect any public sale or distribution of its equity
securities, or any securities convertible into or exchangeable or exercisable
for such equity securities, during the period commencing on the seventh day
prior to, and ending on the ninetieth day (or such longer period as shall be
reasonably required by the managing underwriters) following, the effective date
of any underwritten Demand or Piggyback Registration, except in connection with
any such underwritten registration, or pursuant to any employee benefit plan.
5. Registration Procedures. If (and on each occasion that)
the Company shall become obligated to effect any registration of any Registrable
Securities hereunder, the Company will use its best efforts to effect promptly
the registration of such Registrable Securities under the Securities Act and to
permit the public offering and sale of such Registrable Securities in accordance
with the intended method of disposition thereof, and, in connection therewith,
the Company, as expeditiously as shall be reasonably possible, shall:
(a) use its best efforts to prepare and file
with the Commission a registration statement with respect to such Registrable
Securities, and use its best efforts to cause such registration statement to
become and remain effective as provided herein;
(b) prepare and file with the Commission
such amendments and supplements to such registration statement and the
prospectus included in such registration statement as may be necessary or
advisable to comply in all
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<PAGE>
material respects with the provisions of the Securities Act with respect to the
disposition of all securities covered by such registration statement or as may
be necessary to keep such registration statement effective and current as
provided herein;
(c) furnish to each seller of Registrable
Securities such number of copies of such registration statement, each amendment
and supplement thereto (in each case including all exhibits thereto), the
prospectus included in such registration statement (including each preliminary
prospectus), and such other documents as any such seller may reasonably request
in order to facilitate the disposition of the Registrable Securities held by
such seller;
(d) enter into such customary agreements
(provided they do not require the issuance of securities at a discount to any
underwriter) and take all such other customary actions in connection therewith
as the Stockholders holding 51% or more of the Registrable Securities being
registered reasonably request in order to expedite or facilitate the disposition
of such Registrable Securities;
(e) use its best efforts to register and
qualify the Registrable Securities covered by such registration statement under
such securities or blue sky laws of such jurisdictions as any seller (or the
managing underwriter, in the case of any underwritten offering) shall reasonably
request and do any and all such other acts and things as may be reasonably
necessary or advisable to permit the disposition in such jurisdictions of the
Registrable Securities covered by such registration statement; provided,
however, that the Company shall not be required in connection therewith to
qualify to do business or file a general consent to service of process in any
such jurisdiction, unless the company is already subject to service in such
jurisdiction or subject itself to taxation in any jurisdiction where the Company
is not already subject to taxation;
(f) furnish to each prospective seller a
signed counterpart, addressed to the prospective sellers, (or to the
underwriters, in the case of any underwritten offering) of (i) an opinion of
counsel for the Company, dated the effective date of the registration statement,
and (ii) to the extent not prohibited by applicable financial accounting
statements or standards or not generally
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<PAGE>
delivered by "big six" accounting firms, a "comfort" letter signed by the
independent public accountants who have certified the Company's financial
statements included in the registration statement, covering substantially the
same matters with respect to the registration statement (and the prospectus
included therein) and (in the case of the "comfort" letter) with respect to
events subsequent to the date of the financial statements, as are customarily
covered (at the time of such registration) in opinions of issuer's counsel and
in "comfort" letters, respectively, delivered to the underwriters in
underwritten public offerings of securities.
6. Cooperation by Prospective Sellers, etc.
(a) Each prospective seller of Registrable
Securities will furnish to the Company in writing such information as the
Company may reasonably require and which is customary in such transactions from
such seller, and otherwise reasonably cooperate with the Company in connection
with any registration statement with respect to such Registrable Securities.
(b) The failure of any prospective seller of
Registrable Securities to furnish any information or documents in accordance
with any provision contained in this Agreement shall not affect the obligations
of the Company under this Agreement to any remaining sellers who furnish such
information and documents unless in the reasonable opinion of counsel to the
Company or the underwriters, such failure impairs or may impair the viability of
the offering or the legality of the registration statement or the underlying
offering.
(c) The Stockholders included in any
registration statement will not (until further notice) effect sales of
Registrable Securities included in any registration statement after receipt of
telegraphic or written notice from the Company to suspend sales to permit the
Company to correct or update such registration statement or prospectus (which
obligation to correct or update the Company will satisfy promptly); but the
obligations of the Company with respect to maintaining any registration
statement current and effective shall be extended by a period of days equal to
the period such suspension is in effect.
(d) At the end of any period during which
the Company is obligated to keep any registration statement
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current and effective as provided herein (and any extensions thereof required by
the preceding paragraph (c) of this Section 6), the Stockholders included in
such registration statement shall discontinue sales of shares pursuant to such
registration statement upon receipt of notice from the Company of its intention
to remove from registration the shares covered by such registration statement
which remain unsold, and such Stockholders shall notify the Company of the
number of shares registered which remain unsold promptly after receipt of such
notice from the Company.
7. Registration Expenses.
(a) Except as otherwise provided herein, or
as required by law, all fees and expenses incurred or sustained in connection
with or arising out of the Demand Registrations pursuant to Section 2 hereof and
each registration pursuant to Section 3 hereof, including, without limitation,
all registration, filing fees and qualification fees, fees and expenses of
compliance with federal and state securities or blue sky laws (including
reasonable fees and disbursements of counsel for the underwriters in connection
with the blue sky qualification of Registrable Securities), printing expenses,
messenger, telephone, facsimile and delivery expenses, fees and disbursements of
counsel for the Company, reasonable fees and disbursements of one counsel
representing any or all of the selling holders of Registrable Securities, fees
and disbursements of all independent certified public accountants of the Company
(including the expenses relating to the preparation and delivery of any special
audit or "cold comfort" letters required by or incident to such registration),
and fees and disbursements of underwriters (excluding discounts, commissions and
expenses representing disguised commissions), the reasonable fees and expenses
of any special experts retained by the Company of its own initiative or at the
request of the managing underwriters in connection with such registration, and
fees and expenses of all (if any) other persons retained by the Company (all
such costs and expenses being herein called, collectively, the "Registration
Expenses"), will be borne and paid by the Company. The Company will, in any
case, pay its internal expenses (including, without limitation, all salaries and
expenses of its officers and employees performing legal or accounting duties),
the expense of any annual audit, and the fees and expenses incurred in
connection with the listing of the securities to be registered on each
securities exchange on which similar securities of the Company are then listed.
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(b) The Company will not bear the cost of
nor pay for any stock transfer taxes imposed in respect of the transfer of any
Registrable Securities to any purchaser thereof by any Stockholder in connection
with any registration of Registrable Securities pursuant to this Agreement.
(c) To the extent that Registration Expenses
incident to any registration are, under the terms of this Agreement, not
required to be paid by the Company, each Stockholder included in such
registration will pay all Registration Expenses which are solely attributable to
the registration of such Stockholder's Registrable Securities so included in
such registration, and all other Registration Expenses not so attributable to
one Stockholder will be borne and paid by all sellers of securities included in
such registration in proportion to the number of securities so included by each
such seller.
8. Indemnification.
(a) Indemnification by the Company. To the
full extent permitted by law, the Company will indemnify and hold harmless each
Stockholder requesting or joining in a registration and each underwriter of the
securities so registered, the officers, directors, agents, employees and
partners of each such Person and each Person, if any, who controls any thereof
(within the meaning of the Securities Act) against any and all claims, losses,
damages and liabilities (or actions in respect thereof) arising out of or based
on any untrue statement (or alleged untrue statement) of any material fact
contained in any registration statement, prospectus or any amendment or
supplement thereto, or any document filed pursuant to state securities laws (or
in any related registration statement, notification or the like) or any omission
(or alleged omission) to state therein any material fact required to be stated
therein or necessary to make the statements therein not misleading, or any
violation or alleged violation by the Company of the Securities Act or the
Securities Exchange Act of 1934, as amended (the "1934 Act") or any rule or
regulation promulgated under the Securities Act or the 1934 Act applicable to
the Company and relating to any action or inaction required of the Company in
connection with any such registration, qualification or compliance, and the
Company will reimburse each such Stockholder, underwriter, and each other Person
indemnified pursuant to this paragraph (a) for any legal and any other expenses
reasonably incurred in connection with investigating or defending any such
claim,
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loss, damage, liability or action; provided, however, that the Company will not
be liable in any such case to the extent that any such claim, loss, damage,
liability or expense arises out of or is based on any untrue statement or
omission (or alleged untrue statement or omission) made in reliance upon and in
conformity with written information furnished to the Company by such
Stockholder, underwriter, officer, director, partner or controlling person and
stated to be specifically for use therein and provided further, that such
indemnity shall not inure to the benefit of any Stockholder, underwriter,
director, partner or controlling person ("indemnifiable party") from whom the
person asserting any claim, loss, damage or expense purchased securities which
are the subject thereof if such indemnified party failed to send or give a copy
of the prospectus or such other document as amended or supplemented to such
person at or prior to the confirmation of the sale of such securities to such
person in any case where such delivery is required by the Securities Act by such
indemnified party and the untrue statement or omission of a material fact
contained in a preliminary prospectus was corrected in the prospectus as amended
and supplemented. The Company also agrees to indemnify and provide contribution
arrangements to any underwriters of the Registrable Securities, their officers
and directors and each person who controls such underwriters (within the meaning
of Section 15 of the Securities Act or Section 20 of the 1934 Act)
(collectively, "Securities Professionals") on substantially the same basis as
that of the indemnification of the Stockholder provided in this Section 8 and in
Section 9, if requested.
(b) Indemnification by Each Stockholder.
Each Stockholder requesting or joining in a registration will severally, and not
jointly, indemnify each underwriter of the securities so registered, the Company
and the officers, agents, employees and directors of the Company and each
Person, if any, who controls any thereof (within the meaning of the Securities
Act) and their respective successors in title and assigns against any and all
claims, losses, damages and liabilities (or actions in respect thereof) arising
out of or based on any untrue statement (or alleged untrue statement) of any
material fact contained in any registration statement, prospectus, or any
amendment or supplement thereto, or any document filed pursuant to state
securities laws (or in any related registration statement, notification or the
like) or any omission (or alleged omission) to state therein any material fact
required to be stated therein or necessary to make the statements therein not
misleading, or any violation or alleged violation by
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such Stockholder of any rule or regulation promulgated under the Securities Act
or the 1934 Act applicable to such Person and relating to any action or inaction
required of such Person in connection with any such registration, qualification
or compliance, and such Stockholder will reimburse each underwriter, the Company
and each other Person indemnified pursuant to this paragraph (b) for any legal
and any other expenses reasonably incurred in connection with investigating or
defending any such claim, loss, damage, liability or action; provided, however,
that this paragraph (b) shall apply only if (and only to the extent that) such
statement or omission (or alleged untrue statement or omission) was made in
reliance upon and in conformity with written information furnished to such
underwriter or the Company by any such Stockholder or any officer, director,
partner or controlling person of such Stockholder and stated to be specifically
for use therein, and provided further that each Stockholder's liability
hereunder (including, without limitation, Section 9) with respect to any
particular registration shall be limited to an amount equal to the proceeds
received by such Stockholder from the Registrable Securities sold by such
Stockholder in such registration. The Company and the Stockholders shall be
entitled to receive indemnities from underwriters participating in any
distribution of Registrable Securities to the same extent as provided above with
respect to information so furnished in writing by such underwriters expressly
for use in any prospectus or registration statement.
(c) Indemnification Proceedings. Each party
entitled to indemnification pursuant to this Section 8 (the "indemnified party")
shall give notice to the party required to provide indemnification pursuant to
this Section 8 (the "indemnifying party") promptly after such indemnified party
acquires actual knowledge of any claim as to which indemnity may be sought, and
shall permit the indemnifying party (at its expense) to assume the defense of
any claim or any litigation resulting therefrom; provided that counsel for the
indemnifying party, who shall conduct the defense of such claim or litigation,
shall be reasonably acceptable to the indemnified party, and the indemnified
party may participate in such defense at the indemnified party's expense; and
provided, further, that the failure by any indemnified party to give notice as
provided in this paragraph (c) shall not relieve the indemnifying party of its
obligations under this Section 8, except to the extent the indemnifying party is
materially prejudiced by such failure. No indemnifying party, in the defense of
any such
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claim or litigation, shall, except with the consent of each indemnified party,
consent to entry of any judgment or enter into any settlement which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such indemnified party of a release from all liability in respect of such
claim or litigation. The reimbursement required by this Section 8 shall be made
by periodic payments during the course of the investigation or defense, as and
when bills are received or expenses incurred.
9. Contribution in Lieu of Indemnification. If
the indemnification provided for in Section 8 hereof is unavailable to a party
that would have been an indemnified party under any such section in respect of
any losses, claims, damages, expenses or liabilities (or actions in respect
thereof) referred to therein, then each party that would have been an
indemnifying party thereunder shall, in lieu of indemnifying such indemnified
party, contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages, expenses or liabilities (or actions in
respect thereof) in such proportion as is appropriate to reflect the relative
fault of the indemnifying party on the one hand and such indemnified party on
the other in connection with the statements or omissions which resulted in such
losses, claims, damages, expenses or liabilities (or actions in respect
thereof). The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the indemnifying party or such indemnified party and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company and each Stockholder agree that
it would not be just and equitable if contribution pursuant to this Section 9
were determined by pro rata allocation or by any other method of allocation
which does not take into account the equitable considerations referred to above
in this Section 9. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages, expenses or liabilities (or actions in
respect thereof) referred to above in this Section 9 shall include any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. No Person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be
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<PAGE>
entitled to indemnification or contribution from any Person who was not guilty
of such fraudulent misrepresentation.
10. Rule 144 Requirements. From time to time
after the earlier to occur of (a) the ninetieth day following the date on which
there shall first become effective a registration statement filed by the Company
under the Securities Act with respect to its equity securities, or (b) the date
on which the Company shall register a class of equity securities under Section
12 of the 1934 Act, the Company will use its best efforts to file all reports
required to be filed by it under the 1934 Act in order that there will be
publicly available current public information concerning the Company within the
meaning of Rule 144 promulgated under the Securities Act. The Company will
furnish to any Stockholder, upon request made by such Stockholder at any time
after the undertaking of the Company in the preceding sentence shall have first
become effective, a written statement signed by the Company, addressed to such
Stockholder, describing briefly the action the Company has taken or proposes to
take to comply with the current public information requirements of Rule 144. The
Company will, at the request of any Stockholder, upon receipt from such
Stockholder of an unqualified written opinion of counsel knowledgeable in
securities law matters, addressed to the Company and reasonably acceptable in
form and substance to the Company, remove from the stock certificates
representing such Registrable Securities that portion of any restrictive legend
which relates to the registration provisions of the Securities Act, and,
thereupon, such Registrable Securities will cease to be Registrable Securities
for purposes of this Agreement.
11. Participation in Underwritten Registrations.
No person may participate in any underwritten registration pursuant to this
Agreement unless such person (a) agrees to sell such person's securities on the
basis provided in any underwriting arrangements approved by the persons
entitled, under the provisions hereof, to approve such arrangements, and (b)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents reasonably required by the terms of
such underwriting arrangements. Any Stockholder to be included in any
underwritten registration shall be entitled at any time to withdraw such
Registrable Securities from such registration prior to the execution of the
related underwriting agreement in the event that such Stockholder shall
disapprove of any of the terms of such agreement.
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<PAGE>
12. Miscellaneous.
(a) No Inconsistent Agreements. The Company
hereby represents and warrants that it is not a party to or bound in any manner
under, and covenants that it will not enter into at any time after the date
hereof, any agreement or contract (whether written or oral) with respect to any
of its securities which prevents the Company from complying in any respect with
the registration rights granted by the Company to the Stockholders hereunder.
(b) Waivers. No waiver of any breach or
default hereunder shall be considered valid unless in writing and signed by
party granting such waiver, and no waiver shall be deemed a waiver of any
subsequent breach or default of the same or similar nature.
(c) Term. The agreements of the Company
contained in this Agreement shall continue in full force and effect so long as
any Stockholder holds any Registrable Securities.
(d) Notices. Unless otherwise provided, any
notice required or permitted under this Agreement shall be given in writing and
shall be deemed effectively given (i) upon personal delivery to the party to be
notified, (ii) when delivered by overnight courier or (iii) five (5) days after
deposit with the United States Post Office, by registered or certified mail,
return receipt requested, postage prepaid and addressed:
(i) if to a Stockholder, at such Stockholder's
address on the signature pages hereto with a copy to:
Joel M. Simon, Esq.
Paul, Hastings, Janofsky & Walker
31st Floor
399 Park Avenue
New York, New York 10022
Fax No.: (212) 319-4090
(ii) if to the Company, at:
Narasimhan P. Kannan
University Online, Inc.
105 West Broad Street
Suite 301
Falls Church, Virginia 22046
Fax No.: (703) 532-3929
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<PAGE>
with a copy to:
Donald R. Reynolds, Esq.
Wyrick, Robbins, Yates & Ponton L.L.P
4101 Lake Boone Trail
Suite 300
Raleigh, North Carolina 27607
Fax No.: (919) 781-4865
and thereafter at such other address, notice of which has been given in
accordance with the provisions of this Section 12(d).
(e) Successors and Assigns. Except as
otherwise provided herein, this Agreement shall be binding upon and inure to the
benefit of each party hereto, including subsequent holders of Registrable
Securities agreeing to be bound by all of the terms and conditions of this
Agreement by executing an Instrument of Accession in the form set forth in
attached Exhibit A. Otherwise, this agreement shall not confer any rights,
remedies, obligations or liabilities upon any third party, except for an
indemnified party under Section 8 and Section 9.
(f) Counterparts. This Agreement may be
executed in one or more counterparts, each of which shall be deemed to be an
original, but all of which taken together shall constitute one and the same
instrument.
(g) Headings. The section and subsection
headings contained herein are for convenience only and are not intended to
define or limit the contents of said sections and subsections.
(h) Governing Law. This Agreement and all
amendments hereof shall be governed by and construed in accordance with the laws
of the State of New York, disregarding any New York principles of choice or
conflict of laws that would otherwise provide for the application of the
substantive laws of another jurisdiction.
(i) Severability. If any provision of this
Agreement shall be held to be illegal, invalid or unenforceable, such
illegality, invalidity or unenforceability shall attach only to such provision
and shall not in any manner affect or render illegal, invalid or unenforceable
any other provision of this Agreement, and this Agreement shall be carried out
as if any such illegal,
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<PAGE>
invalid or unenforceable provision were not contained herein.
(j) Specific Performance. Without limiting
the rights of each party hereto to pursue all other legal and equitable rights
and remedies available to such party to any other party's failure to perform its
obligations under this Agreement, each such party acknowledges and agrees that
the remedy at law for any failure to perform obligations hereunder would be
inadequate and all such parties shall be entitled to specific performance,
injunctive relief or other equitable remedies in the event of any such failure.
(k) Entire Agreement. (i) This Agreement
constitutes the entire agreement of the parties with respect to the subject
matter hereof and may not be modified, amended or terminated (other than in
accordance with its terms) except by a written agreement specifically referring
to this Agreement and signed by the Company and the Investors.
(ii) To the extent any term or other provision of
any agreement, instrument or oral understanding by which any party hereto is
bound conflicts with this Agreement, this Agreement shall have precedence over
such conflicting term or provision.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this
Registration Rights Agreement as of the date first written above.
COMPANY:
UNIVERSITY ONLINE, INC.
By: ________________________________
Title: _____________________________
INVESTORS:
BARRY FINGERHUT
____________________________________
Address:
c/o GeoCapital Corporation
767 Fifth Avenue
45th Floor
New York, New York 10153
ELI LEVITIN
____________________________________
Address:
One State Street Plaza
29th Floor
New York, New York 10004
IRWIN LIEBER
____________________________________
Address:
c/o GeoCapital Corporation
767 Fifth Avenue
45th Floor
New York, New York 10153
<PAGE>
SETH LIEBER
____________________________________
Address:
c/o GeoCapital Corporation
767 Fifth Avenue
45th Floor
New York, New York 10153
MATTHEW SMITH
____________________________________
Address:
c/o GeoCapital Corporation
767 Fifth Avenue
45th Floor
New York, New York 10153
WHEATLEY PARTNERS, L.P.
By: ________________________________
Title: _____________________________
Address:
80 Cuttermill Road
Great Neck, New York 11021
AARON WOLFSON
____________________________________
Address:
One State Street Plaza
29th Floor
New York, New York 10004
<PAGE>
ABRAHAM WOLFSON
____________________________________
Address:
One State Street Plaza
29th Floor
New York, New York 10004
MORRIS WOLFSON
____________________________________
Address:
One State Street Plaza
29th Floor
New York, New York 10004
WOLFSON EQUITIES
By: ________________________________
Name:
Title:
Address:
35 Carey Street
Lakewood, New Jersey 08701
WOODLAND PARTNERS
____________________________________
Address:
80 Cuttermill Road, Suite 311
Great Neck, New York 11021
Attn: Barry Rubenstein
<PAGE>
EXHIBIT A
Instrument of Accession
Reference is made to that certain Registration Rights
Agreement dated as of July __, 1996, a copy of which is attached hereto (as
amended and in effect from time to time, the "Registration Rights Agreement"),
among University Online, Inc., a Delaware corporation (the "Company"), Wheatley
Partners, L.P. and certain other parties signatory thereto.
The undersigned, _____________, in order to become the owner
or holder of _____ shares (the "Shares") of _____________ Stock, hereby agrees
that by the undersigned's execution hereof (a) the undersigned is a Stockholder
party to the Registration Rights Agreement subject to all of the restrictions
and conditions applicable to Stockholders set forth in the Registration Rights
Agreement, and (b) all of the Shares (and any and all shares of stock of the
Company issued in respect thereof) constitute Registrable Securities subject to
all the restrictions and conditions applicable to Registrable Securities as set
forth in the Registration Rights Agreement. This Instrument of Accession shall
take effect and shall become a part of said Registration Rights Agreement
immediately upon execution.
Executed as of the date set forth below under the laws of the
State of New York.
Signature:
Address:
Date:
Accepted:
UNIVERSITY ONLINE, INC.
By: _________________________
Title _______________________
Date: _______________________
<PAGE>
THIS PAGE MUST BE KEPT AS THE LAST PAGE OF THE DOCUMENT.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED FOR SALE, SOLD
OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
FILED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR PURSUANT TO AN EXEMPTION
FROM REGISTRATION UNDER SUCH ACT.
VOID AFTER 5:00 P.M., NEW YORK TIME, ON JULY 23, 2001 OR IF NOT A BUSINESS DAY,
AS DEFINED HEREIN, AT 5:00 P.M., NEW YORK TIME, ON THE NEXT FOLLOWING BUSINESS
DAY.
WARRANT TO PURCHASE
150,000 SHARES OF COMMON STOCK
NO. 1
WARRANT TO PURCHASE
COMMON STOCK
OF
UNIVERSITY ONLINE, INC.
TRANSFER RESTRICTED -- SEE SECTION 5.02
This certifies that, for good and valuable consideration,
Oppenheimer & Co., Inc., and its registered, permitted assigns (collectively,
the "Warrantholder"), is entitled to purchase from University Online, Inc., a
Delaware corporation ("UOL" or the "Company"), subject to the terms and
conditions hereof, at any time on or after 9:00 A.M., New York time, on July 23,
1996, and before 5:00 P.M., New York time, on July 23, 2001 (or, if such day is
not a Business Day, at or before 5:00 P.M., New York time, on the next following
Business Day), the number of fully paid and non-assessable shares of Common
Stock stated above at the Exercise Price. The Exercise Price and the number of
shares purchasable hereunder are subject to adjustment from time to time as
provided in Article III hereof.
ARTICLE I
Section 1.01: Definition of Terms. As used in this Warrant, the
following capitalized terms shall have the following respective meanings:
(a) Business Day: A day other than a Saturday, Sunday or
other day on which banks in the State of New York are authorized by law to
remain closed.
(b) Common Stock: Common Stock, $.01 par value per share,
of the Company.
(c) Common Stock Equivalents: Securities that are
convertible into or exercisable for shares of Common Stock.
(d) Exchange Act: The Securities Exchange Act of 1934, as
amended.
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(e) Exercise Price: $1.80 per Warrant Share, as such
price may be adjusted from time to time pursuant to Article III hereof.
(f) Expiration Date: 5:00 P.M., New York time, on July
23, 2001 or if such day is not a Business Day, the next succeeding day which is
a Business Day.
(g) Holder: A Holder of Registrable Securities.
(h) NASD: National Association of Securities Dealers,
Inc., and NASDAQ: NASD Automatic Quotation System.
(i) Person: An individual, partnership, joint venture,
corporation, trust, unincorporated organization or government or any department
or agency thereof.
(j) Piggyback Registration: See Section 6.01.
(k) Prospectus: Any prospectus included in any
Registration Statement, as amended or supplemented by any prospectus supplement,
with respect to the terms of the offering of any portion of the Registrable
Securities covered by such Registration Statement and all other amendments and
supplements to the Prospectus, including post-effective amendments and all
material incorporated by reference in such Prospectus.
(l) Public Offerings: A public offering of any of the
Company's equity or debt securities pursuant to a registration statement under
the Securities Act.
(m) Registration Expenses: Any and all expenses incurred
in connection with any registration or action incident to performance of or
compliance by the Company with Article VI, including, without limitation, (i)
all SEC, national securities exchange and NASD registration and filing fees; all
listing fees and all transfer agent fees; (ii) all fees and expenses of
complying with state securities or blue sky laws (including the fees and
disbursements of counsel for the underwriters in connection with blue sky
qualifications of the Registrable Securities); (iii) all printing, mailing,
messenger and delivery expenses and (iv) all fees and disbursements of counsel
for the Company and of its accountants, including the expenses of any special
audits and/or "cold comfort" letters required by or incident to such performance
and compliance, but excluding underwriting discounts and commissions, brokerage
fees and transfer taxes, if any, and fees of counsel or accountants retained by
the holders of Registrable Securities to advise them in their capacity as
Holders of Registrable Securities.
(n) Registrable Securities: Any Warrant Shares issued to
Oppenheimer & Co., Inc. and/or its designees or transferees as permitted under
Section 5.02 and/or other securities that may be or are issued by the Company
upon exercise of this Warrant, including those which may thereafter be issued by
the Company in respect of any such securities by means of any stock splits,
stock dividends, recapitalizations, reclassifications or the like, and as
adjusted pursuant to Article III hereof.
(o) Registration Statement: Any registration statement of
the Company filed or to be filed with the SEC which covers any of the
Registrable Securities pursuant to the provisions of this Agreement, including
all amendments (including post-effective amendments) and supplements thereto,
all exhibits thereto and all material incorporated therein by reference.
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<PAGE>
(p) SEC: The Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act or the
Exchange Act.
(q) Securities Act: The Securities Act of 1933, as
amended.
(r) Transfer: See Section 5.02.
(s) Warrants: This Warrant, all other warrants issued on
the date hereof and all other warrants that may be issued in its or their place
(together evidencing the right to purchase an aggregate of 150,000 shares of
Common Stock), originally issued as set forth in the definition of Registrable
Securities.
(t) Warrantholder: The person(s) or entity(ies) to whom
this Warrant is originally issued, or any successor in interest thereto, or any
assignee or transferee thereof, in whose name this Warrant is registered upon
the books to be maintained by the Company for that purpose.
(u) Warrant Shares: Common Stock, Common Stock
Equivalents and other securities purchased or purchasable upon exercise of the
Warrants.
ARTICLE II
Duration and Exercise of Warrant
--------------------------------
Section 2.01: Duration of Warrant. Subject to the limitations
specified in ss.2.02.(a)(ii) regarding a Cashless Exercise, the Warrantholder
may exercise this Warrant at any time and from time to time after 9:00 A.M., New
York time, on July 23, 1996, and before 5:00 P.M., New York time, on the
Expiration Date. If this Warrant is not exercised on or prior to the Expiration
Date, it shall become void, and all rights hereunder shall thereupon cease.
Section 2.02.: Exercise of Warrant.
(a) The Warrantholder may exercise this Warrant, in whole or in
part, as follows:
(i) By presentation and surrender of this Warrant
to the Company at its principal executive offices or at the
office of its stock transfer agent, if any, with the
Subscription Form annexed hereto duly executed and accompanied
by payment of the full Exercise Price for each Warrant Share
to be purchased; or
(ii) By presentation and surrender of this Warrant
to the Company at its principal executive offices with a
Cashless Exercise Form annexed hereto duly executed (a
"Cashless Exercise"). In the event of a Cashless Exercise, the
Warrantholder shall exchange its warrant for that number of
shares of Common Stock determined by multiplying the number of
Warrant Shares by a fraction, the numerator of which shall be
the amount by which the then current market price per share of
Common Stock exceeds the Exercise Price, and the denominator
of which shall be the then current market price per share of
Common Stock. For purposes of any computation under this
Section 2.02(a)(ii), the then current market price per share
of Common Stock at any date shall be
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<PAGE>
deemed to be the last sale price of the Common Stock on the
business day prior to the date of the Cashless Exercise or, in
case no such reported sales take place on such day, the
average of the last reported bid and asked prices of the
Common Stock on such day, in either case on the principal
national securities exchange on which the Common Stock is
admitted to trading or listed, or if not listed or admitted to
trading on any such exchange, the representative closing bid
price of the Common Stock as reported by NASDAQ, or other
similar organization if NASDAQ is no longer reporting such
information, or if not so available, the fair market price of
the Common Stock as determined by the Board of Directors.
(b) Upon receipt of this Warrant, in the case of Section
2.02 (a) (i), with the Subscription Form duly executed and accompanied by
payment of the aggregate Exercise Price for the Warrant Shares for which this
Warrant is then being exercised, or, in the case of Section 2.02 (a) (ii), with
the Cashless Exercise Form duly executed, the Company shall cause to be issued
certificates for the total number of whole shares of Common Stock for which this
Warrant is being exercised (adjusted to reflect the effect of the anti-dilution
provisions contained in Article III hereof, if any, and as provided in Section
2.04 hereof) in such denominations as are requested for delivery to the
Warrantholder, and the Company shall thereupon deliver such certificates to the
Warrantholder. The Warrantholder shall be deemed to be the holder of record of
the shares of Common Stock issuable upon such exercise, notwithstanding that the
stock transfer books of the Company shall then be closed or that certificates
representing such shares of Common Stock shall not then be actually delivered to
the Warrantholder. If at the time this Warrant is exercised, a Registration
Statement is not in effect to register under the Securities Act the Warrant
Shares issuable upon exercise of this Warrant, the Company may require the
Warrantholder to make such representations, and may place such legends on
certificates representing the Warrant Shares, as may be reasonably required in
the opinion of counsel to the Company to permit the Warrant Shares to be issued
without such registration.
(c) In case the Warrantholder shall exercise this Warrant
with respect to less than all of the Warrant Shares that may be purchased under
this Warrant, the Company shall execute a new warrant in the form of this
Warrant for the balance of such Warrant Shares and deliver such new warrant to
the Warrantholder.
(d) The Company shall pay any and all stock transfer and
similar taxes which may be payable in respect of the issue of this Warrant or in
respect of the issue of any Warrant Shares.
Section 2.03: Reservation of Shares. The Company hereby agrees that
at all times there shall be reserved for issuance and delivery upon exercise of
this Warrant such number of shares of Common Stock or other shares of capital
stock of the Company from time to time issuable upon exercise of this Warrant.
All such shares shall be duly authorized, and when issued upon such exercise,
shall be validly issued, fully paid and nonassessable, free and clear of all
liens, security interests, charges and other encumbrances or restrictions on
sale and free and clear of all preemptive rights (except the restrictions
imposed by the legend appearing at the top of Page 1 of this Warrant).
Section 2.04: Fractional Shares. The Company shall not be required
to issue any fraction of a share of its capital stock in connection with the
exercise of this Warrant, and in any case where the Warrantholder would, except
for the provisions of this Section 2.04, be entitled under the terms of this
Warrant to receive a fraction of a share upon the exercise of this Warrant, the
Company shall, upon the
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exercise of this Warrant and tender of the Exercise Price (as adjusted to cover
the balance of the share), issue the larger number of whole shares purchasable
upon exercise of this Warrant. The Company shall not be required to make any
cash or other adjustment in respect of such fraction of a share to which the
Warrantholder would otherwise be entitled.
Section 2.05: Listing. Prior to the issuance of any shares of Common
Stock upon exercise of this Warrant, the Company shall secure the listing of
such shares of Common Stock upon each national securities exchange or automated
quotation system, if any, upon which shares of Common Stock are then listed
(subject to official notice of issuance upon exercise of this Warrant) and shall
maintain, so long as any other shares of Common Stock shall so be listed, such
listing of all shares of Common Stock from time to time issuable upon the
exercise of this Warrant; and the Company shall so list on each national
securities exchange or automated quotation system, and shall maintain such
listing of, any other shares of capital stock of the Company issuable upon the
exercise of this Warrant if and so long as any shares of the same class shall be
listed on such national securities exchange or automated quotation system.
ARTICLE III
Adjustment of Shares of Common Stock
Purchasable and of Exercise Price
---------------------------------
The Exercise Price and the number and kind of Warrant Shares
shall be subject to adjustment from time to time upon the happening of certain
events as provided in this Article III.
Section 3.01: Mechanical Adjustments.
(a) If at any time prior to the exercise of this Warrant
in full, the Company shall (i) declare a dividend or make a distribution on the
Common Stock payable in shares of its capital stock (whether shares of Common
Stock or of capital stock of any other class); (ii) subdivide, reclassify or
recapitalize outstanding Common Stock into a greater number of shares; (iii)
combine, reclassify or recapitalize its outstanding Common Stock into a smaller
number of shares; or (iv) issue any shares of its capital stock by
reclassification of its Common Stock (including any such reclassification in
connection with a consolidation or a merger in which the Company is the
continuing corporation), the Exercise Price in effect at the time of the record
date of such dividend, distribution, subdivision, combination, reclassification
or recapitalization shall be adjusted so that the Warrantholder shall be
entitled to receive the aggregate number and kind of shares which, if this
Warrant had been exercised in full immediately prior to such event, he would
have owned upon such exercise and been entitled to receive by virtue of such
dividend, distribution, subdivision, combination, reclassification or
recapitalization. Any adjustment required by this paragraph 3.01(a) shall be
made successively immediately after the record date, in the case of a dividend
or distribution, or the effective date, in the case of a subdivision,
combination, reclassification or recapitalization to allow the purchase of such
aggregate number and kind of shares.
(b) If at any time after July 23, 1996 and prior to the
exercise of this Warrant in full, the Company shall (i) issue or sell any Common
Stock or Common Stock Equivalents without consideration or for consideration per
share (in cash, property or other assets) less than the current market price per
share on the date of such issuance or sale as defined in Section 3.01 (f)
(except for the issuance of any Common Stock or Common Stock Equivalents
pursuant to any options, warrants, rights or other
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agreements in effect prior to July 23, 1996) or (ii) fix a record date for the
issuance of subscription rights, options or warrants to all holders of Common
Stock entitling them to subscribe for or purchase Common Stock (or Common Stock
Equivalents) at a price (or having an exercise or conversion price per share)
less than the current market price of the Common Stock (as determined pursuant
to Section 3.01 (f)) on the record date described below, the Exercise Price
shall be adjusted so that the Exercise Price shall equal the price determined by
multiplying the Exercise Price in effect immediately prior to the date of such
sale or issuance (which date in the event of distribution to stockholders shall
be deemed to be the record date set by the Company to determine stockholders
entitled to participate in such distribution) by a fraction, the numerator of
which shall be (i) the number of shares of Common Stock outstanding on the date
of such sale or issuance, plus (ii) the number of additional shares of Common
Stock which the aggregate consideration received by the Company upon such
issuance or sale (plus the aggregate of any additional amount to be received by
the Company upon the exercise of such subscription rights, options or warrants)
would purchase at such current market price per share of the Common Stock; and
the denominator of which shall be (i) the number of shares of Common Stock
outstanding on the date of such issuance or sale, plus (ii) the number of
additional shares of Common Stock offered for subscription or purchase (or into
which the Common Stock Equivalents so offered are exercisable or convertible).
Any adjustments required by this paragraph 3.01 (b) shall be made immediately
after such issuance or sale or record date, as the case may be. Such adjustments
shall be made successively whenever such event shall occur. To the extent that
shares of Common Stock (or Common Stock Equivalents) are not delivered in
connection with such subscription rights, options or warrants, the Exercise
Price shall be readjusted to the Exercise Price which would then be in effect
had the adjustments made upon the issuance of such rights, options or warrants
been made upon the basis of delivery of only the number of shares of Common
Stock (or Common Stock Equivalents) actually delivered.
(c) If at any time prior to the exercise of this Warrant
in full, the Company shall fix a record date for the issuance or making a
distribution to all holders of Common Stock (including any such distribution to
be made in connection with a consolidation or merger in which the Company is to
be the continuing corporation) of evidences of its indebtedness, any other
securities of the Company or any cash, property or other assets (excluding a
combination, reclassification or recapitalization referred to in Section 3.01
(a)), regular cash dividends or cash distributions paid out of net profits
legally available therefor and in the ordinary course of business and
subscription rights, options or warrants for Common Stock or Common Stock
Equivalents (excluding those referred to in Section 3.01 (b)) (any such
nonexcluded event being herein called a "Special Dividend"), (i) the Exercise
Price shall be decreased immediately after the record date for such Special
Dividend to a price determined by multiplying the Exercise Price then in effect
by a fraction, the numerator of which shall be the then current market price of
the Common Stock (as defined in Section 3.01 (f)) on such record date less the
fair market value (as determined by the Company's Board of Directors) of the
evidences of indebtedness, securities or property, or other assets issued or
distributed in such Special Dividend applicable to one share of Common Stock or
of such subscription rights, options or warrants applicable to one share of
Common Stock and the denominator of which shall be such then current market
price per share of Common Stock (as so determined) and (ii) the number of shares
of Common Stock subject to purchase upon exercise of this Warrant shall be
increased to a number determined by multiplying the number of shares of Common
Stock subject to purchase immediately before such Special Dividend by a
fraction, the numerator of which shall be the Exercise Price in effect
immediately before such Special Dividend and the denominator of which shall be
the Exercise Price in effect immediately after such Special Dividend. Any
adjustment required by this paragraph 3.01 (c) shall be made successively
whenever such a record date is fixed and in the event that such distribution is
not so
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made, the Exercise Price shall again be adjusted to be the Exercise Price that
was in effect immediately prior to such record date.
(d) If at any time prior to the exercise of this Warrant
in full, the Company shall make a distribution to all holders of the Common
Stock of stock of a subsidiary or securities convertible into or exercisable for
such stock, then in lieu of an adjustment in the Exercise Price or the number of
Warrant Shares purchasable upon the exercise of this warrant, each
Warrantholder, upon the exercise hereof at any time after such distribution,
shall be entitled to receive from the Company, such subsidiary or both, as the
Company shall determine, the stock or other securities to which such
Warrantholder would have been entitled if such Warrantholder had exercised this
Warrant immediately prior thereto, all subject to further adjustment as provided
in this Article III, and the Company shall reserve, for the life of the Warrant,
such securities of such subsidiary or other corporation; provided, however, that
no adjustment in respect of dividends or interest on such stock or other
securities shall be made during the term of this Warrant or upon its exercise.
(e) Whenever the Exercise Price payable upon exercise of
each Warrant is adjusted pursuant to one or more of paragraphs (a), (b) and (c)
of this Section 3.01, the Warrant Shares shall simultaneously be adjusted by
multiplying the number of Warrant Shares initially issuable upon exercise of
each Warrant by the Exercise Price in effect on the date of such adjustment and
dividing the product so obtained by the Exercise Price, as adjusted.
(f) For the purpose of any computation under this Section
3.01, the current market price per share of Common Stock at any date shall be
the last sale price regular way on such day or, in case no such reported sales
take place on such day, the average of the last reported bid and asked prices
regular way, in either case on the principal national securities exchange on
which the Common Stock is admitted to trading or listed, or if not listed or
admitted to trading on any such exchange, the representative closing bid price
as reported by NASDAQ, or other similar organization if NASDAQ is no longer
reporting such information, or if not so available, the fair market price as
determined by the Board of Directors of the Company. If the price per share in
any issuance is determined by the average last sale price over some specified
period of time, then the current share price per share shall be deemed to be
such average last sale price. No adjustment in the Exercise Price shall be
required in the event of the issuance of stock through an underwritten follow-on
public offering, if the offering price of such issue is no more than 10% below
the current market price.
(g) No adjustment in the Exercise Price shall be required
unless such adjustment would require an increase or decrease of at least ten
cents ($.10) in such price; provided, however, that any adjustments which by
reason of this paragraph (g) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All calculations
under this Section 3.01 shall be made to the nearest cent or to the nearest
one-hundredth of a share, as the case may be. Notwithstanding anything in this
Section 3.01 to the contrary, the Exercise Price shall not be reduced to less
than the then existing par value of the Common Stock as a result of any
adjustment made hereunder.
(h) In the event that at any time, as a result of any
adjustment made pursuant to Section 3.01(a), the Warrantholder thereafter shall
become entitled to receive any shares of the Company other than Common Stock,
thereafter the number of such other shares so receivable upon exercise of any
Warrant shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to the
Common Stock contained in Section 3.01(a).
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(i) In the case of an issue of additional Common Stock or
Common Stock Equivalents for cash, the consideration received by the Company
therefor,without deducting therefrom any discount or commission or other
expenses paid by the Company for any underwriting of, or otherwise in connection
with, the issuance thereof, shall be deemed to be the amount received by the
Company therefor. The term "issue" shall include the sale or other disposition
of shares held by or on account of the Company or in the treasury of the Company
but until so sold or otherwise disposed of such shares shall not be deemed
outstanding.
Section 3.02: Notice of Adjustment. Whenever the number of Warrant
Shares or the Exercise Price is adjusted as herein provided, the Company shall
prepare and deliver forthwith to the Warrantholder a certificate signed by its
President, and by any Vice President, Treasurer or Secretary, setting forth the
adjusted number of shares purchasable upon the exercise of this Warrant and the
Exercise Price of such shares after such adjustment, a brief statement of the
facts requiring such adjustment and the computation by which adjustment was
made.
Section 3.03: No Adjustment for Dividends. Except as provided in
Section 3.01 of this Agreement, no adjustment in respect of any cash dividends
paid by the Company shall be made during the term of this Warrant or upon the
exercise of this Warrant.
Section 3.04: Preservation of Purchase Rights in Certain
Transactions. In case of any reclassification, capital reorganization or other
change of outstanding shares of Common Stock (other than a subdivision or a
combination of the outstanding Common Stock and other than a change in the par
value of the Common Stock or in case of any consolidation or merger of the
Company with or into another corporation (other than a merger with a subsidiary
in which the Company is the continuing corporation and said merger does not
result in any reclassification, capital reorganization or other change of
outstanding shares of Common Stock of the class issuable upon exercise of this
Warrant)) or in case of any sale, lease, transfer or conveyance to another
corporation of the property and assets of the Company as an entirety or
substantially as an entirety, the Company shall, as a condition precedent to
such transaction, cause such successor or purchasing corporation, as the case
may be, to execute with the Warrantholder an agreement granting the
Warrantholder the right thereafter, upon payment of the Exercise Price in effect
immediately prior to such action, to receive upon exercise of this Warrant the
kind and amount of shares and other securities and property which he would have
owned or have been entitled to receive after the happening of such
reclassification, change, consolidation, merger, sale or conveyance had this
Warrant been exercised immediately prior to such action. Such agreement shall
provide for adjustments in respect of such shares of stock and other securities
and property, which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Article III. In the event that in connection
with any such reclassification, capital reorganization, change, consolidation,
merger, sale or conveyance, additional shares of Common Stock shall be issued in
exchange, conversion, substitution or payment, in whole or in part, for, or of,
a security of the Company other than Common Stock, any such issue shall be
treated as an issue of Common Stock covered by the provisions of Article III.
The provisions of this Section 3.04 shall similarly apply to successive
reclassification, capital reorganizations, consolidations, mergers, sales or
conveyances.
Section 3.05: Form of Warrant After Adjustments. The form of this
Warrant need not be changed because of any adjustments in the Exercise Price or
the number or kind of the Warrant Shares, and Warrants theretofore or thereafter
issued may continue to express the same price and number and kind of shares as
are stated in this Warrant, as initially issued.
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Section 3.06: Treatment of Warrantholder. Prior to due presentment
for registration of transfer of this Warrant, the Company may deem and treat the
Warrantholder as the absolute owner of this Warrant (notwithstanding any
notation of ownership or other writing hereon) for all purposes and shall not be
affected by any notice to the contrary.
ARTICLE IV
Other Provisions Relating
to Rights of Warrantholder
--------------------------
Section 4.01: No Rights as Stockholders; Notice to Warrantholders.
Nothing contained in this Warrant shall be construed as conferring upon the
Warrantholder or his or its transferees the right to vote or to receive
dividends or to consent to or receive notice as a stockholder in respect of any
meeting of stockholders for the election of directors of the Company or any
other matter, or any other rights whatsoever as stockholders of the Company. The
Company shall give notice to the Warrantholder by registered mail if at any time
prior to the expiration or exercise in full of the Warrants, any of the
following events shall occur:
(a) the Company shall authorize the payment of any
dividend upon shares of Common Stock payable in any securities or authorize the
making of any distribution (other than a cash dividend subject to the
parenthetical set forth in Section 3.01(c)) to all holders of Common Stock;
(b) the Company shall authorize the issuance to all
holders of Common Stock of any additional shares of Common Stock or Common Stock
Equivalents or of rights, options or warrants to subscribe for or purchase
Common Stock or Common Stock Equivalents or of any other subscription rights,
options or warrants;
(c) a dissolution, liquidation or winding up of the
Company (other than in connection with a consolidation, merger, or sale or
conveyance of the property of the Company as an entirety or substantially as an
entirety); or
(d) a capital reorganization or reclassification of the
Common Stock (other than a subdivision or combination of the outstanding Common
Stock and other than a change in the par value of the Common Stock) or any
consolidation or merger of the Company with or into another corporation (other
than a consolidation or merger in which the Company is the continuing
corporation and that does not result in any reclassification or change of Common
Stock outstanding) or in the case of any sale or conveyance to another
corporation of the property of the Company as an entirety or substantially as an
entirety.
Such giving of notice shall be initiated (i) at least 10 days prior to the date
fixed as a record date or effective date or the date of closing of the Company's
stock transfer books for the determination of the stockholders entitled to such
dividend, distribution or subscription rights, or for the determination of the
stockholders entitled to vote on such proposed merger, consolidation, sale,
conveyance, dissolution, liquidation or winding up. Such notice shall specify
such record date or the date of closing the stock transfer books, as the case
may be. Failure to provide such notice shall not affect the validity of any
action taken in connection with such dividend, distribution or subscription
rights, or proposed merger, consolidation, sale, conveyance, dissolution,
liquidation or winding up.
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Section 4.02: Lost, Stolen, Mutilated or Destroyed Warrants. If this
Warrant is lost, stolen, mutilated or destroyed, the Company may, on such terms
as to indemnity or otherwise as it may in its discretion impose (which shall, in
the case of a mutilated Warrant, include the surrender thereof), issue a new
Warrant of like denomination and tenor as and in substitution for this Warrant.
Section 4.03: Restrictions on Public Sale by Warrantholders. Each
Warrantholder, if the Company or the managing underwriters so request in
connection with any registration, will not, without the prior written consent of
the Company or such underwriters, effect any public sale or other distribution
of any equity securities of the Company, including any sale pursuant to Rule
144, during the period required by the managing underwriters; provided, however,
that such period of time shall not exceed that applicable to all the Company's
executive officers and directors. The foregoing shall in no way restrict
Oppenheimer's ability to conduct transactions in the Company's stock on behalf
of its customers as a broker/dealer or in connection with its market making
activities.
ARTICLE V
Split-Up, Combination
Exchange and Transfer of Warrants
---------------------------------
Section 5.01: Split-Up, Combination, Exchange and Transfer of
Warrants. Subject to the provisions of Section 5.02 hereof, this Warrant may be
split up, combined or exchanged for another Warrant or Warrants containing the
same terms to purchase a like aggregate number of Warrant Shares. If the
Warrantholder desires to split up, combine or exchange Warrants, he or it shall
make such request in writing delivered to the Company and shall surrender to the
Company any Warrants to be so split up, combined or exchanged. Upon any such
surrender for a split up, combination or exchange, the Company shall execute and
deliver to the person entitled thereto a Warrant or Warrants, as the case may
be, as so requested. The Company shall not be required to effect any split up,
combination or exchange which will result in the issuance of a Warrant entitling
the Warrantholder to purchase upon exercise a fraction of a share of Common
Stock or a fractional Warrant. The Company may require such Warrantholder to pay
a sum sufficient to cover any tax or governmental charge that may be imposed in
connection with any split up, combination or exchange of Warrants.
Section 5.02: Restrictions on Transfer. Neither this Warrant nor the
Warrant Shares may be disposed of or encumbered (any such action, a "Transfer"),
except (i) to Oppenheimer & Co., Inc., any successor to the business of such
company, or any officer or employee of such company, or (ii) to any underwriter
in connection with a Public Offering of the Common Stock, provided (as to (ii))
that this Warrant is exercised upon such Transfer and the shares of Common Stock
issued upon such exercise are sold by such underwriter as part of such Public
Offering and, as to both (i) and (ii), only in accordance with and subject to
the provisions of the Securities Act and the rules and regulations promulgated
thereunder. If at the time of a Transfer, a Registration Statement is not in
effect to register this Warrant or the Warrant Shares, the Company may require
the Warrantholder to make such representations, and may place such legends on
certificates representing this Warrant, as may be reasonably required in the
opinion of counsel to the Company to permit a Transfer without such
registration.
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ARTICLE VI
Registration Under the Securities Act of 1933
---------------------------------------------
Section 6.01: Piggyback Registration.
(a) Right to Include Registrable Securities. If at any
time or from time to time after July 23, 1996 and prior to the Expiration Date,
the Company proposes to register any of its securities under the Securities Act
on any form for the registration of securities under such Act, whether or not
for its own account (other than by a registration statement on Form S-4, S-8 or
other form which does not include substantially the same information as would be
required in a form for the general registration of securities or would not be
available for the Registrable Securities) (a "Piggyback Registration"), it shall
promptly give written notice to all Holders of its intention to do so and of
such Holders' rights under this Section 6.01. Such rights are referred to
hereinafter as "Piggyback Registration Rights." Upon the written request of any
such Holder made within 20 days after receipt of any such notice (which request
shall specify the Registrable Securities intended to be disposed of by such
Holder), the Company shall include in the Registration Statement the Registrable
Securities which the Company has been so requested to register by the Holders
thereof and the Company shall keep such registration statement in effect and
maintain compliance with each Federal and state law or regulation for the period
necessary for such Holder to effect the proposed sale or other disposition (but
in no event for a period greater than 120 days).
(b) Withdrawal of Piggyback Registration by Company. If,
at any time after giving written notice of its intention to register any
securities in a Piggyback Registration but prior to the effective date of the
related Registration Statement, the Company shall determine for any reason not
to register such securities, the Company shall give written notice of such
determination to each Holder and, thereupon, shall be relieved of its obligation
to register any Registrable Securities in connection with such Piggyback
Registration. All best efforts obligations of the Company pursuant to Section
6.03 shall cease if the Company determines to terminate prior to such effective
date any registration where Registrable Securities are being registered pursuant
to this Section 6.01.
(c) Piggyback Registration of Underwritten Public
Offerings. If a Piggyback Registration involves an offering by or through
underwriters, then, (i) all Holders requesting to have their Registrable
Securities included in the Company's Registration Statement must sell their
Registrable Securities to the underwriters selected by the Company on the same
terms and conditions as apply to other selling stockholders and (ii) any Holder
requesting to have his or its Registrable Securities included in such
Registration Statement may elect in writing, not later than three Business Days
prior to the effectiveness of the Registration Statement filed in connection
with such registration, not to have his or its Registrable Securities so
included in connection with such registration.
(d) Payment of Registration Expenses for Piggyback
Registration. The Company shall pay all Registration Expenses in connection with
each registration of Registrable Securities requested pursuant to a Piggyback
Registration Right contained in this Section 6.01
(e) Priority in Piggyback Registration. If a Piggyback
Registration involves an offering by or through underwriters, the Company shall
not be required to include Registrable Shares therein if and to the extent the
underwriter managing the offering reasonably believes in good faith and advises
each Holder requesting to have Registrable Securities included in the Company's
Registration
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Statement that such inclusion would materially adversely affect such offering;
provided that (i) if other selling stockholders who are employees, officers,
directors or other affiliates of the Company have requested registration of
securities in the proposed offering, the Company will reduce or eliminate such
other selling stockholders' securities before any reduction or elimination of
Registrable Securities, and (ii) any such reduction or elimination (after taking
into account the effect of clause (i)) shall be pro rata to all other holders of
the securities of the Company exercising "piggyback registration rights" similar
to those set forth herein in proportion to the respective number of shares they
have requested to be registered.
Section 6.02: Buy-out. In lieu of carrying out its obligations to
effect a Piggyback Registration of any Registrable Securities pursuant to this
Article VI, the Company may carry out such obligation by offering to purchase
and purchasing such Registrable Securities requested to be registered at an
amount in cash equal to the difference between (a) 93% of the last sale price of
the Common Stock on the day the request for registration is made and (b) the
Exercise Price in effect on such day.
Section 6.03: Registration Procedures. If and whenever the Company
is required to use its best efforts to take action pursuant to any Federal or
state law or regulation to permit the sale or other disposition of any Warrant
Shares that are then held or that may be acquired upon exercise of the Warrants,
in order to effect or cause the registration of any Registrable Securities under
the Securities Act as provided in this Article VI, the Company shall, as
expeditiously as practicable:
(a) furnish to each selling Holder of Registrable
Securities and the underwriters, if any, without charge, as many copies of the
Registration Statement, the Prospectus or the Prospectuses (including each
preliminary prospectus) and any amendment or supplement thereto as they may
reasonably request;
(b) enter into such agreements (including an underwriting
agreement) and take all such other actions reasonably required in connection
therewith in order to expedite or facilitate the disposition of such Registrable
Securities and in such connection, if the registration is in connection with an
underwritten offering (i) make such representations and warranties to the
underwriters in such form, substance and scope as are customarily made by
issuers to underwriters in underwritten offerings and confirm the same if and
when requested; (ii) obtain opinions of counsel to the Company and updates
thereof (which counsel and opinions in form, scope and substance shall be
reasonably satisfactory to the underwriters) addressed to the underwriters and
the Holders covering the matters customarily covered in opinions requested in
underwritten offerings and such other matters as may be reasonably requested by
such underwriters; (iii) obtain "cold comfort" letters and updates thereof from
the Company's accountants addressed to the underwriters such letters to be in
customary form and to cover matters of the type customarily covered in "cold
comfort" letters to underwriters and the Holders in connection with underwritten
offerings; (iv) set forth in full, in any underwriting agreement entered into,
the indemnification provisions and procedures of Section 6.04 hereof with
respect to all parties to be indemnified pursuant to said Section; and (v)
deliver such documents and certificates as may be reasonably requested by the
underwriters to evidence compliance with clause (i) above and with any customary
conditions contained in the underwriting agreement or other agreement entered
into by the Company; the above shall be done at each closing under such
underwriting or similar agreement or as and to the extent required thereunder;
(c) make available for inspection by one or more
representatives of the Holders of Registrable Securities being sold, any
underwriter participating in any disposition pursuant to such
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registration, and any attorney or accountant retained by such Holders or
underwriter, all financial and other records, pertinent corporate documents and
properties of the Company, and cause the Company's officers, directors and
employees to supply all information reasonably requested by any such
representatives in connection with such;
(d) otherwise use its best efforts to comply with all
applicable Federal and state regulations; and take such other action as may be
reasonably necessary or advisable to enable each such Holder and each such
underwriter to consummate the sale or disposition in such jurisdiction or
jurisdiction, in which any such Holder or underwriter shall have requested that
the Registrable Securities be sold. Except as otherwise provided in this
Agreement, the Company shall have sole control in connection with the
preparation, filing, withdrawal, amendment or supplementing of each Registration
Statement, the selection of underwriters, and the distribution of any
preliminary prospectus included in the Registration Statement, and may include
within the coverage thereof additional shares of Common Stock or other
securities for its own account or for the account of one or more of its other
security holders;
Each seller of Registrable Securities as to which any
registration is being effected shall furnish to the Company such information
regarding the distribution of such securities and such other information as may
otherwise be required by the Securities Act to be included in such Registration
Statement.
Section 6.04: Indemnification.
(a) Indemnification by Company. In connection with each
Registration Statement relating to disposition of Registrable Securities, the
Company shall indemnify and hold harmless each Holder and each underwriter of
Registrable Securities and each Person, if any, who controls such Holder or
underwriter (within the meaning of Section 15 of the Securities Act or Section
20 of the Exchange Act) against any and all losses, claims, damages and
liabilities, joint or several (including any reasonable investigation, legal and
other expenses incurred in connection with, and any amount paid in settlement of
any action, suit or proceeding or any claim asserted), to which they, or any of
them, may become subject under the Securities Act, the Exchange Act or other
Federal or state law or regulation, at common law or otherwise, insofar as such
losses, claims, damages or liabilities arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in any
Registration Statement, Prospectus or preliminary prospectus or any amendment
thereof or supplement thereto, or arise out of or are based upon any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading; provided, however,
that such indemnity shall not inure to the benefit of any Holder or underwriter
(or any Person controlling such Holder or underwriter within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act) on account
of any losses, claims, damages or liabilities arising from the sale of
Registrable Securities if such untrue statement or omission or alleged untrue
statement or omission was made in such Registration Statement, Prospectus or
preliminary prospectus, or such amendment or supplement, in reliance upon and in
conformity with information furnished in writing to the Company by the Holder or
underwriter specifically for use therein and provided further, that such
indemnity shall not inure to the benefit of any Stockholder, underwriter,
director, partner or controlling person ("indemnifiable party") from whom the
person asserting any claim, loss, damage or expense purchased securities which
are the subject thereof if such indemnified party failed to send or give a copy
of the prospectus or such other document as amended or supplemented to such
person at or prior to the confirmation of the sale of such securities to such
person in any case where such delivery is required by the Securities Act by such
indemnified party and the untrue statement or omission of a material fact
contained in a preliminary prospectus was corrected in the prospectus as amended
and supplemented. The Company shall also indemnify selling brokers, dealer
managers and similar securities industry professionals participating in the
distribution, their officers and
13
<PAGE>
directors and each Person who controls such Persons (within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act) to the same
extent as provided above with respect to the indemnification of the Holders of
Registrable Securities, if requested. This indemnity agreement shall be in
addition to any liability which the Company may otherwise have.
(b) Indemnification by Holder. In connection with each
Registration Statement, each Holder shall indemnify, to the same extent as the
indemnification provided by the Company in Section 6.04(a), the Company, its
directors and each officer who signs the Registration Statement and each Person
who controls the Company (within the meaning of Section 15 of the Securities Act
and Section 20 of the Exchange Act) but only insofar as such losses, claims,
damages and liabilities arise out of or are based upon any untrue statement or
omission or alleged untrue statement or omission which was made in the
Registration Statement, the Prospectus or preliminary prospectus or any
amendment thereof or supplement thereto, in reliance upon and in conformity with
information furnished in writing by such Holder to the Company specifically for
use therein. In no event shall the liability of any selling Holder of
Registrable Securities hereunder be greater in amount than the dollar amount of
the net proceeds received by such Holder upon the sale of the Registrable
Securities giving rise to such indemnification obligation. The Company shall be
entitled to receive indemnities from underwriters, selling brokers, dealer
managers and similar securities industry professionals participating in the
distribution, to the same extent as provided above, with respect to information
so furnished in writing by such Persons specifically for inclusion in any
Prospectus, Registration Statement or preliminary prospectus or any amendment
thereof or supplement thereto.
(c) Conduct of Indemnification Procedure. Any party that
proposes to assert the right to be indemnified hereunder will, promptly after
receipt of notice of commencement of any action, suit or proceeding against such
party in respect of which a claim is to be made against an indemnifying party or
parties under this Section, notify each such indemnifying party of the
commencement of such action, suit or proceeding, enclosing a copy of all papers
served. No indemnification provided for in Section 6.04(a) or 6.04(b) shall be
available to any party who shall fail to give notice as provided in this Section
6.04(c) if the party to whom notice was not given was unaware of the proceeding
to which such notice would have related and was materially prejudiced by the
failure to give such notice, but the omission so to notify such indemnifying
party of any such action, suit or proceeding shall not relieve it from any
liability that it may have to any indemnified party for contribution or
otherwise than under this Section. In case any such action, suit or proceeding
shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate in, and, to the extent that it shall wish, jointly with
any other indemnifying party similarly notified, to assume the defense thereof,
with counsel satisfactory to such indemnified party, and after notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof and the approval by the indemnifying party to such indemnified
party of its election so to assume the defense thereof and the approval by the
indemnified party of such counsel, the indemnifying party shall not be liable to
such indemnified party for any legal or other expenses, except as provided below
and except for the reasonable costs of investigation subsequently incurred by
such indemnified party in connection with the defense thereof. The indemnified
party shall have the right to employ its counsel in any such action, but the
fees and expenses of such counsel shall be at the expense of such indemnified
party unless (i) the employment of counsel by such indemnified party has been
authorized in writing by the indemnifying parties, (ii) the indemnified party
shall have reasonably concluded that there may be a conflict of interest between
the indemnifying parties and the indemnified party in the conduct of the defense
of such action (in which case the indemnifying parties shall not have the right
to direct the defense of such action on behalf of the indemnified party) or
(iii) the indemnifying parties shall not have employed counsel to assume the
defense of such action within a reasonable time after notice of the commencement
thereof, in each of
14
<PAGE>
which cases the fees and expenses of counsel shall be at the expense of the
indemnifying parties. An indemnifying party shall not be liable for any
settlement of any action, suit, proceeding or claim effected without its written
consent.
(d) Contribution in Lieu of Indeminification. If the
indemnification provided for in Section 8 hereof is unavailable to a party that
would have been an indemnified party under any such section in respect of any
losses, claims, damages, expenses or liabilitied (or actions in respect thereof)
referred to therein, then each party that would have been an indemnifying party
thereunder shall, in lieu of indemnifying such indemnified party, contribute to
the amount paid or payable by such indemnified party as a result of such losses,
claims, damages, expenses or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party on the one hand and such indemnified party on the other in connection with
the statements or omissions which resulted in such losses, claims, damages,
expenses or liabilities (or actions in respect thereof). The relative fault
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the indemnifying
party or such indemnified party and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The Company and each Stockholder agree that it would not be just and
equitable if contribution pursuant to this section 6.04(d) were determined by
pro rata allocation or by any other method of allocation which does not take
into account the equitable considerations referred to above in this Section 6.04
(d). The amount paid or payable by an indemnified party as a result of the
losses, claims, damages, expenses or liabilities (or actions in respect thereof)
referred to above in this Section 6.04(d) shall include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. No Person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) or the
Securities Act) shall be entitled to indemnification or contribution from any
Person who was not guilty of such fraudulent misrepresentation.
(e) Specific Performance. The Company and the Holder
acknowledge that remedies at law for the enforcement of this Section 6.04 may be
inadequate and intend that this Section 6.04 shall be specifically enforceable.
ARTICLE VII
Other Matters
-------------
Section 7.01: Amendments and Waivers. The provisions of this
Warrant, including the provisions of this sentence, may not be amended, modified
or supplemented, and waiver or consents to departures from the provisions hereof
may not be given unless the Company has obtained the written consent of holders
of at least a majority of the outstanding Registrable Securities. Holders shall
be bound by any consent authorized by this Section whether or not certificates
representing such Registrable Securities have been marked to indicate such
consent.
Section 7.02: Counterparts. This Warrant may be executed in any
number of counterparts and by the parties hereto in separate counterparts, each
of which so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
15
<PAGE>
Section 7.03: Governing Law. This Warrant shall be governed by and
construed in accordance with the laws of the State of New York.
Section 7.04: Severability. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstances, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provisions in every other respect and of the
remaining provisions contained herein shall not be affected or impaired thereby.
Section 7.05: Attorneys' Fees. In any action or proceeding brought
to enforce any provisions of this Warrant, or where any provisions hereof or
thereof is validly asserted as a defense, the successful party shall be entitled
to recover reasonable attorneys' fees and disbursements in addition to its costs
and expenses and any other available remedy.
Section 7.06: Computations of Consent. Whenever the consent or
approval of Holders of a specified percentage of Registrable Securities is
required hereunder, Registrable Securities held by the Company or its affiliates
(other than the Warrantholder or subsequent Holders if they are deemed to be
such affiliates solely by reason of their holdings of such Registrable
Securities) shall not be counted in determining whether such consent or approval
was given by the Holders of such required percentage.
Section 7.07: Notice. Any notices or certificates by the Company to
the Holder and by the Holder to the Company shall be deemed delivered if in
writing and delivered in person or by registered mail (return receipt requested)
to the Holder addressed to him in care of Oppenheimer & Co., Inc., Oppenheimer
Tower, World Financial Center, New York, New York 10281, and if to the Company,
addressed to it at 105 West Broad Street, Suite 301, Falls Church, Virginia
22046. The Company may change its address by written notice to the Holder and
the Holder may change his or its address by written notice to the Company.
IN WITNESS WHEREOF, this Warrant has been duly executed by the Company
under its corporate seal as of the day of , 1996.
--- ---------
University Online, Inc.
By:
---------------------------
Name:
Title:
Attest:
----------------------------
Secretary
16
<PAGE>
ASSIGNMENT
(To be executed only upon assignment of Warrant Certificate)
For value received, _________________hereby sells, assigns and
transfers unto ________________ the within Warrant Certificate, together with
all right, title and interest therein, and does hereby irrevocably constitute
and appoint ___________________ attorney, to transfer said Warrant Certificate
on the books of the within-named Company with respect to the number of Warrants
set forth below, with full power of substitution in the premises:
Name (s) of
Assignee (s) Address No. of Warrants
------------ ------- ---------------
And if said number of Warrants shall not be all the Warrants represented by the
Warrants Certificate, a new Warrant Certificate is to be issued in the name of
said undersigned for the balance remaining of the Warrants represented by said
Warrant Certificate
Dated: , 19
------------- ----
-------------------------
Note: The above signature should
correspond exactly with the name on
the face of this Warrant Certificate.
17
<PAGE>
SUBSCRIPTION FORM
(TO BE EXECUTED UPON EXERCISE OF WARRANT
PURSUANT TO SECTION 2.02 (A) (I))
The undersigned hereby irrevocably elects to exercise the
right of purchase represented by the within Warrant Certificate for, and to
purchase thereunder __________________ shares of Common Stock, as provided for
therein, and tenders herewith payment of the purchase price in full in the form
of cash or a certified or official bank check in the amount of $ ____________ .
Please issue a certificate or certificates for such Common
Stock in the name of:
Name (Please Print Name, Address
-----------------
and Social Security Number)
Signature
------------------------
NOTE: The above signature should respond exactly with the name on the first page
of this Warrant Certificate or with the name of the assignee appearing in the
assignment form below.
And if said number of shares shall not be all the shares purchasable
under the within Warrant Certificate, a new Warrant Certificate is to be issued
in the name of said undersigned for the balance remaining of the shares
purchasable thereunder rounded up to the next higher number of shares.
18
<PAGE>
CASHLESS EXERCISE FORM
(TO BE EXECUTED UPON EXERCISE OF WARRANT
PURSUANT TO SECTION 2.02 (A) (II))
The undersigned hereby irrevocably elects to Exchange its
Warrant for such shares of Common Stock pursuant to the Cashless Exercise
provisions of the within Warrant Certificate, as provided for in Section 2.02
(a) (ii) of such Warrant Certificate.
Please issue a certificate for such Common Stock in the name
of:
Name (Please Print Name, Address
--------------------
and Social Security Number)
Signature
-----------------------------
NOTE: The above signature should correspond exactly with the name on the first
page of this Warrant Certificate or with the name of the assignee appearing in
the assignment form below.
And if said number of shares shall not be all the shares exchangeable
or purchasable under the within Warrant Certificate, a new Warrant Certificate
is to be issued in the name of the undersigned for the balance remaining of the
shares purchasable rounded up to the next higher number of shares.
19
September 12, 1996
University Online, Inc.
105 West Broad Street, Suite 301
Falls Church, Virginia 22046
Attention: Narasimhan P. Kannan, Chief Executive Officer
Ladies and Gentlemen:
Reference is made to (i) the Subscription Agreement dated October 31,
1994 (the "Subscription Agreement") between University Online, Inc. ("UOL") and
Austin O. Furst, Jr. ("Furst"), individually and as the trustee of three
separate trusts for the benefit of his daughters (the "Trusts"), (ii) the letter
agreement dated March 4, 1996 (the "Letter Agreement") between UOL and Furst,
(iii) the Amended Warrant Certificates dated as of March 4, 1996 (the
"Warrants") to purchase an aggregate of 2,400,000 shares of UOL's common stock,
$.01 par value (the "Common Stock"), issued to the Trustees, and (iv) the Senior
Convertible Promissory Note dated March 4, 1996 in the principal amount of
$300,000 (the "Convertible Note") issued by UOL to Frogtown Holdings, Inc.
("FHI"). Capitalized terms used herein and not otherwise defined shall have the
respective meanings assigned thereto in the Letter Agreement or the Warrants, as
the case may be. The exercise prices and share amounts referred to in this
letter agreement do not take into account any reverse stock split or other
change in the outstanding shares of Common Stock and are subject to adjustment
as provided in the above-referenced documents if any such reverse stock split or
other change occurs.
In connection with the proposed initial public offering of the Common
stock, UOL and its underwriter have requested that Furst cause a portion of
those Warrants with a current exercise price of $0.75 per share (the "First
Tranche Warrants") to be exercised. The following sets forth UOL's and Furst's
agreement as to the terms and conditions of such exercise.
<PAGE>
1. Subject to the conditions set forth below, the First Tranche
Warrants will be exercised to the extent of 800,000 shares for an aggregate
exercise price of $600,000.00 simultaneously with consummation of an initial
underwritten public offering of shares of Common Stock at a price to public to
public (the "IPO Price") of at least $1.10 per share resulting in aggregate
gross proceeds, before expenses and underwriting discounts and commissions, of
at least $20,000,000.00 pursuant to an underwriting agreement in the
underwriter's customary form (the "IPO"). The time and date on which the IPO is
consummated is hereafter referred to as the "Exercise Date".
2. On the Exercise Date:
(a) the principal amount of the Convertible Note and all
accrued interest thereon through the Exercise Date will be paid to FHI or offset
against the exercise price of the First Tranche Warrants, at FHI option;
(b) Furst's rights to appoint one or more members of UOL's
Board of Directors, will automatically be eliminated;
(c) the per share exercise price of those Warrants with per
share exercise prices in excess of the IPO Price (the "Second Tranche Warrants")
will be automatically reduced to the IPO Price; and
(d) all price-based anti-dilution provisions in or relating to
the Second Tranche Warrants will automatically be eliminated for issuances at or
above $0.75 per share, but only to the extent that such anti-dilution rights are
similarly eliminated from all other warrants, rights, options, convertible debt
or other securities outstanding prior to the Exercise Date or issued, directly
or indirectly, in exchange for or in respect thereof;
3. The exercise of the First Tranche Warrants and the matters provided
for in paragraph 2 above shall be conditioned upon the following:
(a) No security holder of UOL shall have their price per share
of the Common Stock payable upon the exercise or conversion of their equity or
debt securities reduced to below $0.75, and UOL shall not have entered into any
contract, agreement or commitment to make any such adjustment;
(b) the IPO shall be consummated at or above the minimum price
and proceeds set forth in Section 1 hereof;
(c) each of UOL's officers and directors and holders of 5% or
more of its outstanding Common Stock (calculated in accordance with rule 13d-3
promulgated under the Securities Exchange Act of 1934, as amended, without
taking into account the shares to be issued in the IPO but assuming the exercise
of all options, warrants and other rights to purchase Common Stock and the
conversion of all preferred stock and convertible debt) shall have executed a
lock-up agreement in the form attached hereto as Exhibit A (the "Lock-up
Agreement");
<PAGE>
(d) the UOL Series B Preferred Stock shall convert into shares
of Common Stock upon the Exercise Date at a ratio of no greater than
$1.60/$0.775;
(e) UOL shall not have entered into any agreement, commitment
or understanding with any person with respect to the direct or indirect purchase
of, or the making of any distribution on or in respect of, any of its
outstanding shares of capital stock or convertible debt, options, warrants or
other rights to purchase shares of such capital stock or other securities,
except pursuant to the existing exercise, conversion or dividend rights of such
capital stock or other securities or amendments thereto permitted under
paragraph (f) below.
(f) UOL shall not have: (i) issued any shares of Common Stock,
any options, warrants or other rights to purchase Common Stock, or any
convertible debt since August 1, 1996, except (x) as described under the heading
"Certain Transactions" attached hereto as Exhibit B and (y) grants of options
under UOL's Amended and Restated Stock Option Plan or 1996 Stock Plan at a per
share exercise price of not less than $1.25; or (ii) amended, or entered into
any contract, agreement or commitment to amend, any of the terms of any
outstanding option, warrant, convertible debt or other right to acquire shares
of Common Stock, except (x) as provided in this letter agreement, (y) as
described in Exhibit B under the heading "Certain Transactions" or (z) for the
re-pricing of options under the Company's 1996 Option Plan to per share exercise
prices not less than $1.25:
(g) UOL shall have caused the underwriters to have covenanted
to Furst in writing: (i) that in the event such underwriters' consent to the
sale or other transfer or distribution of any portion of the securities held by
any person subject to a lock-up agreement, the underwriters shall be deemed to
have consented to the sale or other transfer or distribution of a proportional
amount of the Furst Securities, and (ii) to the registration and sale of Furst
Securities in accordance with paragraph 4 hereof.
4. Furst and the Trusts hereby agree to execute and deliver Lock-up
Agreements on or before the Exercise Date. UOL agrees that if any person subject
to a lock-up agreement shall be allowed by UOL to exercise any demand or
piggyback registration rights prior to the first anniversary of the Exercise
Date, then the demand and piggyback registration rights granted with respect to
the Furst Securities may be exercised with respect to all or a portion of the
shares of Common Stock received pursuant to the exercise of the First Tranche
Warrants without regard to any otherwise applicable lock-up agreements or the
one-year waiting period provided in the Warrants for giving notice of exercise
of demand registration rights.
5. On the Exercise Date, UOL shall grant to Furst a five-year warrant
to purchase an additional 184,615 shares of Common Stock at a per share exercise
price equal to the IPO Price and otherwise, in all material respects, on the
same terms as the Second Tranche Warrants, as amended hereby on and through the
Exercise Date.
<PAGE>
6. UOL hereby represents and warrants that to date there has been no
event that has caused any adjustment to the exercise price of the Warrants.
7. This letter agreement shall terminate and be of no further force or
effect if the Exercise Date does not occur by December 31, 1996.
If the foregoing accurately sets forth our understanding, kindly
indicate our agreement by executing this letter agreement where indicated below
and returning it to the undersigned.
--------------------------------
Austin O. Furst, Jr.
(Individually and as Trustee of
the Trust and President of FHI)
Agreed and Accepted:
University Online, Inc.
By:
--------------------------------
Title:
----------------------------
UNIVERSITY ONLINE, INC.
AMENDED AND RESTATED
STOCK OPTION PLAN
ARTICLE I
PURPOSES OF THE PLAN
--------------------
1.01. Purposes. The purposes of the University OnLine, Inc. (formerly,
IMSATT Corporation and referred to hereinafter as the "Company") Stock Option
Plan (the "Plan") are to advance the interests of the Company and its
subsidiaries by providing incentives to selected employees and other who
contribute and who are expected to contribute materially to the success of the
Company and its subsidiaries, to provide a means of rewarding outstanding
performance and to enable the Company and its subsidiaries to maintain a
competitive position in attracting and retaining the personnel necessary for
continued growth and profitability.
ARTICLE II
ADMINISTRATION OF THE PLAN
--------------------------
2.01. The Committee. The Plan shall be administered by the Board of
Directors of the Company (the "Board") unless a committee (the "Committee") of
two or more persons, all of whom shall be directors of the Company, shall be
appointed by the Board to administer the Plan. The members of the Committee
shall serve at the pleasure of the Board. The Committee shall have all of the
authority and responsibility of the Board hereunder, except for such authority
as is granted to the Board pursuant to
1
<PAGE>
Articles IX and X. If a Committee is appointed, subject to the express
provisions and limitations of the Plan, the Committee may adopt such rules,
regulations and procedures as it deems advisable in the conduct of its affairs
and may appoint one of its members chairman and any person, whether or not a
member, to be its secretary or agent.
2.02. Authority. The Board shall have full and final authority to
interpret the Plan and the instruments evidencing the grant of options
("Options") thereunder, to prescribe, amend and rescind rules and regulations,
if any, relating to the Plan and to make all determinations necessary or
advisable for the administration of the Plan.
The Board shall have full authority to direct the proper
officers of the Company to issue or transfer shares of the Company's common
stock pursuant to the Plan. No member of the Board shall be liable for anything
done or omitted to be done by him or by any other member of the Board in
connection with the Plan, except for his or her own willful misconduct or gross
negligence.
ARTICLE III
OPTIONS
-------
3.01. Options Exercisable for Common Stock. Shares of stock issued upon
exercise of an Option granted under the Plan, shall be shares of common stock,
par value $.01 per share, of the Company (the "Common Stock"), which shares
shall be subject to
-2-
<PAGE>
the terms, conditions and restrictions described in the Plan and in the
instruments evidencing the grant of the Options.
3.02. Maximum Number of Shares. The maximum number of shares of Common
Stock issuable pursuant to Options under the Plan shall be not more than
3,400,000 shares of Common Stock. Shares of Common Stock acquired pursuant to
the exercise of Options under the Plan shall be treasury shares or authorized
but unissued shares. If, on or before November 11, 1996, any shares of Common
Stock subject to an Option granted under the Plan shall be returned to the
Company pursuant to the termination provisions described in Section 5.01 or 5.03
hereof or in the instruments evidencing the grant of the Option, or because the
Option expired or terminated or was cancelled without being exercised, such
shares may again be subject to Options under the Plan (unless the Plan shall
have been theretofore terminated).
3.03. Rights With Respect to Shares. An individual who has exercised
his Option shall have, after delivery to him of, or after notification that
there is being held in custody for him, a certificate or certificates for the
number of shares of Common Stock acquired, absolute ownership of such shares,
including the right to vote the same and to receive dividends thereon, subject,
however, to the terms, conditions and restrictions described in the Plan and in
the instrument evidencing the grant of the Option to such individual.
3.04. Exercise Price. The exercise price for each share of Common Stock
subject to an Option shall be at least the fair
-3-
<PAGE>
market value, as determined by the Board of Directors, of a share of Common
Stock at the time of grant.
3.05. Exercise Term. Notwithstanding any other provision of the Plan
(specifically including Article V hereof) to the contrary, whenever any Option
may be exercised only after a specified date, the Company may accelerate the
exercisability of such Option by written notice to the individual who was
granted the Option (the "Optionee") specifically referencing this Section.
3.06. Maximum Option Term. No Option granted under this Plan shall vest
or be exercised in whole or in part more than ten years after its date of grant.
3.07. Plan Duration. Options may not be granted under this Plan more
than ten years after the date of the adoption of the Plan.
3.08. Payment. Payment for Common Stock purchased under an Option
granted under this Plan shall be made in full in cash concurrently with the
exercise of the Option.
ARTICLE IV
PARTICIPATION
-------------
4.01. Recipients. Options may be granted only to individuals who are
determined by the Board to be capable of materially contributing over an
extended period of time to the success of the Company or of a subsidiary of the
Company on the date the Option is granted and who are employees of the Company,
other persons required by written contract to dedicate at least
-4-
<PAGE>
sixteen hours per month to rendering services to the Company, or directors of
the Company. For purposes of the Plan, the term "subsidiary" means a
corporation, a majority of whose outstanding stock entitled to elect a majority
of its board of directors is at the time owned by the Company and/or a
subsidiary or subsidiaries of the Company. Any individual may elect, revocably,
not to be eligible, either for a period of time or during the entire term of the
Plan, for grant of Options under the Plan by delivering to the Board a written
notice to such effect. Upon receipt of such notice by the Board, such individual
shall thereupon be ineligible to receive Options under the Plan for such period
of time or for the entire term of the Plan, as the case may be.
4.02. Grant of Options. Subject to the terms, conditions and
restrictions of the Plan, the Board shall, in its sole discretion, select from
among the eligible individuals those individuals, if any, to whom Options are to
Optionsincluding, but not limited to, the power (i) to determine whether Options
are to be granted, (ii) to determine the number of shares of Common Stock
covered by each Option, (iii) to determine the time or times when Options will
be granted, (iv) to determine, in accordance with Article V hereof, the
restrictions related to the exercise of the Options and the shares of Common
Stock issuable pursuant to such exercise and (v) to prescribe the form of the
instruments evidencing the grant of the Options under the Plan.
-5-
<PAGE>
Subject to the provisions of Section 5.01, the Board shall have absolute
discretion to establish the vesting schedule for the exercisability of the
Options, including, but not limited to, a vesting schedule providing for full
vesting after a specified number of years or for gradual or some other vesting
over a period of one year, which schedule may be accelerated or decelerated,
dependent on the satisfaction of performance criteria established by the Board.
The vesting schedule may be different for different individuals, and may be
accelerated or decelerated based on different criteria for different
individuals. Options may be granted, with the same or different provisions, to
the same person on more than one occasion or on the same occasion.
The Board's decision to approve the granting of an Option to an
eligible individual in any year shall not require the Board to approve the
granting of an Option (either with the same or different provisions) to that
individual in any other year.
Furthermore, the grant of an Option to any individual shall not affect
the Company's (or any of its subsidiaries') right to terminate the employment of
any individual who is employed by the Company (or any of its subsidiaries) or to
terminate the acceptance of any services provided by any individual to the
Company (or any of its subsidiaries) or to remove or fail to nominate for
reelection any individual to the
-6-
<PAGE>
Board of Directors of the Company, for any reason whatsoever, or for no reason
whatsoever.
ARTICLE V
TERMS AND CONDITIONS OF OPTIONS
-------------------------------
Each Option issued and each share of Common Stock issued upon
the exercise of an Option under the Plan shall contain the following terms,
conditions and restrictions and such additional terms, conditions and
restrictions as may be determined by the Board in its absolute discretion;
provided, however, that none of these additional terms, conditions and
restrictions may be more favorable to an individual awarded an Option for shares
of Common Stock under the Plan than the terms, conditions and restrictions set
forth in this Plan:
5.01. Vesting; Option Termination.
----------------------------
(a) Vesting. The right to exercise an Option shall be vested
in the Optionee in accordance with the terms of a schedule attached to the
agreement setting forth the option (the "Option Agreement"). Such schedule may
provide that all or a portion of the Option may become vested at a time or times
or upon the occurrence of certain conditions. (In all events, an Option which
has a vesting schedule based solely on the passage of time without any other
factors or conditions, will, unless earlier terminated, be vested and
exercisable in full on the tenth anniversary of the date of grant. An Option
which has a vesting schedule based on the satisfaction of conditions other than
the passage of time, shall terminate when the conditions are no
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<PAGE>
longer capable of being satisfied.) An Option, once vested, may be forfeited
pursuant to the terms of this Article V.
(b) Termination of Employment or Consulting Services.
-------------------------------------------------
(i) A "Terminating Event" (as used herein) shall
be deemed to occur if (a) the Optionee was employed by the Company or any of its
subsidiaries at the time of grant of the Option and such Optionee's continuous
employment with the Company or any of its subsidiaries shall terminate for any
reason or no reason, (b) the Optionee was providing services to the Company,
other than as an employee, and the Company ceased to continue accepting such
services for any reason or no reason, unless such cessation is intended to be
temporary and the Company states such in writing at the time of such cessation,
or (c) the Optionee was a director of the Company at the time of the grant of
the Option and such Optionee ceased to serve as a director for any reason.
Except as provided in Section 5.01(b)(ii), Section 5.04 or the Option Agreement,
upon the occurrence of a Termination Event:
(a) An Option (or portion thereof) which has not
vested prior to the Terminating Event shall terminate and no longer be
exercisable; provided, however, that the Board of Directors of the
Company may accelerate the date of vesting of the Option;
(b) An Option (or portion thereof) which has vested
and is exercisable immediately prior to the Terminating Event, shall be
exercisable until the three
-8-
<PAGE>
month anniversary of the Terminating Event, but in no event later than
the expiration date of the Option.
(ii) In all events, an Option shall terminate in
full and no longer be exercisable after the tenth anniversary from the date of
grant of such Option, or at such earlier time as may be specified above or in
the Option Agreement.
5.02. Non-transferability of Options. Options granted under the Plan
are nontransferable and may not be sold, assigned, transferred, pledged,
hypothecated, given (with or without consideration) or otherwise disposed of in
any manner whatsoever. Options are exercisable during the Optionee's lifetime,
except as set forth in Section 5.04, only by him or by his guardian or legal
representative.
5.03. Non-compete Restrictions. Except as set forth in Section 5.04,
until the second anniversary of the date an Option is first exercisable (the
"Second Anniversary Date"), at the election and in the sole discretion of the
Company, Options (or portions thereof) that have vested or shares of Common
Stock acquired pursuant to the exercise of an Option shall be immediately
forfeited and all the rights of the individual to such Common Stock shall
immediately terminate without any payment of consideration by the Company except
for a return of the cash consideration paid by the Optionee to the Company
(without interest) pursuant to the exercise of the Option, if at any time from
and after the date of grant of the Option with respect to such shares, (A) the
individual was an employee at the time of
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<PAGE>
grant of the Option, and such employee engages, at any time (including after
such person is no longer an employee), in conduct that is competitive with the
Company or its subsidiaries or otherwise adversely affects the interests of the
Company or its subsidiaries, (B) the individual was providing services other
than as an employee, the written contract pursuant to which such person was
providing such services provided for a noncompetition covenant, and such
individual engaged in activities that would violate such covenant, regardless of
whether such covenant is specifically enforceable, or (C) the individual was a
director of the Company at the time of grant of the Option, and such individual
breaches his fiduciary duties to the Company in connection with his obligations
as director.
If the shares of Common Stock acquired pursuant to an exercise
of an Option shall be forfeited by an Optionee pursuant to this Section 5.03,
the Optionee shall forthwith deliver to the Secretary or any Assistant Secretary
of the Company any instrument of transfer that may be required by the Secretary
or any Assistant Secretary of the Company.
5.04. Termination of Employment by Reason of Death or Disability. If
(a) an employee who has been in the continuous employment of the Company (or any
subsidiary) since the date as of which an Option was granted to him shall, while
in such employment, die or terminate employment by reason of disability as
defined in this Section 5.04, (b) a person was providing services to the Company
(or any subsidiary) other than as an
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<PAGE>
employee, and such person shall die during the period such services were to be
rendered to the Company (or any subsidiary), or (c) the person was serving as
director of the Company and such person shall die during the period he served on
the Board of Directors and in addition, any of such events under (a), (b) or (c)
above shall occur more than one year after the date that the Options were
granted, then, unless the agreement providing for the Option shall specify
otherwise, the restrictions set forth in Section 5.03 hereof shall lapse as to
all shares of Common Stock that have been or may be issued to such person
pursuant to the exercise of the Option (or portion thereof) that was vested as
of the date of the event under (a), (b) or (c) above, and any unexercised
portion of the vested Option (or portion thereof) may be exercised (in the event
of death, by such person's executor) until the first anniversary of the date of
the death or disability of the Grantee.
Unless the Board of Directors, in its absolute discretion
determines otherwise, all or any portion of the Option not then vested shall
terminate and no longer be exercisable.
As used in this Section 5.04, the term "disability" shall mean
a condition that the Board determines has rendered an employee completely and
permanently unable to perform the duties of his regular occupation
5.05. Right of First Refusal. (a) Except as provided in Section 5.06
below, for so long as the Common Stock is not listed for trading on any national
securities exchange or the Nasdaq
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<PAGE>
Stock Market or reported by the National Quotation Bureau, the Company shall
have a right to advance written notice of, and an assignable right of first
refusal with respect to, any bona fide proposed transfer of any or all of the
shares of Common Stock acquired pursuant to the exercise of an Option including
any proposed transfer to one or more shareholders of the Company. Any individual
proposing to effect such transfer (the "Selling Grantee") shall give advance
written notice of such transfer to the Company. Such notice shall
(i) identify the transferee, the number of shares
to be transferred and the consideration for such transfer
offered by the transferee, if any,
(ii) include a copy of any agreement pertaining to
such transfer, and
(iii) be deemed to be an irrevocable offer to the
Company, subject to the terms and conditions of this Section.
The Company shall, within ten business days after receipt of such notice, have
the right to elect to purchase or assign its right to purchase any or all of the
shares subject to this Section 5.05 proposed to be sold by the Selling Grantee
at the lowest of (1) the same price and the same terms as are set forth in the
Selling Grantee's notice to the Company, (2) the most recent selling price of
shares of Common Stock by the Company to an independent third party increased by
a compound interest rate of 10% per year from the time of such sale, or (3) an
appraised fair market
-12-
<PAGE>
value, determined as of a date within the twelve months preceding the Selling
Grantee's notice by an appraiser chosen by the Board in its absolute discretion.
The Company shall not, however, be required to obtain an appraised fair market
value for use as a purchase price and may elect to purchase the shares pursuant
to clause 1 or 2 without obtaining an appraisal. If the Company does not elect
to purchase or assign its right to purchase any or all the shares subject to
this Section 5.05 proposed to be sold by the Selling Grantee within such ten
business day period, then the Secretary of the Company shall so notify the
Selling Grantee, the Selling Grantee's irrevocable offer to the Company shall
automatically lapse, and the Selling Grantee may, for a period of forty (40)
business days from the date on which the Secretary so notifies the Selling
Grantee, effect the transfer on terms and conditions identical to those set
forth in the Selling Grantee's notice, subject always to the restrictions set
forth in this Plan. In the event the Selling Grantee does not effect such a
transfer within such period, the provisions of this Section 5.05 shall again be
applicable with respect to any proposed transfer.
(b) The transferee of any shares pursuant to this Section 5.05
shall assume all of the Selling Grantee's rights, obligations and liabilities as
a shareholder, and the shares so transferred shall be subject to the right of
first refusal restrictions contained in this Section 5.05 with respect to future
transfers. As a condition to any transfer under this Section 5.05, the
transferee shall be required to assume such
-13-
<PAGE>
obligations and liabilities by appropriate and valid written instruments. No
transfer shall relieve the Selling Grantee (or any transferee) of any of its
obligations and liabilities hereunder; provided, however, that such Selling
Grantee (or transferee) shall have no further liability under this Plan for the
acts, or failures to act, of the transferee of such Selling Grantee (or
transferee) on and after the effective date of such transfer.
5.06. Exception. The notice and first refusal requirements set forth in
Section 5.05 above shall not apply to any transfer of shares of Common Stock
acquired pursuant to the exercise of an Option to immediate family members
(spouse and children) of the Selling Grantee or Optionee or to estates or trusts
the beneficiaries of which are immediate family members of the Selling Grantee
or Optionee, but any such transferee shall be bound by the provisions hereof.
5.07. Agreement by Individual Regarding Withholding Taxes. Each
individual awarded shares of Common Stock under the Plan shall agree that:
(i) he will pay to the Company, or make arrangements
satisfactory to the Board regarding payment of, any Federal, State or
local taxes of any kind required by law to be withheld with respect to
the shares of Common Stock acquired under the Plan, no later than the
date such taxes are first incurred, and
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<PAGE>
(ii) the Company and its subsidiaries shall, to the
extent permitted by law, have the right to deduct from any payments of
any kind otherwise due to the individual any Federal, State or local
taxes of any kind required by law to be withheld with respect to the
shares of Common Stock acquired under the Plan.
5.08. Deferral of Receipt of Dividends. The Board may adopt rules
whereby any individual may elect to defer, or be required to defer, receipt of
the dividends that may otherwise be payable on any shares of Common Stock
acquired by him pursuant to exercise of Options under the Plan. In such event,
he shall be credited, during the period of deferral, with interest on any such
dividends at a reasonable rate of interest to be determined by the Board.
ARTICLE VI
COMPLIANCE WITH LAW AND OTHER CONDITIONS
----------------------------------------
6.01. Restrictions Upon Grant of Options. The listing upon any
securities exchange or the registration or qualification under any Federal or
State law of any shares of Common Stock to be issued pursuant to the exercise of
an Option (whether to permit the granting of an Option or the resale or other
disposition of any such shares) may be necessary or desirable as a condition of
or in connection with such Option and, in any such event, if the Board in its
sole discretion so determines, delivery of the certificates for such shares of
Common Stock shall not be made until such listing, registration or
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<PAGE>
qualification shall have been completed; provided, however, that the Company
shall be required in such circumstances where it has refused to grant delivery
of the certificates only to use its best efforts to effect any such listing,
registration or qualification, provided further, however, that in no event shall
the Company be required to use its best efforts to effect such registration
under the Securities Act of 1933 other than on Form S-8, as presently in effect,
or such other forms as may be in effect from time to time calling for
information comparable to that presently required to be furnished under Form
S-8.
6.02. Restrictions Upon Resale of Unregistered Common Stock. If the
shares of Common Stock that have been acquired pursuant to the exercise of an
Option are not registered under the Securities Act of 1933, as amended, pursuant
to an effective registration statement, such individual, if the Board shall deem
it advisable, may be required to represent and agree in writing (i) that any
shares of Common Stock so acquired by such individual pursuant to the Plan will
not be sold except pursuant to an effective registration statement under the
Securities Act of 1933, as amended, or pursuant to an exemption from
registration under said Act and (ii) that such individual is acquiring such
shares of Common Stock for his own account and not with a view to the
distribution thereof.
6.03. Legends. The certificates evidencing shares of Common Stock
issuable pursuant to the Plan may contain such legends as the Board deems
appropriate to reflect the transfer
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<PAGE>
and other restrictions imposed on such shares under the Plan or in the
instruments evidencing the grant of the Option, or under applicable law, rule or
regulation.
Any attempt to dispose of any such shares of Common Stock in
contravention of the terms, conditions and restrictions described in the Plan or
in the instruments evidencing the grant of the Options shall be ineffective.
ARTICLE VII
ADJUSTMENTS
-----------
7.01. Adjustment of Shares Reserved Because of Common Stock Splits,
etc. The number of shares of Common Stock of the Company (i) reserved for
issuance pursuant to Options that may be granted under the Plan and (ii) subject
to Options then outstanding, shall be subject to adjustment by the Board, in its
sole discretion, to reflect any stock split, stock dividend, recapitalization,
merger, consolidation, reorganization, combination or exchange of shares or
other similar event. All determinations made by the Board with respect to
adjustments under this Section 7.01 shall be conclusive and binding for all
purposes of the Plan.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
------------------------
8.01. No Right to Receive Option. Nothing in the Plan shall be
construed to give any person any right to receive an Option under the Plan.
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<PAGE>
8.02. Expenses of Plan. The expenses of the Plan shall be borne by the
Company.
8.03. Governing Law. The Plan shall be governed by the laws of the
State of Delaware.
ARTICLE IX
AMENDMENTS
----------
9.01. Amendments. The Plan may be amended at any time and from time to
time by the Board, provided, however, that if the Company then has a class of
equity securities that are registered under the Securities Exchange Act of 1934,
no amendment that increases the aggregate number of shares of Common Stock which
may be granted under the Plan, extends the period during which Options may be
granted under the Plan, changes the class of persons eligible to participate in
the Plan, or otherwise materially increases the benefits accruing to individuals
under the Plan or materially modifies the requirements with respect to
eligibility for participation in the Plan shall be effective unless and until
the same is approved by the affirmative vote of the holders of a majority of the
shares of the Company entitled to vote. No amendment of the Plan shall adversely
affect any right of any individual, except with the written consent of such
individual, with respect to any Option theretofore granted to such individual.
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<PAGE>
ARTICLE X
TERMINATION OR SUSPENSION
-------------------------
10.01. Right of Board to Terminate or Suspend Plan.
(a) The Board of Directors may at any time suspend or
terminate the Plan. No Options may be granted during any suspension of the Plan
or after the Plan has been terminated.
(b) In the event of adverse accounting consequences to the
Company due to any change in accounting practices subsequent to the date of the
adoption of the Plan, the Board of Directors shall have the right to terminate
the Plan and cancel any then outstanding Options. The Board shall attempt to
establish a substitute compensation plan that in the good faith judgment of the
Board provides, to the extent practicable in light of accounting changes,
similar compensation to employees.
10.02. Termination of Plan. The Plan shall terminate upon the earlier
of the following date:
(i) the date of termination specified in a resolution of the
Board of Directors, or
(ii) November 11, 1996. After the Plan terminates, the
function of the Board will be limited to the administration of Options
previously granted.
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<PAGE>
ARTICLE XI
APPROVAL BY STOCKHOLDERS
------------------------
11.01. Approval by Stockholders. The Plan shall become effective upon
approval thereof by the affirmative vote of the holders of a majority of the
shares of the Company entitled to vote.
Dated: November 11, 1986
Amended: January 27, 1988
Amended: April 23, 1990
Amended: November 15, 1994
-20-
UNIVERSITY ONLINE, INC.
1996 STOCK PLAN
1. Purposes of the Plan. The purposes of this 1996 Stock Plan are to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and its Subsidiaries, and to promote the success of the Company's
business. Options granted under the Plan may be incentive stock options (as
defined under Section 422 of the Code) or non-statutory stock options, as
determined by the Administrator at the time of grant of an option and subject to
the applicable provisions of Section 422 of the Code, as amended, and the
regulations promulgated thereunder. Stock purchase rights may also be granted
under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees
appointed pursuant to Section 4 of the Plan.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as
amended.
(d) "Committee" means the Committee appointed by the Board of
Directors in accordance with Section 4(a) of the Plan.
(e) "Common Stock" means the Common Stock of the Company.
(f) "Company" means University Online, Inc., a Delaware
corporation.
(g) "Consultant" means any person, including an advisor, who
is engaged by the Company or any Parent or Subsidiary of the Company to render
services and is compensated for such services, and any director of the Company
whether compensated for such services or not, provided that if and in the event
the Company registers any class of any equity security pursuant to the Exchange
Act, the term Consultant shall thereafter not include directors who are not
compensated for their services or are paid only a director's fee by the Company.
(h) "Continuous Status as an Employee or Consultant" means the
absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of: (i) sick leave; (ii) military leave;
(iii) any other leave of absence approved by the Administrator, provided that
such leave is for a period of not more than ninety (90) days, unless
reemployment upon the expiration of such leave is guaranteed by contract or
statute, or unless provided otherwise pursuant to Company policy adopted from
time to time; or (iv) transfers between locations of the Company or between the
Company, its Subsidiaries or
<PAGE>
their respective successors. For purposes of this Plan, a change in status from
an Employee to a consultant or from a consultant to an Employee will not
constitute a termination of employment or consulting relationship; provided that
a change from an Employee to a consultant may cause an Incentive Stock Option to
become a Nonstatutory Stock Option under the Code.
(i) "Employee" means any person, including officers and
directors, employed by the Company or any Parent or Subsidiary of the Company,
with the status of employment determined based upon such minimum number of hours
or periods worked as shall be determined by the Administrator in its discretion,
subject to any requirements of the Code. The payment of a director's fee by the
Company shall not be sufficient to constitute "employment" by the Company.
(j) "Exchange Act" means the Securities Exchange Act of 1934,
as amended. ------------ .
(k) "Fair Market Value" means, as of any date, the fair market
value of Common Stock determined as follows:
(i) If the Common Stock is listed on any established
stock exchange or a national market system, including, without limitation, the
National Market System of the National Association of Securities Dealers, Inc.
Automated Quotation ("NASDAQ") System, its Fair Market Value shall be the
closing sales price for such stock (or the closing bid, if no sales were
reported), as quoted on such system or exchange, or the exchange with the
greatest volume of trading in Common Stock for the last market trading day prior
to the time of determination, as reported in The Wall Street Journal or such
other source as the Administrator deems reliable;
(ii) If the Common Stock is quoted on the NASDAQ
System (but not on the National Market System thereof) or regularly quoted by a
recognized securities dealer but selling prices are not reported, its Fair
Market Value shall be the mean between the high bid and low asked prices for the
Common Stock for the last market trading day prior to the time of determination,
as reported in The Wall Street Journal or such other source as the Administrator
deems reliable; or
(iii) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in good faith by
the Administrator.
(l) "Incentive Stock Option" means an Option intended to
qualify as an incentive stock option within the meaning of Section 422 of the
Code, or any successor provision.
(m) "Nonstatutory Stock Option" means an Option not intended
to qualify as an Incentive Stock Option.
<PAGE>
(n) "Option" means a stock option granted pursuant to the
Plan.
(o) "Optioned Stock" means the Common Stock subject to an
Option or a Stock Purchase Right.
(p) "Optionee" means an Employee or Consultant who receives an
Option or a Stock Purchase Right.
(q) "Parent" means a "parent corporation", whether now or
hereafter existing, as defined in Section 424(e) of the Code, or any successor
provision.
(r) "Plan" means this 1996 Stock Plan.
(s) "Reporting Person" means an officer, director, or greater
than ten percent stockholder of the Company within the meaning of Rule 16a-2
under the Exchange Act, who is required to file reports pursuant to Rule 16a-3
under the Exchange Act, or any successor provision.
(t) "Restricted Stock" means shares of Common Stock acquired
pursuant to a grant of a Stock Purchase Right under Section 10 below.
(u) "Rule 16b-3" means Rule 16b-3 promulgated under the
Exchange Act, as the same may be amended from time to time, or any successor
provision.
(v) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 12 of the Plan.
(w) "Stock Exchange" means any stock exchange or consolidated
stock price reporting system on which prices for the Common Stock are quoted at
any given time.
(x) "Stock Purchase Right" means the right to purchase Common
Stock pursuant to Section 10 below.
(y) "Subsidiary" means a "subsidiary corporation," whether now
or hereafter existing, as defined in Section 424(f) of the Code, or any
successor provision.
3. Stock Subject to the Plan. Subject to the provisions of Section 12
of the Plan, the maximum aggregate number of shares that may be optioned and
sold under the Plan is 1,600,000 shares of Common Stock. The shares may be
authorized, but unissued, or reacquired Common Stock. If an Option should expire
or become unexercisable for any reason without having been exercised in full,
the unpurchased Shares that were subject thereto shall, unless the Plan shall
have been terminated, become available for future grant under the Plan. If the
Company shall repurchase unvested shares of Restricted Stock, such repurchased
Shares that were subject thereto shall, unless the Plan shall have been
terminated, become available for future grant under the Plan. In addition, any
shares of
<PAGE>
Common Stock which are retained by the Company upon exercise of an Option or
Stock Purchase Right in order to satisfy the exercise or purchase price for such
Option or Stock Purchase Right or any withholding taxes due with respect to such
exercise shall be treated as not issued and shall continue to be available under
the Plan.
4. Administration of the Plan.
(a) Procedure. The Plan shall be administered by (A) the Board
or (B) a committee designated by the Board, which committee shall be constituted
in such a manner as to satisfy the legal requirements relating to the
administration of incentive stock option plans, if any, of applicable state and
federal corporate and securities laws, of the Code and of any applicable Stock
Exchange (collectively, the "Applicable Laws"). Once appointed, such Committee
shall continue to serve in its designated capacity until otherwise directed by
the Board. From time to time the Board may increase the size of the Committee
and appoint additional members thereof, remove members (with or without cause)
and appoint new members in substitution therefor, fill vacancies, however
caused, and remove all members of the Committee and thereafter directly
administer the Plan, all to the extent permitted by the Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of
the Plan and in the case of a Committee, the specific duties delegated by the
Board to such Committee, and subject to the approval of any relevant
authorities, including the approval, if required, of any Stock Exchange, the
Administrator shall have the authority, in its discretion:
(i) to determine the Fair Market Value of the Common
Stock, in accordance with Section 2(k) of the Plan;
(ii) to select the Consultants and Employees to whom
Options and Stock Purchase Rights may from time to time be granted hereunder;
(iii) to determine whether and to what extent Options
and Stock Purchase Rights or any combination thereof are granted hereunder;
(iv) to determine the number of shares of Common Stock
to be covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the
Plan;
(vi) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any award granted hereunder;
(vii) to determine whether and under what
circumstances an Option may be settled in cash under Section 9(f) instead of
Common Stock;
(viii) to accelerate the exercisability of any Option
or Stock Purchase
<PAGE>
Right;
(ix) to determine the terms and restrictions
applicable to Stock Purchase Rights and the Restricted Stock purchased by
exercising such Stock Purchase Rights;
(x) in order to fulfill the purposes of the Plan and
without amending the Plan, to modify grants of Options or Stock Purchase Rights
to participants who are foreign nationals or employed outside of the United
States in order to recognize differences in local law, tax policies or customs;
(xi) to accelerate the vesting of any Option or Stock
Purchase Right or waive forfeiture restrictions with respect thereto; and
(xii) to make all other determinations, not
inconsistent with the terms of the Plan, deemed necessary or advisable for
administering the Plan.
(c) Effect of Administrator's Decision. All decisions,
determinations and interpretations of the Administrator shall be final and
binding on all holders of Options or Stock Purchase Rights.
5. Eligibility.
(a) Nonstatutory Stock Options and Stock Purchase Rights may
be granted to Employees and Consultants. Incentive Stock Options may be granted
only to Employees. An Employee or Consultant who has been granted an Option or
Stock Purchase Right may, if he or she is otherwise eligible, be granted
additional Options or Stock Purchase Rights.
(b) Each Option shall be designated in the written option
agreement as either an Incentive Stock Option or a Nonstatutory Stock Option.
However, notwithstanding such designations, to the extent that the aggregate
Fair Market Value of the Shares with respect to which Options designated as
Incentive Stock Options are exercisable for the first time by any Optionee
during any calendar year (under all plans of the Company or any Parent or
Subsidiary) exceeds $100,000, such excess Options shall be treated as
Nonstatutory Stock Options.
(c) For purposes of Section 5(b), Incentive Stock Options
shall be taken into account in the order in which they were granted, and the
Fair Market Value of the Shares subject to an Incentive Stock Option shall be
determined as of the date of the grant of such Option.
(d) The Plan shall not confer upon any Optionee any right with
respect to continuation of employment or consulting relationship with the
Company, nor shall it interfere in any way with such Optionee's right or the
Company's right to terminate his or her employment or consulting relationship at
any time, with or without cause.
<PAGE>
6. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
stockholders of the Company as described in Section 19 of the Plan. It shall
continue in effect for a term of ten (10) years unless sooner terminated under
Section 15 of the Plan.
7. Term of Option. The term of each Option shall be the term stated in
the Option Agreement; provided, however, that the term shall be no more than ten
(10) years from the date of grant thereof or such shorter term as may be
provided in the Option Agreement. However, in the case of an Option granted to
an Optionee who, at the time the Option is granted, owns stock representing more
than ten percent (10%) of the voting power of all classes of stock of the
Company or any Parent or Subsidiary, the term of the Option shall be five (5)
years from the date of grant thereof or such shorter term as may be provided in
the Option Agreement.
8. Option Exercise Price and Consideration.
(a) The per share exercise price for the Shares to be issued
pursuant to exercise of an Option shall be such price as is determined by the
Board, but shall be subject to the following:
(i) In the case of an Incentive Stock Option that is:
(A) granted to an Employee who, at the time of
the grant of such Incentive Stock Option, owns stock representing more than ten
percent (10%) of the voting power of all classes of stock of the Company or any
Parent or Subsidiary, the per Share exercise price shall be no less than 110% of
the Fair Market Value per Share on the date of grant.
(B) granted to any other Employee, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(ii) In the case of a Nonstatutory Stock Option that
is:
(A) granted to a person who, at the time of the
grant of such Option, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
the per Share exercise price shall be no less than 110% of the Fair Market Value
per Share on the date of the grant.
(B) granted to any other person, the per Share
exercise price shall be no less than 85% of the Fair Market Value per Share on
the date of grant.
(b) The consideration to be paid for the Shares to be issued
upon exercise of an Option, including the method of payment, shall be determined
by the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (1) cash, (2)
check, (3) promissory note, (4) other Shares that (x) in
<PAGE>
the case of Shares acquired upon exercise of an Option, have been owned by the
Optionee for more than six months on the date of surrender or such other period
as may be required to avoid a charge to the Company's earnings, and (y) have a
Fair Market Value on the date of surrender equal to the aggregate exercise price
of the Shares as to which such Option shall be exercised, (5) authorization for
the Company to retain from the total number of Shares as to which the Option is
exercised that number of Shares having a Fair Market Value on the date of
exercise equal to the exercise price for the total number of Shares as to which
the Option is exercised, (6) delivery of a properly executed exercise notice
together with such other documentation as the Administrator and the broker, if
applicable, shall require to effect an exercise of the Option and delivery to
the Company of the sale or loan proceeds required to pay the exercise price and
any applicable income or employment taxes, (7) delivery of an irrevocable
subscription agreement for the Shares that irrevocably obligates the option
holder to take and pay for the Shares not more than twelve months after the date
of delivery of the subscription agreement, (8) any combination of the foregoing
methods of payment, or (9) such other consideration and method of payment for
the issuance of Shares to the extent permitted under Applicable Laws. In making
its determination as to the type of consideration to accept, the Administrator
shall consider if acceptance of such consideration may be reasonably expected to
benefit the Company.
9. Exercise of Option.
(a) Procedure for Exercise; Rights as a Stockholder. Any
Option granted hereunder shall be exercisable at such times and under such
conditions as determined by the Administrator, including performance criteria
with respect to the Company and/or the Optionee, and as shall be permissible
under the terms of the Plan. An Option may not be exercised for a fraction of a
Share. An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and the Company has
received full payment for the Shares with respect to which the Option is
exercised. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 8(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a stockholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Company shall issue (or cause to
be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 12 of the Plan.
Exercise of an Option in any manner shall result in a decrease
in the number of Shares that thereafter may be available, both for purposes of
the Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Employment or Consulting Relationship.
Subject to Section 9(c), in the event of termination of an Optionee's consulting
relationship or
<PAGE>
Continuous Status as an Employee with the Company, such Optionee may, but only
within three (3) months (or such other period of time not less than thirty (30)
days as is determined by the Administrator, with such determination in the case
of an Incentive Stock Option being made at the time of grant of the Option and
not exceeding three (3) months) after the date of such termination (but in no
event later than the expiration date of the term of such Option as set forth in
the Option Agreement), exercise his or her Option to the extent that the
Optionee was entitled to exercise it at the date of such termination. To the
extent that Optionee was not entitled to exercise the Option at the date of such
termination, or if Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate. No
termination shall be deemed to occur and this Section 9(b) shall not apply if
(i) the Optionee is a Consultant who becomes an Employee within the time
specified herein; or (ii) the Optionee is an Employee who becomes a Consultant
within the time specified herein.
(c) Disability of Optionee. Notwithstanding the provisions of
Section 9(b) above, in the event of termination of an Optionee's consulting
relationship or Continuous Status as an Employee as a result of his or her total
and permanent disability (as defined in Section 22(e)(3) of the Code, or any
successor provision), the Optionee may, but only within six (6) months (or such
other period of time not exceeding twelve (12) months as is determined by the
Board, with such determination in the case of an Incentive Stock Option being
made at the time of the grant of the option) from the date of such termination
(but in no event later than the expiration date of the term of such Option as
set forth in the Option Agreement), exercise the Option to the extent otherwise
entitled to exercise it at the date of such termination. To the extent that
Optionee was not entitled to exercise the Option at the date of termination, or
if Optionee does not exercise such Option to the extent so entitled within the
time specified herein, the Option shall terminate.
(d) Death of Optionee. In the event of the death of an
Optionee (i) during the period of Continuous Status as an Employee or any
consulting relationship or (ii) within thirty (30) days following the
termination of the Optionee's Continuous Status as an Employee or consulting
relationship, the Option may be exercised, at any time within six (6) months (or
such other period of time not exceeding twelve (12) months as is determined by
the Board, with such determination in the case of an Incentive Stock Option
being made at the time of the grant of the option) following the date of death
(but in no event later than the expiration date of the term of such Option as
set forth in the Option Agreement), by the Optionee's estate or by a person who
acquired the right to exercise the Option by bequest or inheritance, but only to
the extent the Optionee was entitled to exercise the Option at the date of death
or, if earlier, the date of termination of the consulting relationship or
Continuous Status as an Employee. To the extent that Optionee was not entitled
to exercise the Option at the date of death or termination, as the case may be,
or if Optionee does not exercise such Option to the extent so entitled within
the time specified herein, the Option shall terminate.
(e) Rule 16b-3. Options granted to Reporting Persons shall
comply with Rule 16b-3 and shall contain such additional conditions or
restrictions as may be required thereunder to qualify for the maximum exemption
for Plan transactions.
<PAGE>
(f) Buyout Provisions. The Administrator may at any time offer
to buy out for a payment in cash or Shares, an Option previously granted, based
on such terms and conditions as the Administrator shall establish and
communicate to the Optionee at the time that such offer is made.
10. Stock Purchase Rights.
(a) Rights to Purchase. Stock Purchase Rights may be issued
either alone, in addition to, or in tandem with other awards granted under the
Plan and/or cash awards made outside of the Plan. After the Administrator
determines that it will offer Stock Purchase Rights under the Plan, it shall
advise the offeree in writing of the terms, conditions and restrictions related
to the offer, including the number of Shares that such person shall be entitled
to purchase, the price to be paid (which price shall not be less than 85% of the
Fair Market Value of the Shares as of the date of the offer), and the time
within which such person must accept such offer, which shall in no event exceed
thirty (30) days from the date upon which the Administrator made the
determination to grant the Stock Purchase Right. The offer shall be accepted by
execution of a Restricted Stock purchase agreement in the form determined by the
Administrator.
(b) Repurchase Option. Unless the Administrator determines
otherwise, the Restricted Stock purchase agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's employment or consulting relationship with the Company for any
reason (including death or disability). The purchase price for Shares
repurchased pursuant to the Restricted Stock purchase agreement shall be the
original purchase price paid by the purchaser and may be paid by cancellation of
any indebtedness of the purchaser to the Company.
(c) Other Provisions. The Restricted Stock purchase agreement
shall contain such other terms, provisions and conditions not inconsistent with
the Plan as may be determined by the Administrator in its sole discretion. In
addition, the provisions of Restricted Stock purchase agreements need not be the
same with respect to each purchaser.
(d) Rights as a Stockholder. Once the Stock Purchase Right is
exercised, the purchaser shall have the rights equivalent to those of a
stockholder, and shall be a stockholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 12
of the Plan.
11. Stock Withholding to Satisfy Withholding Tax Obligations. At the
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option or Stock Purchase Right, which tax liability is
subject to tax withholding under applicable tax laws, and the Optionee is
obligated to pay the Company an amount required to be withheld under applicable
tax laws, the Optionee may satisfy the withholding tax obligation by one or some
<PAGE>
combination of the following methods: (a) by cash payment, or (b) out of
Optionee's current compensation, (c) if permitted by the Administrator, in its
discretion, by surrendering to the Company Shares that (i) in the case of Shares
previously acquired from the Company, have been owned by the Optionee for more
than six months on the date of surrender, and (ii) have a fair market value on
the date of surrender equal to or greater than Optionee's marginal tax rate
times the ordinary income recognized, or (d) by electing to have the Company
withhold from the Shares to be issued upon exercise of the Option, or the Shares
to be issued in connection with the Stock Purchase Right, if any, that number of
Shares having a fair market value equal to the amount required to be withheld.
For this purpose, the fair market value of the Shares to be withheld shall be
determined on the date that the amount of tax to be withheld is to be determined
(the "Tax Date").
Any surrender by a Reporting Person of previously owned Shares
to satisfy tax withholding obligations arising upon exercise of this Option must
comply with the applicable provisions of Rule 16b-3 and shall be subject to such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
All elections by an Optionee to have Shares withheld to
satisfy tax withholding obligations shall be made in writing in a form
acceptable to the Administrator and shall be subject to the following
restrictions:
(a) the election must be made on or prior to the applicable
Tax Date;
(b) once made, the election shall be irrevocable as to the
particular Shares of the Option or Stock Purchase Right as to which the election
is made;
(c) all elections shall be subject to the consent or
disapproval of the
Administrator; and
(d) if the Optionee is a Reporting Person, the election must
comply with the applicable provisions of Rule 16b-3 and shall be subject to such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
In the event the election to have Shares withheld is made by
an Optionee and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Optionee shall receive
the full number of Shares with respect to which the Option or Stock Purchase
Right is exercised but such Optionee shall be unconditionally obligated to
tender back to the Company the proper number of Shares on the Tax Date.
<PAGE>
12. Adjustments Upon Changes in Capitalization, Merger or Certain Other
Transactions.
(a) Changes in Capitalization. Subject to any required action
by the stockholders of the Company, the number of shares of Common Stock covered
by each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock that have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or that have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination, recapitalization or reclassification of the Common Stock, or any
other increase or decrease in the number of issued shares of Common Stock
effected without receipt of consideration by the Company; provided, however,
that conversion of any convertible securities of the Company shall not be deemed
to have been "effected without receipt of consideration." Such adjustment shall
be made by the Board, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issuance by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock subject
to an Option or Stock Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Board shall notify the Optionee
at least fifteen (15) days prior to such proposed action. To the extent it has
not been previously exercised, the Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(c) Merger or Sale of Assets. In the event of a proposed sale
of all or substantially all of the Company's assets or a merger of the Company
with or into another corporation where the successor corporation issues its
securities to the Company's stockholders (excluding any transaction with a
majority-owned or wholly-owned subsidiary), each outstanding Option or Stock
Purchase Right shall be assumed or an equivalent option or right shall be
substituted by such successor corporation or a parent or subsidiary of such
successor corporation (and such assumed or substituted Option or Stock Purchase
Right shall provide that such Option or Stock Purchase Right shall vest in its
entirety in the event that the Consultant or Employee holding such Option or
Stock Purchaser Right is terminated without cause within the twelve (12) month
period following the consummation of the merger or sale of assets). If the
successor corporation does not agree to so assume an Option or Stock Purchase
Right or to so substitute an equivalent option or right, such Option or Stock
Purchase Right shall vest in its entirety and become exercisable prior to the
consummation of the merger or sale of assets. If an Option becomes fully
exercisable in lieu of assumption or substitution in the event of a merger or
sale of assets as provided in the preceding two sentences, the Board shall
notify the Optionee within a reasonable time prior to the
<PAGE>
consummation of such transaction, and the Option shall be fully exercisable for
a period of ten (10) days from the date of such notice, and will terminate upon
the expiration of such period.
(d) Certain Distributions. In the event of any distribution to
the Company's stockholders of securities of any other entity or other assets
(other than dividends payable in cash or stock of the Company) without receipt
of consideration by the Company, the Administrator may, in its discretion,
appropriately adjust the price per share of Common Stock covered by each
outstanding Option or Stock Purchase Right to reflect the effect of such
distribution.
13. Non-Transferability of Options, Stock Purchase Rights and
Restricted Stock. To the extent required by any Applicable Law, Options and
Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised or purchased during the lifetime of
the Optionee only by the Optionee.
14. Time of Granting Options and Stock Purchase Rights. The date of
grant of an Option or Stock Purchase Right shall, for all purposes, be the date
on which the Administrator makes the determination granting such Option or Stock
Purchase Right, or such other date as is determined by the Board. Notice of the
determination shall be given to each Employee or Consultant to whom an Option or
Stock Purchase Right is so granted within a reasonable time after the date of
such grant.
15. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time
amend, alter, suspend or discontinue the Plan, but no amendment, alteration,
suspension or discontinuation shall be made that would impair the rights of any
Optionee under any grant theretofore made, without his or her consent. In
addition, to the extent necessary and desirable to comply with Rule 16b-3 or
with Section 422 of the Code, or any successor provision (or any other
applicable law or regulation, including the requirements of any Stock Exchange),
the Company shall obtain stockholder approval of any Plan amendment in such a
manner and to such a degree as required.
(b) Effect of Amendment or Termination. No amendment or
termination of the Plan shall adversely affect Options or Stock Purchase Rights
already granted, unless mutually agreed otherwise between the Optionee and the
Board, which agreement must be in writing and signed by the Optionee and the
Company.
16. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option or Stock Purchase Right unless the
exercise of such Option or Stock Purchase Right and the issuance and delivery of
such Shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended, the
Exchange Act, the rules and regulations promulgated thereunder,
<PAGE>
and the requirements of any Stock Exchange. As a condition to the exercise of an
Option, the Company may require the person exercising such Option to represent
and warrant at the time of any such exercise that the Shares are being purchased
only for investment and without any present intention to sell or distribute such
Shares if, in the opinion of counsel for the Company, such a representation is
required by law.
17. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. The inability of the Company
to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
18. Agreements. Options and Stock Purchase Rights shall be evidenced by
written agreements in such form as the Administrator shall approve from time to
time.
19. Stockholder Approval. Continuance of the Plan shall be subject to
approval by the stockholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such stockholder approval shall be obtained
in the degree and manner required under applicable state and federal law and the
rules of any Stock Exchange. All Options and Stock Purchase Rights issued under
the Plan shall become void in the event such approval is not obtained.
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of July 1, 1996, between UNIVERSITY ONLINE,
INC., a corporation organized and existing under the laws of the State of
Delaware ("UOL") and NARASIMHAN P. KANNAN ("Kannan").
WHEREAS, UOL desires to employ Kannan and Kannan desires to accept such
employment on the terms and conditions hereinafter set forth; and
WHEREAS, the parties hereby acknowledge that the goodwill, continued
patronage, names, addresses and specific business requirements of UOL's clients
and customers, and the designs, procedures, systems, strategies, business
methods and know-how of UOL, having been acquired through UOL's efforts and the
expenditure of considerable time and money, are among the principal assets of
UOL; and
WHEREAS, the parties hereby acknowledge that as a result of the
position(s) in which Kannan is and will be employed, Kannan has developed and
will continue to develop special skills and knowledge peculiar to UOL's
business, whereby he has become and will continue to become, through his
employment with UOL, acquainted with the identities of the clients and customers
of UOL, and has acquired and will continue to acquire access to the techniques
of UOL in carrying on its business, as well as other confidential and
proprietary information; and
WHEREAS, the parties hereto acknowledge that the Covenants set forth in
Section 8 of this Agreement are necessary for the reasonable and proper
protection of UOL's confidential and proprietary information (as defined
herein), customer relationships, and the goodwill of UOL's business, and that
such Covenants constitute a material portion of the consideration for Kannan's
employment hereunder.
NOW, THEREFORE, in consideration of the premises and mutual promises
and covenants contained herein, and for other good and valuable consideration,
the receipt and legal sufficiency of which are hereby acknowledged, the parties
agree as follows:
1. Term. UOL agrees to employ Kannan, and Kannan agrees to be employed,
as Chairman of the Board of Directors and Chief Executive Officer of UOL, or in
such other management position as the Board of Directors may from time to time
assign, for a term of two (2) years commencing July 1, 1996 and ending June 30,
1998 (the "Initial Term"), unless such employment is sooner terminated as
provided herein.
2. Renewal Terms. Unless either party provides written notice to the
other of its/his intention not to renew this Agreement at least sixty (60) days
prior to the expiration of the
<PAGE>
Initial Term (or then-current renewal term hereof), this Agreement shall be
automatically renewed for consecutive additional one (1) year renewal terms,
subject to the termination provisions set forth in Section 7 hereof.
3. Compensation. In consideration of Kannan's services as Chief
Executive Officer and Chairman of the Board (or any other capacity in which
Kannan may be employed by UOL), UOL shall pay Kannan a minimum annual base
salary of One Hundred Sixty Thousand and 00/100 Dollars ($160,000.00) per annum,
payable in equal monthly installments in accordance with UOL's normal payroll
practices, plus an annual performance bonus of up to fifty percent (50%) of
Kannan's base salary in an amount to be determined by the Board of Directors of
UOL in its sole discretion, based upon the growth rate in revenues and earnings
of UOL during the term hereof. Kannan's total compensation shall also be
reviewed by the Board of Directors of UOL on an annual basis during the term
hereof and may be increased as UOL deems appropriate in its sole discretion. In
the event that UOL completes an Initial Public Offering ("IPO") of UOL stock
during the term hereof, Kannan's base salary shall be automatically increased to
One Hundred Eighty Thousand and 00/100 Dollars ($180,000.00) per annum,
beginning as of the effective date of such IPO.
4. Employee Benefits; Vacation. During the term of this Agreement,
Kannan shall be eligible to receive and/or participate in all employee benefits
that are offered by UOL to its executive employees, including, without
limitation, major medical, dental, and long term disability insurance coverage
for Kannan. During the term hereof, Kannan shall be entitled to receive up to
four (4) weeks (i.e., twenty (20) days) of paid vacation per calendar year. Up
to five (5) days of accrued but unused vacation may be carried over by Kannan
from one calendar year to the next.
5. Reimbursement of Expenses. Kannan is authorized to incur reasonable
expenses in connection with the business of UOL including expenses for travel
and similar items. UOL will reimburse Kannan for all such reasonable expenses
upon itemized account of expenditures.
6. Illness or Disability. Kannan shall receive full compensation for
any period of illness or disability during the term of this Agreement until such
time as he receives benefits under the long term disability insurance coverage
referred to in paragraph 4, supra. Notwithstanding the foregoing, UOL shall have
the right to terminate this Agreement without further obligation to Kannan if
such illness or disability shall be of such a character as totally to disable
Kannan from rendering any services to UOL for a period of more than six (6)
consecutive months on giving at least thirty (30) days' written notice of
intention to do so.
2
<PAGE>
7. Termination of Employment. Kannan's employment hereunder is
employment at will, and either UOL or Kannan may terminate this Agreement and
Kannan's employment at any time, with or without cause. For purposes of this
Agreement, notice of intent not to renew this Agreement given by UOL to Kannan
shall not be deemed a termination hereof.
a. Severance Benefit Payable. If Kannan terminates this
Agreement for Good Reason (as defined below), or if UOL terminates the Agreement
other than (i) for Cause (defined below) or (ii) due to Kannan's Disability as
described in Section 6 hereof, Kannan shall be entitled to receive, as his
exclusive remedy for such termination, the severance benefit set forth in
subsection 7d hereof (the "Severance Benefit"). Such Severance Benefit shall be
payable to Kannan in equal monthly installments, consistent with UOL's standard
payroll practices, the first of such installments to be due within thirty (30)
days after termination hereof. In order, however, to invoke termination for
"Good Reason" hereunder, Kannan must communicate such termination in advance and
by written notice UOL, which written notice (i) indicates the specific
termination provision in this Agreement relied upon, (ii) sets forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of Kannan's employment under the provision so indicated and (iii)
specifies the termination date (which date shall not be more than thirty (30)
days after the giving of such notice).
b. Good Reason. For purposes of this Agreement, "Good Reason"
shall mean (i) any material change in Kannan's duties, titles, authority or
position with UOL, excluding any isolated, unsubstantial or inadvertent action
not taken in bad faith and which is remedied by UOL promptly after receipt of
notice thereof given by Kannan, (ii) any material reduction in Kannan's base
salary below the amount in effect as of the date hereof, or (iii) any purported
termination by UOL of Kannan's employment other than for Cause; provided,
however, that no severance benefit shall be payable to Kannan based upon a
termination of this Agreement for Good Reason unless such termination is
properly noticed and takes effect within thirty (30) days after the occurrence
of such Good Reason.
c. Cause. For purposes of this Agreement, "Cause" shall mean
mismanagement, drug or alcohol abuse, conviction of a felony or crime involving
moral turpitude, a material breach of this Agreement, or any willful or grossly
negligent act or omission by Kannan having a material adverse effect on UOL, as
determined by no less than a majority of the Board of Directors.
d. Amount of Severance Benefit. The amount of the Severance
Benefit shall equal nine (9) months of Kannan's Base Salary, less applicable
withholdings for taxes.
e. Optional Consulting Arrangement. In the event of a
termination hereof by Kannan due to a material change in
3
<PAGE>
Kannan's duties, titles, authority or position with UOL, excluding any isolated,
unsubstantial or inadvertent action not taken in bad faith and which is remedied
by UOL promptly after receipt of notice thereof given by Kannan, Kannan may, at
his option and in lieu of the Severance Benefit described above, accept a
consulting arrangement with UOL for a period of one (1) year (renewable on an
annual basis by the Board of Directors in its sole discretion). Under such
arrangement, Kannan shall devote substantially all of his time and best efforts
on behalf of UOL and perform such duties as may be assigned to him by the
President or Chief Executive Officer of UOL. As compensation for such consulting
services, Kannan shall receive $750.00 per day. All pre-approved out of pocket
expenses incurred by Kannan in the course of his performance under such
consulting arrangement shall be reimbursed by UOL upon the provision by Kannan
of appropriate receipts. Kannan shall also be eligible for performance bonuses
as recommended by the Chief Executive Officer or President of UOL and approved
by UOL's Board of Directors.
f. Deferred Compensation. In the event of a termination or
nonrenewal of this Agreement and Kannan's employment hereunder, UOL shall
provide for the payment to Kannan of all previously earned but unpaid
compensation due and owing to Kannan on an installment basis and in a manner
consistent with UOL's then current cash position. Notwithstanding the foregoing,
full payment of all earned but unpaid compensation due and owing to Kannan shall
be made by UOL not later than one (1) year following the termination or
nonrenewal hereof. Notwithstanding the foregoing, if UOL completes an IPO during
the term of this Agreement (including any renewals hereof), the entire amount of
the earned but unpaid compensation owed to Kannan by UOL, less all amounts owed
by Kannan to UOL (the "Net Deferred Compensation"), shall become immediately due
and payable to Kannan; provided, however, that the Net Deferred Compensation
payable to Kannan after applicable tax withholding shall in no event exceed One
Hundred Thousand and 00/100 Dollars ($100,000.00). Kannan hereby authorizes UOL
to retain earned but unpaid compensation owed to Kannan by UOL and apply such
compensation towards repayment of any amounts owed by Kannan to UOL.
8. Restrictive Covenants.
a. Noncompetition. Kannan agrees that during, and for a period
of two (2) years after, termination or expiration of this Agreement and his
employment with UOL, he will not, directly or indirectly, on his own behalf or
on behalf of any other individual or entity:
(1) become an officer, employee, director, agent,
representative, member, associate or consultant of a
corporation, partnership, firm or other entity, or
(2) have, directly or indirectly, a proprietary interest
in any business, firm, partnership, or other entity,
or act as contractor thereto, or
4
<PAGE>
(3) own, directly or indirectly, any stock in a
corporation that engages in any business which is the
same as or similar to that in which UOL is engaged or
shall be engaged upon the termination of Kannan's
employment with UOL, or renders any services that are
the same as or similar to those services currently
provided by UOL, or which UOL is providing as of the
date of termination of Kannan's employment with UOL,
and shall not in any other manner, directly or
indirectly, compete to any extent with such business
of UOL. Notwithstanding the foregoing, Kannan shall
not be bound by the terms of this subsection 8a if
the Agreement is terminated by UOL and such
termination is without Cause as defined herein.
b. Nonsolicitation. During Kannan's employment with UOL, and
for the two (2) year period of time described in Section 8a hereof, Kannan
agrees not to solicit or conduct business with any client or customer of UOL
(past or present), whether or not UOL is doing work for such client or customer
as of the date of termination of Kannan's employment with UOL, as well as any
prospective client or customer of UOL, or to contact, solicit, interfere with or
attempt to entice in any form, fashion or manner any employee of UOL for the
purpose of inducing that employee to terminate his/her employment with UOL or
act in any way that would be contrary to the best interests of UOL.
c. Nondisclosure. During and after Kannan's employment with
UOL, Kannan agrees not to disclose, or to knowingly allow any other employee to
disclose, to any other person or business entity, or use for personal profit or
gain, any confidential or proprietary information of UOL, regardless of whether
the same shall be or may have been originated, discovered or invented by Kannan
or by Kannan in conjunction with others. For purposes of this Agreement, the
term "confidential or proprietary information" shall include, without
limitation: the names, addresses and telephone numbers of past, present and
prospective clients or customers of UOL, as well as products, designs, business
plans, proposed business development, marketing strategies, customers
requirements, contractual provisions, employee capabilities, proposed marketing
initiatives, pricing methods, company earnings, computer software and reporting
systems; and the procedures, systems and business methods of UOL.
d. Geographic Scope of Restrictive Covenants. The geographic
area in which Kannan shall not engage in any of the prohibited activities listed
in subsections 8a and 8b hereof shall be limited to: (a) the continental United
States; (b) the State of California; (c) the State of Texas; (d) the State of
Virginia; (e) all other states in which UOL has customers or otherwise conducts
business; (f) the area within a 50 mile radius of UOL's place of business in
Falls Church, Virginia; and (g) the area within a 50 mile radius of Waxahachie,
Texas.
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e. Additional Consideration. As additional consideration for
Kannan's agreement to be bound by the terms of this Section 8, Kannan shall
receive from UOL a lump sum payment of Two Thousand Five Hundred and 00/100
Dollars ($2,500.00) (the "Additional Consideration"). Kannan hereby acknowledges
that he would not be entitled to receive the Additional Consideration but for
his agreement to be bound by the provisions of this Section 8.
9. Remedies for Breach. Kannan hereby acknowledges and agrees that a
violation of any of the covenants set forth in Section 8 hereof (the
"Covenants") would result in immediate and irreparable harm to UOL, and that
UOL's remedies at law, including, without limitation, the award of money
damages, would be inadequate relief to UOL for any such violation. Therefore,
any violation or threatened violation by Kannan of the Covenants shall give UOL
the right to enforce such Covenants through specific performance, temporary
restraining order, preliminary or permanent injunction, and other equitable
relief. Such remedies shall be cumulative and in addition to any other remedies
UOL may have, at law or in equity.
10. Notice of Subsequent Employment; Etc. Kannan agrees that he shall,
during the two (2) year period following the termination of his employment with
UOL, give reasonable written notice to UOL of the names and addresses of each
person, firm, corporation or other entity by whom he is employed or for whom he
acts as director, agent, representative, member, associate, or consultant.
Kannan further agrees that if at any time during such two (2) year period he
conducts business on his own account, or through a proprietary interest in any
business, firm, partnership or other entity, or as contractor, or owns any stock
in a corporation, Kannan shall give written notice to UOL of the name, address
and nature of any such business.
11. Return of UOL Property; Assignment of Inventions.
a. Return of Property. Upon the termination of Kannan's
employment with UOL for any reason, Kannan shall leave with or return to UOL all
personal property belonging to UOL ("UOL Property") that is in Kannan's
possession or control as of the date of such termination of employment,
including, without limitation, all records, papers, drawings, notebooks,
specifications, marketing materials, software, reports, proposals, equipment, or
any other device, document or possession, however obtained, whether or not such
UOL Property contains confidential or proprietary information of UOL as
described in Section 8c hereof.
b. Assignment of Inventions. If at any time or times during
Kannan's employment, Kannan shall (either alone or with others) make, conceive,
discover or reduce to practice any invention, modification, discovery, design,
development, improvement, process, software program, work of authorship,
6
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documentation, formula, data, technique, know-how, secret or intellectual
property right whatsoever or any interest therein (whether or not patentable or
registrable under copyright or similar statutes or subject to analogous
protection) (herein called "Developments") that (a) relates to the business of
UOL or any of the products or services being developed, manufactured or sold by
UOL or that may be used in relation therewith, (b) results from tasks assigned
him by UOL or (c) results from the use of premises or personal property (whether
tangible or intangible) owned, leased or contracted for by UOL, such
Developments and the benefits thereof shall immediately become the sole and
absolute property of UOL and its assigns, and Kannan shall promptly disclose to
UOL (or any persons designated by it) each such Development and hereby assigns
any rights Kannan may have or acquire in the Developments and benefits and/or
rights resulting therefrom to UOL and its assigns without further compensation
and shall communicate, without cost or delay, and without publishing the same,
all available information relating thereto (with all necessary plans and models)
to UOL.
Upon disclosure of each Development to UOL, Kannan will,
during his employment and at any time thereafter, at the request and expense of
UOL, sign, execute, make and do all such deeds, documents, acts and things as
UOL and its duly authorized agents may reasonably require:
(i) to apply for, obtain and vest in the name of UOL
alone (unless UOL otherwise directs) letters patent,
copyrights or other analogous protection in any
country throughout the world and when so obtained or
vested to renew and restore the same; and
(ii) to defend any opposition proceedings in respect
of such applications and any opposition proceedings
or petitions or applications for revocation of such
letters patent, copyright or other analogous
protection.
In the event UOL is unable, after reasonable effort, to secure
Kannan's signature on any letters patent, copyright or other analogous
protection relating to a Development, whether because of Kannan's physical or
mental incapacity or for any other reason, Kannan hereby irrevocably designates
and appoints UOL and its duly authorized officers and agents as Kannan's agents
and attorneys-in-fact, to act for and in behalf of Kannan and stead to execute
and file any such application or applications and to do all other lawfully
permitted acts to further the prosecution and issuance of letters patent,
copyright or other analogous protection thereon with the same legal force and
effect as if executed by Kannan.
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12. Survival. The provisions of Sections 8, 9, 10 and 11
hereof shall survive the termination of this Agreement, regardless of the manner
or cause of such termination.
13. Effect of Agreement. This Agreement sets forth the final
and complete Agreement of the parties. It shall not be assigned by Kannan and
may not be modified except by way of a writing executed by both parties. All the
terms and provisions of this Agreement shall be binding upon and inure to the
benefit of and be enforceable by the parties hereto and their successors and
assigns.
14. Governing Law. The provisions of this Agreement and any
disputes arising hereunder shall be governed by and construed in accordance with
the laws of the State of Virginia.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and their seals affixed hereto as of the day and
year first above written.
UNIVERSITY ONLINE, INC.
By: ______________________________
Corporate Seal Name:_____________________________
Title:____________________________
Attest: ____________________
Secretary
_____________________________(SEAL)
Narasimhan P. Kannan
8
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of July 1, 1996, between UNIVERSITY ONLINE,
INC., a corporation organized and existing under the laws of the State of
Delaware ("UOL") and CARL N. TYSON ("Tyson").
WHEREAS, UOL desires to employ Tyson and Tyson desires to accept such
employment on the terms and conditions hereinafter set forth; and
WHEREAS, the parties hereby acknowledge that the goodwill, continued
patronage, names, addresses and specific business requirements of UOL's clients
and customers, and the designs, procedures, systems, strategies, business
methods and know-how of UOL, having been acquired through UOL's efforts and the
expenditure of considerable time and money, are among the principal assets of
UOL; and
WHEREAS, the parties hereby acknowledge that as a result of the
position(s) in which Tyson is and will be employed, Tyson has developed and will
continue to develop special skills and knowledge peculiar to UOL's business,
whereby he has become and will continue to become, through his employment with
UOL, acquainted with the identities of the clients and customers of UOL, and has
acquired and will continue to acquire access to the techniques of UOL in
carrying on its business, as well as other confidential and proprietary
information; and
WHEREAS, the parties hereto acknowledge that the Covenants set forth in
Section 8 of this Agreement are necessary for the reasonable and proper
protection of UOL's confidential and proprietary information (as defined
herein), customer relationships, and the goodwill of UOL's business, and that
such Covenants constitute a material portion of the consideration for Tyson's
employment hereunder.
NOW, THEREFORE, in consideration of the premises and mutual promises
and covenants contained herein, and for other good and valuable consideration,
the receipt and legal sufficiency of which are hereby acknowledged, the parties
agree as follows:
1. Term. UOL agrees to employ Tyson, and Tyson agrees to be employed,
as President and Chief Operating Officer of UOL, or in such other management
position as the Board of Directors may from time to time assign, for a term of
two (2) years commencing July 1, 1996 and ending June 30, 1998 (the "Initial
Term"), unless such employment is sooner terminated as provided herein.
2. Renewal Terms. Unless either party provides written notice to the
other of its/his intention not to renew this Agreement at least sixty (60) days
prior to the expiration of the Initial Term (or then-current renewal term
hereof), this
<PAGE>
Agreement shall be automatically renewed for consecutive additional one (1) year
renewal terms, subject to the termination provisions set forth in Section 7
hereof.
3. Compensation. In consideration of Tyson's services as President and
Chief Operating Officer (or any other capacity in which Tyson may be employed by
UOL), UOL shall pay Tyson a minimum annual base salary of Two Hundred Ten
Thousand Dollars ($210,000.00) per annum, payable in equal monthly installments
in accordance with UOL's normal payroll practices, plus an annual performance
bonus of up to fifty percent (50%) of Tyson's base salary in an amount to be
determined by the Board of Directors of UOL in its sole discretion, based upon
the growth rate in revenues and earnings of UOL during the term hereof. Tyson's
total compensation shall be reviewed by the Board of Directors of UOL on an
annual basis during the term hereof (including renewal terms) and may be
increased as UOL deems appropriate in its sole discretion.
4. Employee Benefits; Vacation. During the term of this Agreement,
Tyson shall be eligible to receive and/or participate in all employee benefits
that are offered by UOL to its executive employees, including, without
limitation, major medical, dental, and long term disability insurance coverage
for Tyson. During the term hereof, Tyson shall be entitled to receive up to
three (3) weeks (i.e., fifteen (15) days) of paid vacation per calendar year. Up
to five (5) days of accrued but unused vacation may be carried over by Tyson
from one calendar year to the next.
5. Reimbursement of Expenses. Tyson is authorized to incur reasonable
expenses in connection with the business of UOL including expenses for travel
and similar items. UOL will reimburse Tyson for all such reasonable expenses
upon itemized account of expenditures.
6. Illness or Disability. Tyson shall receive full compensation for any
period of illness or disability during the term of this Agreement until such
time as he receives benefits under the long term disability insurance coverage
referred to in paragraph 4, supra. Notwithstanding the foregoing, UOL shall have
the right to terminate this Agreement without further obligation to Tyson if
such illness or disability shall be of such a character as totally to disable
Tyson from rendering any services to UOL for a period of more than six (6)
consecutive months on giving at least thirty (30) days' written notice of
intention to do so.
7. Termination of Employment. Tyson's employment hereunder is
employment at will, and either UOL or Tyson may terminate this Agreement and
Tyson's employment at any time, with or without cause. For purposes of this
Agreement, notice of intent not to renew this Agreement given by UOL to Tyson
shall not be deemed a termination hereof.
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<PAGE>
a. Severance Benefit Payable. If Tyson terminates this
Agreement for Good Reason (as defined below), or if UOL terminates the Agreement
other than (i) for Cause (defined below) or (ii) due to Tyson's Disability as
described in Section 6 hereof, Tyson shall be entitled to receive, as his
exclusive remedy for such termination, the severance benefit set forth in
subsection 7d hereof (the "Severance Benefit"). Such Severance Benefit shall be
payable to Tyson in equal monthly installments consistent with UOL's standard
payroll practices, the first of such installments to be due within thirty (30)
days after termination hereof. In order, however, to invoke termination for
"Good Reason" hereunder, Tyson must communicate such termination in advance and
by written notice UOL, which written notice (i) indicates the specific
termination provision in this Agreement relied upon, (ii) sets forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of Tyson's employment under the provision so indicated and (iii)
specifies the termination date (which date shall not be more than thirty (30)
days after the giving of such notice).
b. Good Reason. For purposes of this Agreement, "Good Reason"
shall mean (i) any material change in Tyson's duties, titles, authority or
position with UOL, excluding any isolated, unsubstantial or inadvertent action
not taken in bad faith and which is remedied by UOL promptly after receipt of
notice thereof given by Tyson, (ii) any material reduction in Tyson's base
salary below the amount in effect as of the date hereof, or (iii) any purported
termination by UOL of Tyson's employment other than for Cause; provided,
however, that no severance benefit shall be payable to Tyson based upon a
termination of this Agreement for Good Reason unless such termination is
properly noticed and takes effect within thirty (30) days after the occurrence
of such Good Reason.
c. Cause. For purposes of this Agreement, "Cause" shall mean
mismanagement, drug or alcohol abuse, conviction of a felony or crime involving
moral turpitude, a material breach of this Agreement, or any willful or grossly
negligent act or omission by Tyson having a material adverse effect on UOL, as
determined by no less than a majority of the Board of Directors.
d. Amount of Severance Benefit. The amount of the Severance
Benefit shall equal nine (9) months of Tyson's Base Salary, less applicable
withholdings for taxes.
8. Restrictive Covenants.
a. Noncompetition. Tyson agrees that during, and for a period
of two (2) years after, the later of termination or expiration of this Agreement
and his employment with UOL, he will not, directly or indirectly, on his own
behalf or on behalf of any other individual or entity:
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<PAGE>
(1) become an officer, employee, director, agent,
representative, member, associate or consultant of a
corporation, partnership, firm or other entity, or
(2) have, directly or indirectly, a proprietary interest
in any business, firm, partnership, or other entity,
or act as contractor, or
(3) own, directly or indirectly, any stock in a
corporation
that engages in any business which is the same as or similar to that in which
UOL is engaged or shall be engaged upon the termination of Tyson's employment
with UOL, or renders any services that are the same as or similar to those
services currently provided by UOL, or which UOL is providing as of the date of
termination of Tyson's employment with UOL, and shall not in any other manner,
directly or indirectly, compete to any extent with such business of UOL.
Notwithstanding the foregoing, Tyson shall not be bound by the terms of this
subsection 8a if the Agreement is terminated by UOL and such termination is
without Cause as defined herein.
b. Nonsolicitation. During Tyson's employment with UOL, and
for the two (2) year period of time described in Section 8a hereof, Tyson agrees
not to solicit or conduct business with any client or customer of UOL (past or
present), whether or not UOL is doing work for such client or customer as of the
date of termination of Tyson's employment with UOL, as well as any prospective
client or customer of UOL, or to contact, solicit, interfere with or attempt to
entice in any form, fashion or manner any employee of UOL for the purpose of
inducing that employee to terminate his/her employment with UOL or act in any
way that would be contrary to the best interests of UOL.
c. Nondisclosure. During and after Tyson's employment with
UOL, Tyson agrees not to disclose, or to knowingly allow any other employee to
disclose, to any other person or business entity, or use for personal profit or
gain, any confidential or proprietary information of UOL, regardless of whether
the same shall be or may have been originated, discovered or invented by Tyson
or by Tyson in conjunction with others. For purposes of this Agreement, the term
"confidential or proprietary information" shall include, without limitation: the
names, addresses and telephone numbers of past, present and prospective clients
or customers of UOL, as well as products, designs, business plans, proposed
business development, marketing strategies, customers requirements, contractual
provisions, employee capabilities, proposed marketing initiatives, pricing
methods, company earnings, computer software and reporting systems; and the
procedures, systems and business methods of UOL.
4
<PAGE>
d. Geographic Scope of Restrictive Covenants. The geographic
area in which Tyson shall not engage in any of the prohibited activities listed
in subsections 8a and 8b hereof shall be limited to: (a) the continental United
States; (b) the State of California; (c) the State of Texas; (d) the State of
Virginia; (e) all other states in which UOL has customers or otherwise conducts
business; (f) the area within a 50 mile radius of UOL's place of business in
Falls Church, Virginia; and (g) the area within a 50 mile radius of Waxahachie,
Texas.
e. Additional Consideration. As additional consideration for
Tyson's agreement to be bound by the terms of this Section 8, Tyson shall
receive from UOL a lump sum payment of Two Thousand Five Hundred and 00/100
Dollars ($2,500.00) (the "Additional Consideration"). Tyson hereby acknowledges
that he would not be entitled to receive the Additional Consideration but for
his agreement to be bound by the provisions of this Section 8.
9. Remedies for Breach. Tyson hereby acknowledges and agrees that a
violation of any of the covenants set forth in Section 8 hereof (the
"Covenants") would result in immediate and irreparable harm to UOL, and that
UOL's remedies at law, including, without limitation, the award of money
damages, would be inadequate relief to UOL for any such violation. Therefore,
any violation or threatened violation by Tyson of the Covenants shall give UOL
the right to enforce such Covenants through specific performance, temporary
restraining order, preliminary or permanent injunction, and other equitable
relief. Such remedies shall be cumulative and in addition to any other remedies
UOL may have, at law or in equity.
10. Notice of Subsequent Employment; Etc. Tyson agrees that he shall,
during the two (2) year period following the termination of his employment with
UOL, give reasonable written notice to UOL of the names and addresses of each
person, firm, corporation or other entity by whom he is employed or for whom he
acts as director, agent, representative, member, associate or consultant. Tyson
further agrees that if at any time during such two (2) year period he conducts
business on his own account, or through a proprietary interest in any business,
firm, partnership or other entity, or as contractor, or owns any stock in a
corporation, Tyson shall give written notice to UOL of the name, address and
nature of any such business.
11. Return of UOL Property; Assignment of Inventions.
a. Return of Property. Upon the termination of Tyson's
employment with UOL for any reason, Tyson shall leave with or return to UOL all
personal property belonging to UOL ("UOL Property") that is in Tyson's
possession or control as of the date of such termination of employment,
including, without limitation, all records, papers, drawings, notebooks,
specifications, marketing materials, software, reports,
5
<PAGE>
proposals, equipment, or any other device, document or possession, however
obtained, whether or not such UOL Property contains confidential or proprietary
information of UOL as described in Section 8c hereof.
b. Assignment of Inventions. If at any time or times during
Tyson's employment, Tyson shall (either alone or with others) make, conceive,
discover or reduce to practice any invention, modification, discovery, design,
development, improvement, process, software program, work of authorship,
documentation, formula, data, technique, know-how, secret or intellectual
property right whatsoever or any interest therein (whether or not patentable or
registrable under copyright or similar statutes or subject to analogous
protection) (herein called "Developments") that (a) relates to the business of
UOL or any of the products or services being developed, manufactured or sold by
UOL or that may be used in relation therewith, (b) results from tasks assigned
him by UOL or (c) results from the use of premises or personal property (whether
tangible or intangible) owned, leased or contracted for by UOL, such
Developments and the benefits thereof shall immediately become the sole and
absolute property of UOL and its assigns, and Tyson shall promptly disclose to
UOL (or any persons designated by it) each such Development and hereby assigns
any rights Tyson may have or acquire in the Developments and benefits and/or
rights resulting therefrom to UOL and its assigns without further compensation
and shall communicate, without cost or delay, and without publishing the same,
all available information relating thereto (with all necessary plans and models)
to UOL.
Upon disclosure of each Development to UOL, Tyson will, during
his employment and at any time thereafter, at the request and expense of UOL,
sign, execute, make and do all such deeds, documents, acts and things as UOL and
its duly authorized agents may reasonably require:
(i) to apply for, obtain and vest in the name of UOL
alone (unless UOL otherwise directs) letters patent,
copyrights or other analogous protection in any
country throughout the world and when so obtained or
vested to renew and restore the same; and
(ii) to defend any opposition proceedings in respect
of such applications and any opposition proceedings
or petitions or applications for revocation of such
letters patent, copyright or other analogous
protection.
In the event UOL is unable, after reasonable effort, to secure
Tyson's signature on any letters patent, copyright or other analogous protection
relating to a Development, whether because of Tyson's physical or mental
incapacity or for any other reason, Tyson hereby irrevocably designates and
appoints UOL and
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its duly authorized officers and agents as Tyson's agents and attorneys-in-fact,
to act for and in behalf of Tyson and stead to execute and file any such
application or applications and to do all other lawfully permitted acts to
further the prosecution and issuance of letters patent, copyright or other
analogous protection thereon with the same legal force and effect as if executed
by Tyson.
12. Survival. The provisions of Sections 8, 9, 10 and 11
hereof shall survive the termination of this Agreement, regardless of the manner
or cause of such termination.
13. Effect of Agreement. This Agreement sets forth the final
and complete Agreement of the parties. It shall not be assigned by Tyson and may
not be modified except by way of a writing executed by both parties. All the
terms and provisions of this Agreement shall be binding upon and inure to the
benefit of and be enforceable by the parties hereto and their successors and
assigns.
14. Governing Law. The provisions of this Agreement and any
disputes arising hereunder shall be governed by and construed in accordance with
the laws of the State of Virginia.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and their seals affixed hereto as of the day and
year first above written.
UNIVERSITY ONLINE, INC.
By: ______________________________
Corporate Seal Name:_____________________________
Title:____________________________
Attest: ____________________
Secretary
____________________________(SEAL)
Carl N. Tyson
7
EMPLOYMENT AND NONCOMPETITION AGREEMENT
THIS AGREEMENT is made and entered into as of this 31st day of July
1996 by and between University Online, Inc. ("University Online") and Michael L.
Brown ("Employee").
RECITALS
A. Pursuant to an Agreement and Plan of Merger dated as of July, 1996
by and among University Online, Cognitive Training Associates, Inc. ("Cognitive
Training"), CTA Acquisition Corporation ("CTA Acquisition"), and the Employee
who also is the sole shareholder of Cognitive Training (the "Merger Agreement"),
Cognitive Training and University Online combined their operations through a
merger of CTA Acquisition, a wholly owned subsidiary of University Online, into
Cognitive Training (the "Merger") after which Cognitive Training was the
surviving corporation. Cognitive Training now continues to operate its business
based in Waxahachie, Texas (the "Business") as a wholly owned subsidiary of
University Online.
B. Prior to the Merger, Employee was actively involved in the
operation of the Business as an executive officer.
C. In order to ensure a smooth transition of operational
responsibility for the Business, University Online is desirous of
retaining the services of Employee.
D. Employee is desirous of continuing to be associated with the
Business and has agreed to accept employment with University Online.
E. University Online and Employee are desirous of documenting the
terms and conditions of said employment relationship.
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants of the parties set forth herein, IT IS HEREBY AGREED AS
FOLLOWS:
AGREEMENT
1. Employee Responsibilities. During the Term (as defined in
Section 3), Employee shall serve as Executive Vice President, Corporate Training
of University Online and President of Cognitive Training, and shall be an
"affiliate" of University Online for federal securities law purposes. In the
performance of his responsibilities, Employee shall be subject to all of
University Online's policies, rules and regulations applicable to
<PAGE>
its employees of comparable status. During the Term, Employee shall report
directly to and be subject to the direction of the President of University
Online. Employee shall be an executive officer of the Cognitive Training
subsidiary of University Online. Employee shall perform the duties consistent
with Employee's prior knowledge, experience and position with Cognitive Training
and the duties of University Online employees of comparable status. Employee
shall have such other duties and responsibilities consistent with his position
as the President of University Online (or his successor) or the Board of
Directors of University Online shall from time to time reasonably assign to him
consistent with past practice. In performing such duties, Employee shall be
subject to and shall substantially abide by all policies and procedures
developed by University Online.
During the Term, Employee shall devote his entire business time,
energies, skills and attention to the affairs and activities of University
Online and/or Cognitive Training and the discharge of his duties and
responsibilities. University Online acknowledges that Employee works in
Waxahachie, Texas and that the performance of his duties hereunder shall not
require Employee to relocate to another company or University Online facility
more than 20 miles from the Waxahachie, Texas facility without Employee's
consent.
2. Compensation. In consideration for the services provided
hereunder, University Online shall pay to Employee the following:
a. Base Salary. During the Term of this Agreement (as defined
below) Employee shall receive an annual base salary as set forth on Exhibit A
(the "Base Salary"). The Base Salary shall be payable in conformity with
University Online's customary practices as established from time to time (less
any applicable local, state and federal taxes including, but not limited to,
unemployment taxes and the employer portion of FICA taxes, for which University
Online shall be responsible). Employee will receive annual cost of living
adjustments (if any) to the Base Salary. The Base Salary may be renegotiated in
six months and increased at the discretion of University Online.
b. Bonus. During the Term of this Agreement, in addition to
the Base Salary, Employee shall be eligible to receive an annual bonus of up to
50% of the Base Salary, based on Employee's performance of his designated duties
and responsibilities. University Online in its sole discretion shall determine
whether to award Employee such bonus, and if so, in what amount.
In addition, University Online shall pay to Employee an additional
bonus of $150,000 upon the earliest of: (i) successful completion of the
acquisition of Cognitive Training by University Online pursuant to the Merger
Agreement and transition of control of Cognitive Training's operations to
University
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Online; (ii) the closing of University Online's initial public offering of
Common Stock registered with the Securities and Exchange Commission; and (iii)
December 31, 1996.
c. Additional Compensation. In addition to his Base Salary
and bonus (if any), Employee shall be entitled to the following additional
compensation:
i. Employee, at University Online's expense, shall be eligible
to participate in qualified retirement, pension, profit sharing, 401(k), group
medical, accident, disability and health insurance of University Online as may
be provided by University Online from time to time to University Online
executives of comparable status on the same basis as such executives, subject
to, and to the extent that, Employee is eligible under such benefit plans in
accordance with their respective terms. Employee's eligibility for continuation
of health insurance benefits under COBRA after termination of Employee's
employment shall begin at the time University Online is no longer required to
provide health insurance benefits hereunder.
ii. Employee shall receive a stock option to purchase 200,000
shares of University Online Common Stock, in substantially the form attached
hereto as Exhibit B, and shall be eligible to participate in any other stock
option, purchase or other equity compensation plans on the same basis as
University Online executives of comparable status. Employee acknowledges that
grants of stock options under University Online's existing stock option programs
are discretionary and are generally made during the fourth quarter of each year.
iii. Employee shall be entitled to reasonable periods of paid
vacation, personal and sick leave during the Term in accordance with University
Online's policies regarding vacation and leaves for executives of comparable
status.
iv. University Online shall pay or reimburse Employee for all
of his out of pocket expenses reasonably incurred in performing the services on
behalf of University Online or Cognitive Training, including, but not limited
to, overnight delivery charges, long distance telephone and facsimile charges
and travel expenses (including airfare, hotels, car rental expenses and meals),
all in accordance with University Online's expense reimbursement policy. Payment
shall be due after University Online's receipt of Employee's invoice or expense
report therefor and in accordance with University Online's expense reimbursement
policies.
v. During the Term, University Online shall provide the
Employee with long-term disability insurance, accidental death and disability
insurance, health and term life insurance, with the Employee or his spouse as
the designated beneficiary under the life insurance policy, in scope and
coverage equivalent
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to that provided to other University Online executives of comparable status.
With respect to each of the items of benefit listed in this Section 2
and any vesting or other criteria for eligibility applicable thereto, Employee
shall be credited with length of service beginning as of the initial date of his
employment by Cognitive Training, except as otherwise required by law.
3. Term. The term of this Agreement shall commence and this Agreement
shall be effective upon the Effective time of the Merger (as that term is
defined in the Merger Agreement (the "Effective Time")) and shall terminate on
the earlier to occur of (i) the two year anniversary of the Effective Time, (ii)
Employee's death, (iii) a determination that Employee has become disabled, as
defined in Section 4(d), (iv) termination "for cause" under the provisions of
Section 4(a), (v) termination without cause as provided in Section 4(b), or (vi)
voluntary termination by Employee as provided in Section 4(c).
4. Termination.
a. For Cause By University Online. During the Term,
University Online may terminate Employee's employment under this Agreement at
any time for "Cause". For purposes of this Section 4(a) and Section 4(b),
"Cause" means:
i. Employee's conviction of any crime (whether or
not involving University Online) which constitutes a felony in the jurisdiction
involved (other than unintentional motor vehicle felonies);
ii. Any intentional act of theft, fraud or
embezzlement by Employee in connection with his work with University Online or
Cognitive Training or engage in his capacity as an officer of University Online
in any willful misconduct or dishonest behavior;
iii. Employee's continuing, repeated, and willful
failure or refusal to perform his reasonable assigned duties under this
Agreement in accordance with Section 1 (other than due to his incapacity due to
illness or injury), provided that such failure or refusal continues uncorrected
for a period of forty-five (45) days after Employee shall have received written
notice stating with specificity the nature of such failure or refusal; or
iv. Employee's repeated and willful violation of any
of his material obligations contained in this Agreement.
No action on the Employee's part shall be considered willful unless
taken, or omitted by the Employee without reasonable belief that the act or
omission was in the best interest of the company or when the act or omission was
not in good faith. After
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notice of termination for Cause has been delivered to the Employee, the Employee
shall be entitled to have the grounds for termination of employment reviewed by
the Board of Directors of University Online provided such entitlement to review
shall not serve to extend the date upon which his termination of employment
shall become effective. In the event of any such termination, Employee shall be
entitled to (X) accrued and unpaid salary and vacation through the termination
date, (Y) COBRA benefits for up to 18 months, provided Employee makes the
appropriate conversion and payments, and (Z) no further severance or other
compensation benefits.
b. Without Cause by University Online. During
the Term, University Online may terminate Employee's employment under this
Agreement at any time and for any reason without Cause. If University Online
terminates Employee's employment pursuant to the provisions of this Section 4(b)
during the Term, Employee shall continue to receive the Base Salary being paid
to him immediately prior to such termination and the benefits provided for in
Section 2(c)(i) (except pension, profit-sharing, disability and 401(k) plans),
(iv) and (v) plus accrued but unpaid vacation pay as of the date of termination
(collectively, the "Termination Payment") for the applicable severance pay
period provided under University Online's standard severance plan (which is
currently six months), giving Employee full credit for his period of employment
by Cognitive Training (the "Standard Severance Period"). In the event of any
such termination, Employee shall be entitled to (i) the applicable Termination
Payment set forth above, (ii) COBRA benefits for up to 18 months, provided
Employee makes the appropriate conversion and payments, (iii) vesting of stock
options pursuant to the terms of the relevant stock option agreement and plan,
and (iv) no further severance or other compensation benefits.
c. Without Cause by Employee. During the Term,
Employee may voluntarily terminate his employment by giving University Online
written notice no less than 30 days in advance of the effective date of such
termination. If Employee voluntarily terminates his employment pursuant to the
provisions of this Section 4(c) or dies, Employee shall not be entitled to
receive any Compensation or Benefits following the date of such termination or
death other than the proceeds of, or payment of any benefits under, any life
insurance or pension plans or other similar plans in effect on the date thereof.
In the event of any such termination, Employee shall be entitled to (i) accrued
and unpaid salary and vacation through the termination date, (ii) any insurance
proceeds available to Employee's estate under any life insurance programs
maintained by University Online or Cognitive Training providing for payment of
such benefits to Employee's estate, (iii) vesting of stock options pursuant to
the terms of the relevant stock option agreement and plan, (iv) COBRA benefits
for up to 18 months, provided Employee makes the appropriate conversion and
payments, and (v) no further severance or other compensation benefits.
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d. Termination for Disability. During the Term,
Employee's employment may be terminated by either party in the event Employee
suffers a physical or mental disability which in the reasonable opinion of
University Online renders him substantially unable to perform his duties under
this Agreement. Employee shall be deemed to be permanently disabled in the event
he is deemed to be permanently disabled within the meaning of University
Online's long-term disability insurance policy under which coverage is provided
to Employee, provided that if Employee shall become permanently disabled, he
shall receive the termination benefits available to University Online employees
of comparable status under University Online's long-term disability insurance
policy.
For this purpose, "disability" shall be deemed to exist if the Employee
has been unable for a period of ninety (90) days, whether or not consecutive,
during any 360-day period to perform the services contemplated hereby as a
result of incapacity because of a physical or mental illness or injury.
5. Non-Disclosure. In connection with his employment by the Company
pursuant to the terms of this Agreement, Employee shall execute, prior to the
execution hereof by the Company, the Confidentiality and Inventions Agreement
attached hereto as Exhibit C, the terms and conditions of which are incorporated
herein by reference.
6. Possession. Employee agrees that upon termination of this Agreement,
or upon request by University Online, Employee shall turn over to University
Online all documents, files, office supplies and any other material or work
product in his possession or control which were created pursuant to or derived
from Employee's services to University Online.
7. Non-Competition. (a) Employee recognizes and agrees that University
Online has many substantial, legitimate business interests that can be protected
only by Employee agreeing not to compete with University Online under certain
circumstances. These interests include, without limitation, University Online's
contacts and relationships with its customers, University Online's reputation
and goodwill in the industry, the financial and other support afforded by
University Online, and University Online's rights in its confidential
information. Employee therefore agrees that he will not during the Term and
until the later of (X) the expiration of one (1) year following such termination
or (Y) July 1, 2001, directly or indirectly without the prior written consent of
University Online, engage in any of the following activities within the State of
Texas (the "Protected Zones"), relating to the Protected Businesses (as defined
below):
i. own, operate or manage in any of the Protected
Zones, a business providing products or services similar to those
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currently provided by University Online or Cognitive Training as of the date
hereof (the "Protected Businesses");
ii. work as an employee, employer, independent
contractor or consultant for or with, or provide services as an employee,
independent contractor or consultant under the terms of a verbal or written
agreement to, any entity engaged in any of the Protected Businesses in
competition with University Online or Cognitive Training in the Protected Zones;
iii. solicit, acquire or conduct any Protected
Business from or with any of University Online's customers (as defined below) in
the Protected Zones;
iv. solicit any of the employees or independent
contractors of University Online or Cognitive Training or induce any such
persons to terminate their employment or contractual relationships with any such
entities; or
v. serve as an officer or director of, or hold an
equity interest in, any entity engaged in any of the Protected Businesses in the
Protected Zones.
For purposes of this Section 7, University Online's customers shall include
those customers to whom University Online or Cognitive Training was providing
products or services at the termination of Employee's employment, or had
proposals outstanding for the provision of services, at the time of such
termination.
Notwithstanding the foregoing, (A) nothing herein shall prevent the
ownership by Employee of a equity interest in any business entity, provided that
such ownership does not contravene University Online's conflict of interest
policies in effect from time to time and (B) Employee shall be entitled to serve
on the board of directors of a corporation that is not competitive with the
business of University Online or Cognitive Training to the extent permitted
under University Online's policies in effect from time to time and to the extent
authorized by the Board of Directors of University Online.
(b) The parties understand and agree that the non-
competition agreement set forth in this Section 7 shall be construed as a series
of separate covenants not to compete: one covenant for each country, state and
province within the Protected Zone, one for each separate line of business of
Cognitive Training and University Online, and one for each month of the
non-competition period. If any restriction set forth in this Section 7 is held
by a court of competent jurisdiction to be unenforceable with respect to one or
more geographic areas, lines of business and/or months of duration, then
Employee agrees, and hereby submits, to the reduction and limitation of such
restriction to the minimal effect necessary so that the provisions of this
Section 7 shall be enforceable.
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8. Saving Provision. University Online and Employee agree and stipulate
that the agreements set out in Sections 5 and 7 above are fair and reasonably
necessary for the protection of the business, goodwill, confidential
information, and other protectable interests of University Online in light of
all of the facts and circumstances of the relationship between Employee and
University Online. In the event a court of competent jurisdiction should decline
to enforce those provisions, they shall be deemed to be modified to restrict
Employee to the maximum extent which the court shall find enforceable; however,
in no event shall the above provisions be deemed to be more restrictive to
Employee than those contained herein.
9. Injunctive Relief. Employee acknowledges that the breach or
threatened breach of any of the non-disclosure or non-competition covenants
contained herein would give rise to irreparable injury to University Online
which injury would be inadequately compensable in money damages. Accordingly,
University Online may seek and obtain a restraining order and/or injunction
prohibiting the breach or threatened breach of any provision, requirement or
covenant of this Agreement, in addition to and not in limitation of any other
legal remedies which may be available. Employee further acknowledges and agrees
that the agreements set out above are necessary for the protection of University
Online's legitimate goodwill and business interests and are reasonable in scope
and content.
10. Enforcement. The provisions of this Agreement shall be
enforceable notwithstanding the existence of any claim or cause of action
against University Online by Employee or against Employee by University Online,
whether predicated on this Agreement or otherwise.
11. Governing Law. This Agreement, the employment relationship
contemplated herein and any claim arising from such relationship, whether or not
arising under this Agreement, shall be governed by and construed in accordance
with the internal laws of the State of Delaware, without regard to conflict of
law principles.
12. Waiver of Breach. The waiver of any breach of any provision
of this Agreement or failure to enforce any provision hereof shall not operate
or be construed as a waiver of any subsequent breach by any party.
13. Modification. This Agreement may be modified, and the rights,
remedies and obligations contained in any provision hereof may be waived, only
in accordance with this Section. No waiver by either party or any breach by the
other or any provision hereof shall be deemed to be a waiver of any later or
other breach thereof or as a waiver of any other provision of this Agreement.
This Agreement may not be waived, changed, discharged or terminated orally or by
any course of dealing between the parties, but only by an instrument in writing
signed
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by the party against whom any waiver, change, discharge or termination is
sought. No modification or waiver by University Online shall be effective
without the consent of the President of University Online or at least a majority
of the members of the Board of Directors then in office at the time of such
modification or waiver.
14. Entirety. This Agreement, including any exhibits hereto, as it may
be amended pursuant to the terms hereof, represents the complete and final
agreement of the parties and shall control over any other statement,
representation or agreement by University Online (e.g., as may appear in
employment or policy manuals). This Agreement supersedes any prior negotiations
or discussions between the parties.
15. Survival. The provisions of this Agreement relating to
confidentiality and non-competition shall survive the termination of this
Agreement.
16. Severability. Without in any way limiting the provisions of Section
7(b), in case any one or more of the provisions contained in this Agreement or
the other agreements executed in connection with the transactions contemplated
hereby for any reason shall be held to be invalid, illegal or unenforceable in
any respect, such invalidity, illegality or unenforceability shall not affect
any other provision of this Agreement or such other agreements, but this
Agreement or such other agreements, as the case may be, shall be construed and
reformed to the maximum extent permitted by law.
17. Binding Effect. This Agreement shall inure to the benefit of
Employee and his heirs, successors, personal representatives and assigns.
Employee acknowledges that the services to be rendered by him thereunder are
unique and personal in nature. Accordingly, Employee may not assign any of his
rights or delegate any of his duties or obligations under this Agreement.
University Online shall have the right to assign this Agreement to any successor
of all of its business or assets, and any such successor shall be bound by all
of the provisions hereof.
18. Indemnification. Each of University Online and Employee agrees to
indemnify, defend and hold the other harmless from and against any and all
costs, expenses and liability, including, but not limited to, reasonable
attorneys' fees, which it or he may incur in the event of a breach by the other
party of its obligations hereunder or arising from the acts or omissions of the
other party in performing its obligations hereunder.
19. Authority. University Online does hereby represent and
warrant that it has full power and authority to enter into this Agreement and to
carry out the terms hereof and that the same has been duly authorized by the
Board of Directors of University Online and that the person executing the same
on behalf of
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University Online has been duly authorized to act in the name and on behalf of
University Online.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the undersigned have executed this Employment
Agreement, intending to be bound under their respective seals, effective as of
the day and year first set forth above.
UNIVERSITY ONLINE, INC.
By:__________________________[SEAL]
Its:_________________________
_____________________________[SEAL]
Michael L. Brown
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EXHIBIT A
---------
Base Salary: $150,000.00/year
<PAGE>
EXHIBIT B
---------
STOCK OPTION
<PAGE>
EXHIBIT C
---------
CONFIDENTIALITY AND INVENTIONS AGREEMENT
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of August 15, 1996, between UNIVERSITY
ONLINE, INC., a corporation organized and existing under the laws of the State
of Delaware ("UOL") and LEONARD P. KURTZMAN ("Kurtzman").
WHEREAS, UOL desires to employ Kurtzman and Kurtzman desires to accept
such employment on the terms and conditions hereinafter set forth; and
WHEREAS, the parties hereby acknowledge that the goodwill, continued
patronage, names, addresses and specific business requirements of UOL's clients
and customers, and the designs, procedures, systems, strategies, business
methods and know-how of UOL, having been acquired through UOL's efforts and the
expenditure of considerable time and money, are among the principal assets of
UOL; and
WHEREAS, the parties hereby acknowledge that as a result of the
position(s) in which Kurtzman is and will be employed, Kurtzman has developed
and will continue to develop special skills and knowledge peculiar to UOL's
business, whereby he has become and will continue to become, through his
employment with UOL, acquainted with the identities of the clients and customers
of UOL, and has acquired and will continue to acquire access to the techniques
of UOL in carrying on its business, as well as other confidential and
proprietary information; and
WHEREAS, the parties hereto acknowledge that the Covenants set forth in
Section 8 of this Agreement are necessary for the reasonable and proper
protection of UOL's confidential and proprietary information (as defined
herein), customer relationships, and the goodwill of UOL's business, and that
such Covenants constitute a material portion of the consideration for Kurtzman's
employment hereunder.
NOW, THEREFORE, in consideration of the premises and mutual promises
and covenants contained herein, and for other good and valuable consideration,
the receipt and legal sufficiency of which are hereby acknowledged, the parties
agree as follows:
1. Term. UOL agrees to employ Kurtzman, and Kurtzman agrees to be
employed, as Vice President and Chief Financial Officer of UOL, or in such other
management position as the Board of Directors may from time to time assign, for
a term of approximately two (2) years commencing August 15, 1996 and ending
August 31, 1998 (the "Initial Term"), unless such employment is sooner
terminated as provided herein.
2. Renewal Terms. Unless either party provides written notice to the
other of its/his intention not to renew this Agreement at least sixty (60) days
prior to the expiration of the
<PAGE>
Initial Term (or then-current renewal term hereof), this Agreement shall be
automatically renewed for consecutive additional one (1) year renewal terms,
subject to the termination provisions set forth in Section 7 hereof.
3. Compensation. In consideration of Kurtzman's services as Vice
President and Chief Financial Officer (or any other capacity in which Kurtzman
may be employed by UOL), UOL shall, beginning with the pay period commencing
September 1, 1996, pay Kurtzman a minimum annual base salary of One Hundred
Fifty Thousand Dollars ($150,000.00) per annum, payable in equal monthly
installments in accordance with UOL's normal payroll practices, plus an annual
performance bonus of up to fifty percent (50%) of Kurtzman's base salary in an
amount to be determined by the Board of Directors of UOL in its sole discretion,
based upon the achievement of specified goals to be established by the Board
during the term hereof. Kurtzman's total compensation shall be reviewed by the
Board of Directors of UOL on an annual basis during the term hereof (including
renewal terms) and may be increased as UOL deems appropriate in its sole
discretion. In addition, Kurtzman shall receive an allowance of up to Eighteen
Thousand Dollars ($18,000.00) to cover moving expenses and other costs of
transition to his new position with UOL and shall be paid ___________________ ($
) for his performance hereunder on a part-time basis during the period August
15-31, 1996.
4. Employee Benefits; Vacation. During the term of this Agreement,
Kurtzman shall be eligible to receive and/or participate in all employee
benefits that are offered by UOL to its executive employees, including, without
limitation, UOL's contributory (80% paid by UOL and 20% paid by employee) major
medical, dental and life insurance plan, and coverage under UOL's long term
disability plan (100% paid by employee). During the term hereof, Kurtzman shall
be entitled to receive thirteen (13) hours of paid vacation for each month of
completed service (i.e., four weeks per calendar year) during the term hereof.
No more than forty hours (i.e., five (5) days) of accrued but unused vacation
may be carried over by Kurtzman from one calendar year to the next during the
term hereof without prior written approval of UOL. Kurtzman shall also be
eligible for a maximum of ten (10) days of paid sick leave per calendar year
during the term of this Agreement.
5. Reimbursement of Expenses. Kurtzman is authorized to incur
reasonable expenses in connection with the business of UOL including expenses
for travel and similar items. UOL will reimburse Kurtzman for all such
reasonable expenses upon itemized account of expenditures.
6. Illness or Disability. Kurtzman shall receive full compensation for
any period of illness or disability during the term of this Agreement until such
time as he receives benefits under the long term disability insurance coverage
referred to in
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paragraph 4, supra; provided, however, that such interim period of compensation
for illness or disability shall not exceed _____________ ( ) months.
Notwithstanding the foregoing, UOL shall have the right to terminate this
Agreement without further obligation to Kurtzman if such illness or disability
shall be of such a character as totally to disable Kurtzman from rendering any
services to UOL for a period of more than six (6) consecutive months on giving
at least thirty (30) days' written notice of intention to do so.
7. Termination of Employment. Kurtzman's employment hereunder is
employment at will, and either UOL or Kurtzman may terminate this Agreement and
Kurtzman's employment at any time, with or without cause. For purposes of this
Agreement, notice of intent not to renew this Agreement given by UOL to Kurtzman
shall not be deemed a termination hereof.
a. Severance Benefit Payable. If Kurtzman terminates this
Agreement for Good Reason (as defined below), or if UOL terminates the Agreement
other than (i) for Cause (defined below) or (ii) due to Kurtzman's Disability as
described in Section 6 hereof, Kurtzman shall be entitled to receive, as his
exclusive remedy for such termination, the severance benefit set forth in
subsection 7d hereof (the "Severance Benefit"). Such Severance Benefit shall be
payable to Kurtzman in equal monthly installments consistent with UOL's standard
payroll practices, the first of such installments to be due within thirty (30)
days after termination hereof. In order, however, to invoke termination for
"Good Reason" hereunder, Kurtzman must communicate such termination in advance
and by written notice UOL, which written notice (i) indicates the specific
termination provision in this Agreement relied upon, (ii) sets forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of Kurtzman's employment under the provision so indicated and (iii)
specifies the termination date (which date shall not be more than thirty (30)
days after the giving of such notice).
b. Good Reason. For purposes of this Agreement, "Good Reason"
shall mean any material change in Kurtzman's duties, titles, authority or
position with UOL as a result of a Change of Control of UOL (as defined below),
excluding any isolated, unsubstantial or inadvertent action not taken in bad
faith and which is remedied by UOL promptly after receipt of notice thereof
given by Kurtzman; provided, however, that no severance benefit shall be payable
to Kurtzman based upon a termination of this Agreement for Good Reason unless
such termination is properly noticed and takes effect within thirty (30) days
after the occurrence of such Good Reason. As used in this Agreement, the term
"Change of Control" shall mean:
The acquisition by any individual, entity or group of
individuals or entities of direct or indirect ownership of more than
fifty percent (50%) of either (i) the then
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outstanding shares of common stock of UOL or (ii) the combined voting
power of the then outstanding voting securities of UOL entitled to vote
generally in the election of directors; provided, however, that the
following acquisitions shall not constitute a Change of Control: (i)
any acquisition by UOL, (ii) any acquisition by any corporation
controlled by UOL or (iii) any acquisition by any corporation pursuant
to a reorganization, merger or consolidation, if, following such
reorganization, merger or consolidation, the conditions described in
clauses (i) or (ii) of subsection (c) of this Section 7 are satisfied;
or
Approval by the shareholders of UOL of a reorganization,
merger or consolidation, in each case, unless, following such
reorganization, merger or consolidation, (i) more than fifty percent
(50%) of, respectively, the then outstanding shares of common stock of
the corporation resulting from such reorganization, merger or
consolidation and the combined voting power of the then outstanding
voting securities of such corporation entitled to vote generally in the
election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and entities
who were the beneficial owners, respectively, of the outstanding shares
of common stock of UOL or the outstanding voting securities of UOL
prior to such reorganization, merger or consolidation in substantially
the same proportions as their ownership, immediately prior to such
reorganization, merger or consolidation, of the outstanding shares of
common stock of UOL or the outstanding voting securities of UOL, as the
case may be, and (ii) no individual, entity or group of individuals or
entities (excluding UOL or such corporation resulting from such
reorganization, merger or consolidation and any individual, entity or
group of individuals or entities beneficially owning, immediately prior
to such reorganization, merger or consolidation, directly or
indirectly, more than thirty percent (30%) of the outstanding shares of
common stock or outstanding voting securities of UOL, as the case may
be) beneficially owns, directly or indirectly, more than thirty percent
(30%) of, respectively, the then outstanding shares of common stock of
the corporation resulting from such reorganization, merger or
consolidation or the combined voting power of the then outstanding
voting securities of such corporation entitled to vote generally in the
election of directors; or
Approval by the shareholders of UOL of (i) a complete
liquidation or dissolution of UOL or (ii) the sale or other disposition
of all or substantially all of the assets of UOL other than to a
corporation, with respect to which following such sale or other
disposition, (A) more than fifty percent (50%) of, respectively, the
then outstanding shares of common stock of such corporation and the
combined voting power of the then outstanding voting securities of such
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corporation entitled to vote generally in the election of directors is
then beneficially owned, directed or indirectly, by all or
substantially all of the individuals and entities who were the
beneficial owners, respectively, of the outstanding shares of common
stock and outstanding voting securities of UOL immediately prior to
such sale or other disposition in substantially the same proportion as
their ownership, immediately prior to such sale or other disposition,
of the outstanding shares of common stock and outstanding voting
securities of UOL, as the case may be, and (B) no individual, entity or
group of individuals or entities (excluding UOL or such corporation and
any individual, entity or group of individuals or entities beneficially
owning, immediately prior to such sale or other disposition, directly
or indirectly, more than thirty percent (30%) of the outstanding shares
of common stock or outstanding voting securities of UOL, as the case
may be) beneficially owns, directly or indirectly, more than thirty
percent (30%) of, respectively, the then outstanding shares of common
stock of such corporation and the combined voting power of the then
outstanding voting securities of such corporation entitled to vote
generally in the election of directors.
c. Cause. For purposes of this Agreement, "Cause" shall mean
mismanagement, drug or alcohol abuse, conviction of a felony or crime involving
moral turpitude, a material breach of this Agreement, or any willful or grossly
negligent act or omission by Kurtzman having a material adverse effect on UOL,
as determined by no less than a majority of the Board of Directors.
d. Amount of Severance Benefit. The amount of the Severance
Benefit shall equal six (6) months of Kurtzman's Base Salary, less applicable
withholdings for taxes.
8. Restrictive Covenants.
a. Noncompetition. Kurtzman agrees that during, and for a
period of two (2) years after, the later of termination or expiration of this
Agreement and his employment with UOL, he will not, directly or indirectly, on
his own behalf or on behalf of any other individual or entity:
(1) become an officer, employee, director, agent,
representative, member, associate or consultant of a
corporation, partnership, firm or other entity, or
(2) have, directly or indirectly, a proprietary interest
in any business, firm, partnership, or other entity,
or act as contractor, or
(3) own, directly or indirectly, any stock in a
corporation
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that engages in any business which is the same as or
similar to that in which UOL is engaged or shall be
engaged upon the termination of Kurtzman's employment
with UOL, or renders any services that are the same
as or similar to those services currently provided by
UOL, or which UOL is providing as of the date of
termination of Kurtzman's employment with UOL, and
shall not in any other manner, directly or
indirectly, compete to any extent with such business
of UOL. Notwithstanding the foregoing, Kurtzman shall
not be bound by the terms of this subsection 8a if
the Agreement is terminated by UOL and such
termination is without Cause as defined herein.
b. Nonsolicitation. During Kurtzman's employment with UOL, and
for the two (2) year period of time described in Section 8a hereof, Kurtzman
agrees not to solicit or conduct business with any client or customer of UOL
(past or present), whether or not UOL is doing work for such client or customer
as of the date of termination of Kurtzman's employment with UOL, as well as any
prospective client or customer of UOL, or to contact, solicit, interfere with or
attempt to entice in any form, fashion or manner any employee of UOL for the
purpose of inducing that employee to terminate his/her employment with UOL or
act in any way that would be contrary to the best interests of UOL.
c. Nondisclosure. During and after Kurtzman's employment with
UOL, Kurtzman agrees not to disclose, or to knowingly allow any other employee
to disclose, to any other person or business entity, or use for personal profit
or gain, any confidential or proprietary information of UOL, regardless of
whether the same shall be or may have been originated, discovered or invented by
Kurtzman or by Kurtzman in conjunction with others. For purposes of this
Agreement, the term "confidential or proprietary information" shall include,
without limitation: the names, addresses and telephone numbers of past, present
and prospective clients or customers of UOL, as well as products, designs,
business plans, proposed business development, marketing strategies, customers
requirements, contractual provisions, employee capabilities, proposed marketing
initiatives, pricing methods, company earnings, computer software and reporting
systems; and the procedures, systems and business methods of UOL.
d. Geographic Scope of Restrictive Covenants. The
geographic area in which Kurtzman shall not engage in any of the prohibited
activities listed in subsections 8a and 8b hereof shall be limited to: (a) the
continental United States; (b) the State of California; (c) the State of Texas;
(d) the State of Virginia; (e) all other states in which UOL has customers or
otherwise conducts business; (f) the area within a 50 mile radius of UOL's place
of business in Falls Church, Virginia; and (g) the area within a 50 mile radius
of Waxahachie, Texas.
e. Additional Consideration. As additional consideration for
Kurtzman's agreement to be bound by the terms of this Section 8, Kurtzman shall
receive from UOL a lump sum
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payment of Two Thousand Five Hundred and 00/100 Dollars ($2,500.00) (the
"Additional Consideration"). Kurtzman hereby acknowledges that he would not be
entitled to receive the Additional Consideration but for his agreement to be
bound by the provisions of this Section 8.
9. Remedies for Breach. Kurtzman hereby acknowledges and agrees that a
violation of any of the covenants set forth in Section 8 hereof (the
"Covenants") would result in immediate and irreparable harm to UOL, and that
UOL's remedies at law, including, without limitation, the award of money
damages, would be inadequate relief to UOL for any such violation. Therefore,
any violation or threatened violation by Kurtzman of the Covenants shall give
UOL the right to enforce such Covenants through specific performance, temporary
restraining order, preliminary or permanent injunction, and other equitable
relief. Such remedies shall be cumulative and in addition to any other remedies
UOL may have, at law or in equity.
10. Notice of Subsequent Employment; Etc. Kurtzman agrees that he
shall, during the two (2) year period following the termination of his
employment with UOL, give reasonable written notice to UOL of the names and
addresses of each person, firm, corporation or other entity by whom he is
employed or for whom he acts as director, agent, representative, member,
associate or consultant. Kurtzman further agrees that if at any time during such
two (2) year period he conducts business on his own account, or through a
proprietary interest in any business, firm, partnership or other entity, or as
contractor, or owns any stock in a corporation, Kurtzman shall give written
notice to UOL of the name, address and nature of any such business.
11. Return of UOL Property; Assignment of Inventions.
a. Return of Property. Upon the termination of Kurtzman's
employment with UOL for any reason, Kurtzman shall leave with or return to UOL
all personal property belonging to UOL ("UOL Property") that is in Kurtzman's
possession or control as of the date of such termination of employment,
including, without limitation, all records, papers, drawings, notebooks,
specifications, marketing materials, software, reports, proposals, equipment, or
any other device, document or possession, however obtained, whether or not such
UOL Property contains confidential or proprietary information of UOL as
described in Section 8c hereof.
b. Assignment of Inventions. If at any time or times during
Kurtzman's employment, Kurtzman shall (either alone or with others) make,
conceive, discover or reduce to practice any invention, modification, discovery,
design, development, improvement, process, software program, work of authorship,
documentation, formula, data, technique, know-how, secret or intellectual
property right whatsoever or any interest therein (whether or not patentable or
registrable under copyright or
7
<PAGE>
similar statutes or subject to analogous protection) (herein called
"Developments") that (a) relates to the business of UOL or any of the products
or services being developed, manufactured or sold by UOL or that may be used in
relation therewith, (b) results from tasks assigned him by UOL or (c) results
from the use of premises or personal property (whether tangible or intangible)
owned, leased or contracted for by UOL, such Developments and the benefits
thereof shall immediately become the sole and absolute property of UOL and its
assigns, and Kurtzman shall promptly disclose to UOL (or any persons designated
by it) each such Development and hereby assigns any rights Kurtzman may have or
acquire in the Developments and benefits and/or rights resulting therefrom to
UOL and its assigns without further compensation and shall communicate, without
cost or delay, and without publishing the same, all available information
relating thereto (with all necessary plans and models) to UOL.
Upon disclosure of each Development to UOL, Kurtzman will,
during his employment and at any time thereafter, at the request and expense of
UOL, sign, execute, make and do all such deeds, documents, acts and things as
UOL and its duly authorized agents may reasonably require:
(i) to apply for, obtain and vest in the name of UOL
alone (unless UOL otherwise directs) letters patent,
copyrights or other analogous protection in any
country throughout the world and when so obtained or
vested to renew and restore the same; and
(ii) to defend any opposition proceedings in respect
of such applications and any opposition proceedings
or petitions or applications for revocation of such
letters patent, copyright or other analogous
protection.
In the event UOL is unable, after reasonable effort, to secure
Kurtzman's signature on any letters patent, copyright or other analogous
protection relating to a Development, whether because of Kurtzman's physical or
mental incapacity or for any other reason, Kurtzman hereby irrevocably
designates and appoints UOL and its duly authorized officers and agents as
Kurtzman's agents and attorneys-in-fact, to act for and in behalf of Kurtzman
and stead to execute and file any such application or applications and to do all
other lawfully permitted acts to further the prosecution and issuance of letters
patent, copyright or other analogous protection thereon with the same legal
force and effect as if executed by Kurtzman.
12. Survival. The provisions of Sections 8, 9, 10 and 11
hereof shall survive the termination of this Agreement, regardless of the manner
or cause of such termination.
8
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13. Effect of Agreement. This Agreement sets forth the final and
complete Agreement of the parties. It shall not be assigned by Kurtzman and may
not be modified except by way of a writing executed by both parties. All the
terms and provisions of this Agreement shall be binding upon and inure to the
benefit of and be enforceable by the parties hereto and their successors and
assigns.
14. Governing Law. The provisions of this Agreement and any
disputes arising hereunder shall be governed by and construed in accordance with
the laws of the State of Virginia.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and their seals affixed hereto as of the day and
year first above written.
UNIVERSITY ONLINE, INC.
By: ______________________________
Corporate Seal Name:_____________________________
Title:____________________________
Attest: ____________________
Secretary
____________________________(SEAL)
Leonard P. Kurtzman
9
Agreement
This agreement, dated August 14. 1995. is between Educational Services Institute
(ESI) and University Online (UOL).
Recitals
1. UOL is in the business of providing training online via its own computer
network (the "UOL Network").
2. ESI currently offers traditional classroom training and would like to expand
its scope to offer courses online.
3. UOL and ESI desire to form a business relationship to of or a number of ESI's
courses online.
Agreement
Course Content
ESI, in association with The George Washington University, will license to UOL
particular ESI-owned or controlled course materials (including course manuals.
exams, and handouts) (collectively referred to as the "Works") and make
available to UOL subject matter experts and the authors of such course materials
(if available) on a project specific basis.
Course Content Conversion
UOL will design, develop and otherwise "convert" Works selected jointly by UOL
and ESI into high quality online courses and products ("Courses"), using its
in-house instructional design and programming experts.
Course "Presentation"
ESI hereby grants UOL the right to maintain and distribute or "present" the
Courses on its online network, and wherever reasonably possible. offer as an
adjunct to the Courses hard copy versions of the Works as a licensed
distributor. It is understood that the Works are to be sold to the public and
not to other training providers.
UOL will be responsible for maintaining and presenting the Courses on its
Network, which includes making or maintaining all necessary arrangements with
communications carriers, computer software and hardware suppliers, as necessary.
- ----------
* [ ] CONFIDENTIAL TREATMENT REQUESTED; CERTAIN INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SEC.
<PAGE>
Marketing
UOL will promote the Courses to its distribution partners and client base.
Specific terms of such distribution are subject to approval by ESI. The Courses
will be promoted using the names of UOL, ESI, and The George Washington
University to achieve maximum recognition.
ESI will promote and market the Courses in connection with its traditional Works
offerings through its normal channels to its client base. In addition to its
normal channels, ESI can market in conjunction with UOL over the UOL Network.
ESI will make reasonable space available for descriptions of the Courses in its
catalogs, product lists, and marketing materials.
Pricing
UOL and ESI will jointly determine the prices at which the Courses in the online
format are offered. At this point, it is conceived that customers will pay a
premium for ESI's traditional classroom-taught course offerings and that the
Courses, in their online format will be priced lower. The exact pricing will be
determined later.
Course Registration
Ultimately, the parties expect that students will register and pay for an
Courses on an online basis. Until that time, ESI will be responsible for
registering students and taking payment from students who call, fax, or mail in
their registrations. UOL will be responsible for registering students who chose
to do so online.
Revenue Sharing and Accounting
Gross revenues earned from the Courses and online sale of the Works will be
split using the following formula: ESI [ ]% and UOL [ ]%.* ESI is responsible
for paying royalties from its portion of the revenues to content, accreditation,
and certification providers based on established agreements between them and
ESI.
Ultimately, UOL will be responsible for collecting all revenues, keeping
accounts of revenues earned, and remitting to ESI its share of such revenues.
Until such time that all tuition payments are made and collected on an online
basis, ESI will be responsible for collecting and accounting for payments made
by telephone, fax, or mail. ESI will forward registration information to UOL,
and will remit to UOL, on a monthly, basis its share of revenues collected by
ESI.
UOL will collect and keep account of revenues from students who register online,
and remit to ESI, on a monthly basis, its share of such revenues. Each party
will be responsible for collecting delinquent payments owed them. The parties
expect to bill individual students on a per course basis, however, if deemed
more appropriate later, billing could be on an hourly basis, tracked by the
online server. Corporate clients will be billed monthly.
Approval Rights
ESI has the right to participate in the final decision of how the Works are used
in UOL's Courses (i.e., editorial, design, graphics and creative input).
- ----------
* [ ] CONFIDENTIAL TREATMENT REQUESTED; CERTAIN INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SEC.
<PAGE>
User Support Service
UOL will provide support services and respond to user questions using its
standard operating procedures.
Intellectual Property Rights
UOL and ESI will share copyrights and full distribution rights to the Courses
and any derivative online or interactive versions of the Courses developed under
the partnership.
ESI will own or control the copyrights to all the Works from which the online
Course version will be derived.
Mutual Non-compete
After the termination or expiration of this agreement, UOL may not develop or
distribute online courses based on or incorporating Works without a license from
ESI.
During the term of this agreement and for three years thereafter, ESI and its
affiliates will not themselves or with others develop, distribute any online
product that incorporates, builds upon, or contemplates content and
instructional design from the Courses developed under the partnership and where
online distribution rights are licensed to UOL by ESI.
Governing Law
This agreement is governed by the laws of the Commonwealth of Virginia.
In witness whereof, the parties have signed this agreement this day of August,
1995.
Educational Services Institute University Online
- --------------------------------- -----------------------------
By: By:
FORM OF
ONLINE EDUCATIONAL SERVICES
DISTRIBUTION AGREEMENT
This Agreement is made as of the _____ day of _____, ____, by
and between University Online, Inc., a Delaware corporation with its principal
place of business located at 105 W. Broad Street, Falls Church, Virginia ("UOL")
and _________________________, a ____________________, with its principal place
of business at _______________________________________________________________
("Distributor").
Recitals
A. UOL is in the business of developing, publishing and distributing
multimedia educational software for continuing education, including but
not limited to courses such as business writing, managing business
priorities and financial management (the "Online Products").
B. Distributor is a company engaged in providing information to an
established clientele and market to whom Distributor markets its
products.
C. UOL and Distributor desire to enter into an agreement pursuant to which
UOL will grant to Distributor non-exclusive rights to distribute the
Online Products to Distributor's clients, all as set forth herein.
NOW, THEREFORE, the parties hereto agree as follows:
1. Online Products
1.1 UOL hereby grants to Distributor for the term of and pursuant
to this Agreement a non-exclusive right to provide to clients
of Distributor access to the Online Products electronically in
an online format through online time-sharing access equipment
or by direct downloading via online access to remote
processors.
1.2 UOL shall coordinate and assume primary responsibility for the
delivery of necessary text components for the Online Products
licensed to Distributor's client end users.
<PAGE>
2. Marketing and Distribution
2.1 Distributor shall license and distribute the Online Products
pursuant to this Agreement. Distributor shall permit each user
to store, manipulate, analyze, reformat, print and display
material contained in the Online Products only on a single
personal computer under such user's direct control.
Distributor shall not permit users to distribute or
redistribute the Online Products or any such derived
materials, in whole or in part, in any form or medium.
2.2 Distributor agrees to use its best efforts to market and
promote the Online Products as part of its course offerings,
build market awareness of the Online Products and maximize use
of the Online Products, all at its sole cost and expense. In
addition, Distributor will use its best efforts to provide UOL
with qualified leads for prospective customers beyond
Distributor's client base and focused marketing activity.
2.3 Distributor agrees to use the tradename and trade dress of UOL
as UOL may direct in connection with Distributor's promotion
and sale of the Online Products. UOL agrees to provide
Distributor with adequate marketing supplies. UOL agrees that
it shall not publish or distribute any advertising or
promotional material using Distributor's name, trademark(s),
service mark(s) or trade names without the prior written
consent of Distributor, which consent may be withheld by
Distributor in its sole discretion. In the event Distributor
determines that a permitted use by UOL of Distributor's name,
trademarks, service marks or trade names is or has become
adverse to the business or reputation of Distributor, any or
all of the then existing permitted uses may be withdrawn by
written notice to UOL, and UOL shall take all reasonable steps
to cease use of such materials as provided in such notice.
3. Relationship of the Parties
This Agreement does not create and shall not be deemed to constitute a
partnership or joint venture between the parties and neither party nor
any of its directors, officers, employees or agents shall by virtue of
the performance of their obligations under this Agreement, be deemed to
be an employee of the other party. Distributor hereby acknowledges and
agrees that it is an independent contractor and not the agent or legal
representative of UOL, and that any representation made or agreement
executed by Distributor shall be Distributor's sole responsibility. The
appointment of Distributor contained herein as a promoter and
distributor of the Online Products does not constitute a grant of any
specified territory or geographic area. UOL expressly reserves the
right to market and solicit licensees or buyers directly, through other
2
<PAGE>
distributors and through any other channel of distribution at any time
and from time to time, in its sole judgment, and Distributor will not
be entitled to any commission or other compensation with respect to or
on account of such transactions.
4. Reports; Accounting, Billing and Collection; Royalties
4.1 UOL shall prepare monthly reports to Distributor detailing the
website activity of Distributor's client end users in a format
that can be transferred to Distributor's individual
development plan tracking mechanism or accessed online.
4.2 UOL shall perform all necessary accounting, billing and
collection with regard to all revenues from the Online
Products distributed by Distributor.
4.3 UOL shall pay Distributor a royalty on all revenues from
Online Products through Distributor. The royalty amount and
payment terms other than net ten days for each Online Product
shall be as agreed between the parties pursuant to good faith
negotiations and set forth in an addendum to this Agreement;
in no event shall such royalties exceed ____ percent of the
gross sales price of the Online Product.
4.4 UOL shall maintain complete and accurate books and records of
account regarding all matters under this Agreement in
accordance with generally accepted accounting principles
consistently applied. Distributor shall have the right, itself
or through its authorized representative, to inspect such
records on an annual basis to conduct an audit of matters
covered by this Agreement. In the event such audit reveals a
material understatement of revenues or a material underpayment
to Distributor (such underpayment being presumptively material
if a deviance of greater than 10% of the amount which
Distributor should have been paid), then UOL shall have the
right to confirm such audit results with its independent
certified public accountants. If such an understatement is
thereby confirmed, UOL shall immediately pay such sum to
Distributor with interest thereon at the then prime rate and
shall reimburse Distributor for the costs of such audit. If
UOL's independent certified public accountants dispute the
results of Distributor's audit, such dispute shall be referred
to arbitration as provided in Section 7.3 below.
3
<PAGE>
5. Term and Termination
5.1 This Agreement will be in effect from the date hereof through
the third anniversary thereof, unless sooner terminated
pursuant to Section 5.2 or Section 5.3 below. At the
expiration of the initial term, this Agreement shall be
renewed automatically for one year terms.
5.2 This Agreement may be terminated upon the occurrence of the
breach of a material provision of this Agreement by either
party which is not cured within thirty (30) days of written
notice of such breach given to the breaching party; in such
event the non-breaching party may terminate this Agreement on
thirty (30) days written notice.
5.3 Either party may terminate this Agreement at any time upon
thirty (30) days prior written notice.
6. Effect of Termination
6.1 Upon the termination of this Agreement for any reason (at
expiration of its term or pursuant to Section 5.2 or Section
5.3), Distributor's rights in respect of the Online Products
shall forever terminate.
6.2 The termination of this Agreement shall in no way affect the
continued applicability of the provisions set forth in
Sections 7.1, 7.2 and 7.3.
7. Other
7.1 Indemnification.
(a) Each party shall defend, indemnify and hold harmless
the other party and its officers, directors, owners
and employees from and against any and all loss,
liability, claims, damage, cost or expense (including
attorneys' fees and costs) relating to or arising out
of a breach of this Agreement by the indemnifying
party, or any claims which, if true, would contradict
any covenants, warranties or representations by the
indemnifying party herein, provided that the
indemnified party must give the indemnifying party
prompt notice of any claims alleged to
4
<PAGE>
be covered by this indemnity and the indemnifying
party shall control defense and settlement of all
third party claims hereunder.
(b) Each party ("Indemnifying Party") shall defend,
indemnify and hold harmless the other party
("Indemnified Party") from any and all costs,
liabilities or expenses, including reasonable
attorneys' fees, arising out of or caused by any
claims against the Indemnified Party by any third
party in connection with the breach or alleged breach
by the Indemnifying Party of any of its
representations, warranties or agreements contained
herein.
7.2 Warranty Disclaimer and Liability Limitation. EACH PARTY
HEREBY DISCLAIMS ANY AND ALL WARRANTIES, EXPRESS OR IMPLIED,
IN REGARD TO ANY INFORMATION, PRODUCT OR SERVICE FURNISHED BY
IT HEREUNDER, INCLUDING WITHOUT LIMITATION ANY AND ALL IMPLIED
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE. NEITHER PARTY SHALL BE LIABLE UNDER ANY CIRCUMSTANCES
FOR LOSS OF PROFITS OR ANY INCIDENTAL, SPECIAL, EXEMPLARY,
PUNITIVE OR CONSEQUENTIAL DAMAGES, EVEN IF IT HAS BEEN ADVISED
OF THE POSSIBILITY OF SUCH DAMAGES.
7.3 Patent and Copyright. Except with respect to Online Products
which originate from Distributor or its affiliates, UOL
warrants that it owns or has acquired the rights to the Online
Products which will be offered through Distributor pursusant
to this Agreement. UOL agrees to defend, hold harmless and
indemnify Distributor from and against any liability, claim,
suit or proceeding brought against Distributor on the issue of
infringement of any U.S. patent or copyright with regard to
such Online Products provided by UOL.
7.4 Assignability. This Agreement may not be assigned, sublicensed
or transferred by either party without the prior written
consent of the other party.
7.5 Notices. All notices hereunder shall be given in writing at
the addresses set forth above. The parties shall promptly
notify each other in writing of any change in address. Notice
given by express courier requiring signature upon delivery
shall be deemed delivered on the day of receipt by the
5
<PAGE>
notified party or someone who purports to sign on behalf of
the notified party.
7.6 Governing law. This Agreement shall be interpreted, construed
and enforced in accordance with the laws of the State of
______, without regard to the choice of law rules of that
State.
7.7 Entire Agreement. This Agreement sets forth the entire
understanding of the parties with respect to the subject
matter hereof. It may be amended only with a writing signed by
both parties.
IN WITNESS WHEREOF, the parties hereto have caused their duly
authorized representatives to execute this Agreement as of the day and year
first above written.
University Online, Inc. ______________________
By:___________________ By:_____________________
6
UNIVERSITY MASTER AGREEMENT
for
ONLINE EDUCATIONAL SERVICES
UNIVERSITY ONLINE, INC. and __________________________
This Agreement is made as of the ____ day of ____, ____, by and between
University Online, Inc., a Delaware corporation with its principal place of
business located at 105 W. Broad Street, Falls Church, Virginia ("UOL") and
__________________________, a _________________________________________________
__________________ ("Provider") with its principal place of business at
__________________________________________.
Recitals
A. UOL is in the business of developing, publishing and distributing
multimedia educational software for distance learning, including
providing online resources and technology to institutions of higher
learning in order to facilitate their provision of online courses and
programs.
B. ______________________________ is a _______________________ offering
____________________ to its target audience of students.
C. Provider is interested in developing, coordinating and maximizing its
online educational capabilities with respect to its programs including
offering specific courses and possibly entire degree or certification
programs in a distance learning format with online components.
D. Provider has developed extensive course materials (collectively, the
"Courses"), which it desires to publish electronically and distribute
in an online format in connection with the provision of courses online.
E. UOL and Provider desire to enter into this Agreement pursuant to which
the parties will align to select, plan, and develop distance learning
courses and programs with online components for the academic centers of
the Provider System (the "Online Courses"). UOL and Provider will
jointly develop and distribute the distance learning programs through
the marketing efforts of both UOL and Provider and allocate the sharing
of revenues and profits from the commercialization of such Online
Courses.
<PAGE>
NOW, THEREFORE, the parties hereto agree as follows:
1. Provider Representations and Warranties
1.1 Provider hereby represents and warrants that the undersigned
it is a duly authorized representative of Provider, with full
power and authority to enter into this Agreement, binding
Provider to the terms hereof.
1.2 Provider hereby represents and warrants that all rights to the
Courses are legally and equitably owned solely by Provider or
that Provider has the exclusive rights to the exploitation of
the Courses as contemplated hereby.
1.3 Provider hereby represents and warrants that it is not bound
by any other agreement, restriction or obligation that could
in any way interfere or be inconsistent with the rights and
obligations set forth herein.
1.4 Provider hereby represents and warrants that the Courses do
not infringe any patent known to Provider, nor infringe or
violate any copyright, trade secret or any other proprietary
or other right of any third party.
2. Online Course Development
2.1 Attached is the course development plan that will set forth
sufficient detail of all of the milestones (with applicable
target completion dates), generally identified on Exhibit A
hereto, which may be necessary or desirable for the successful
development and distribution of the Online Courses.
2.2 UOL shall provide the online technology, software, and
hardware required for the creation, operation, and maintenance
of the Online Courses, including data and information
management for enrollment, and student management.
2.3 Subject to the terms and conditions of this Agreement, as this
Agreement may be amended with a "Course Addendum" in the form
attached hereto as Exhibit B, the parties will jointly
identify those educational programs from the Provider System
for conversion to Online Courses.
2.4 UOL shall use its best efforts to design, develop, and
otherwise create the Online Courses for each of the Courses
which is the subject of a Course Addendum. The costs and
responsibilities in respect of such design, development and
creation shall be allocated pursuant to the agreement of the
parties on a course-by-course basis as provided in Exhibit B
or in the Course Addendum for that product. The
<PAGE>
Online Courses shall conform as nearly as possible to the
product descriptions set forth in the relevant Course
Addendum.
2.5 Provider shall provide access to Provider faculty,
administrators, and other academic support to facilitate UOL's
conversion of the Provider Courses and shall provide course
administration with respect to each of the Courses identified
for online conversion; Provider shall take all necessary
action to ensure that the Online Courses receive Provider
accreditation and, where appropriate, certification.
2.6 As between UOL and Provider, all copyrights and other
interests in the Courses are and shall be exclusively owned by
Provider; all copyrights and other interests in the Online
Courses shall be owned jointly by UOL and Provider; and all
online distribution rights of the Online Courses shall be
owned exclusively by UOL, it being expressly understood and
agreed that exploitation of the Online Courses shall be only
as set forth in this Agreement (as amended pursuant to the
Course Addenda).
2.7 The parties expressly acknowledge and agree that UOL may seek
copyright and/or trade secret protection for the
computer-based portions and code of the Online Courses and
UOL's student management and courseware development systems
unrelated to the content matter of the Courses.
2.8 While UOL will develop and establish an online enrollment
system for Provider that can be centrally administered by the
home campus registrar office to enroll students in the Online
Courses worldwide, Provider will handle all enrollment per its
normal course of business until that time. This future system
will conform to Provider's existing systems and procedures for
enrollment and UOL will consult with Provider administrators
to ensure the system is efficient, easy to use, and meets
their needs.
2.9 Provider will select faculty to author the Online Courses.
Provider and UOL will have final approval authority on the
faculty members and subject-matter experts that are selected
as an Online Course Author.
3. Marketing and Distribution
3.1 UOL and Provider shall use their reasonable best efforts to
market and promote the Online Courses, build market awareness
of the Online Courses, and maximize use of the Online Courses
by Provider's students and by users of UOL's services in their
capacity as end users. UOL agrees to provide a __% cooperative
royalty of UOL's revenues derived from the Online Course to
Provider for use on approved marketing campaigns for the
Online Course.
3.2 UOL shall have the exclusive worldwide online rights to the
sale, license, and
<PAGE>
distribution of the Online Courses. UOL will market the Online
Courses to user's of its services in their capacity as
end-users and corporate external distribution channels
("Marketing Partners"). Marketing Partners are defined as
corporations that act solely as a selling agent, not an
accrediting institution, that attracts students to classes
given by the Provider. However, UOL shall not sell, license or
distribute the Online Courses to its Marketing Partners,
resellers, remarketers, brokers or other entities without the
prior written consent of Provider as expressed in Exhibit C.
Provided, however, that the parties expressly contemplate that
UOL will offer the Online Courses pursuant to UOL's
distribution agreements with its Marketing Partners, each
Marketing Partner will be added to this Agreement as
appropriate with the joint approval of UOL and Provider in
Exhibit C.
3.3 Provider agrees that the tradename and trade dress of UOL may
be used in connection with promotion of the Online Courses.
Upon the written approval of Provider, UOL may use marketing
and promotional materials for the Online Courses making
reference to the Provider name, trademarks, and service marks.
4. Pricing and Revenue Sharing
4.1 UOL and Provider will jointly determine the prices at which
the Online Courses will be offered, but not lower than
Provider's typical tuition. Provider agrees to bill
subscribers according to the price schedule so agreed upon.
For the purposes of this Agreement, typical Provider tuition
charges for its Courses will apply to the Online Courses
unless indicated otherwise in Exhibit B in the Course Addenda.
4.2 UOL and Provider shall share the "Gross Revenues" (defined
below) based on the relative rights and responsibilities with
respect to each Online Course, as more particularly set forth
in Exhibit B or a separate Course Addendum for that Online
Course.
4.3 Provider shall be solely responsible for payment of any and
all royalties attributable to the Courses and Online Courses
(e.g., to content providers) provided by Provider pursuant to
the appropriate Course Addendum.
4.4 UOL shall bill Provider for its share of the Gross Revenues
derived from the Online Courses 30 days after each class
begins and the roster is confirmed (pursuant to the relevant
Course Addendum).
5. Term and Termination
5.1 This Agreement will be in effect from the date hereof through
the fifth anniversary thereof, unless sooner terminated at the
convenience of Provider or pursuant to Section 5.2 below. At
the expiration of the initial term, this Agreement shall be
renewed automatically for one year terms unless a party hereto
<PAGE>
gives sixty (60) days notice of intent to terminate at the end
of the then term.
5.2 This Agreement may be terminated, upon written notice, upon
the occurrence of any of the following events:
(a) The breach of a material provision of this Agreement
by either party which is not cured within ninety (90)
days of written notice of such breach given to the
breaching party, then this Agreement may be
terminated by the non-breaching party;
(b) In the event that either party shall be adjudged
insolvent or bankrupt, or upon the institution of any
proceedings by seeking relief, reorganization or
arrangement under any laws relating to insolvency, or
if any involuntary petition in bankruptcy is filed
against such party and said petition is not
discharged within sixty (60) days after such filing,
or upon any assignment for the benefit of its
creditors, or upon the appointment of a receiver,
liquidator or trustee of any of its assets, or upon
the liquidation, dissolution or winding up of its
business (each of which shall be deemed an "Event of
Bankruptcy"), then the party affected by any such
Event of Bankruptcy shall immediately give notice
thereof to the other party and the other party may at
its option terminate this Agreement upon written
notice; or
(c) The mutual agreement of the parties hereto, expressed
in a written document signed by both parties.
6. Effect of Termination
6.1. In the event of termination of this Agreement for any reason
(at expiration of its term or earlier termination), UOL shall
be entitled to retain its exclusive worldwide license to
distribute the Online Courses, electronically in an online
format, for the duration of the copyright term(s) applicable
to the Online Course(s).
6.2. Termination of this Agreement shall not affect UOL's
obligation to pay to Provider a royalty in respect of
post-termination sales of Online Courses, as set forth in the
relevant Course Addenda. Provider shall retain its ownership
of the Courses.
6.2. The termination of this Agreement shall in no way effect the
continued applicability of the provisions set forth in
Sections 2.6, 4.3, 6.1, 7.1, 7.2 and 7.3.
7. Other
7.1. Indemnification. Each party shall defend, indemnify and hold
harmless the other
<PAGE>
party and its officers, directors, owners and employees from
and against any and all loss, liability, claims, damage, cost
or expense (including attorneys' fees and costs) relating to
breach of any warranties or representations by the
indemnifying party herein, or any claims which, if true, would
contradict any warranties or representations by the
indemnifying party herein, provided that the indemnified party
must give the indemnifying party prompt notice of any claims
covered by this indemnity and the indemnifying party shall
control defense and settlement of all third party claims
hereunder.
7.2. Warranty Disclaimer and Liability Limitation. EACH PARTY
HEREBY DISCLAIMS ANY AND ALL WARRANTIES, EXPRESS OR IMPLIED,
IN REGARD TO ANY INFORMATION, PRODUCT OR SERVICE FURNISHED BY
IT HEREUNDER, INCLUDING WITHOUT LIMITATION ANY AND ALL IMPLIED
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE. NEITHER PARTY SHALL BE LIABLE UNDER ANY CIRCUMSTANCES
FOR LOSS OF PROFITS OR ANY INCIDENTAL, SPECIAL, EXEMPLARY,
PUNITIVE OR CONSEQUENTIAL DAMAGES, EVEN IF IT HAS BEEN ADVISED
OF THE POSSIBILITY OF SUCH DAMAGES, EXCEPT FOR ANY EXPRESS
INDEMNITY OBLIGATIONS HEREUNDER.
7.3. Arbitration. Any claim, dispute or controversy arising out of
or in connection with or relating to this Agreement or the
breach or alleged breach thereof, shall be solely and finally
settled by arbitration as herein provided. Except as they may
be modified by the parties' mutual agreement, the commercial
arbitration rules of the American Arbitration Association (the
"Rules") shall govern any arbitration contemplated by this
Section 8.3. The arbitration shall be conducted where best
suited for the resolution of the dispute in light of the
convenience of the parties and their documents and witnesses.
The arbitration shall be conducted by one arbitrator who shall
be selected in accordance with the Rules. Nothing herein
contained shall limit the right of either party to seek to
obtain in any court of competent jurisdiction any interim
relief or provisional remedy, including injunctive relief.
Seeking or obtaining such interim relief or provisional remedy
in a court shall not be deemed a waiver of this agreement to
arbitrate. Any award rendered by the arbitrator shall be final
and not subject to judicial review. Judgment on the award of
the panel may be entered and the prevailing party may seek
enforcement thereof in any court having jurisdiction over the
parties or their assets.
7.4. Assignability. This Agreement may not be assigned, sublicensed
or transferred by either party without the prior written
consent of the other party.
7.5. Notices. All notices hereunder shall be given in writing at
the addresses set forth above. The parties shall promptly
notify each other in writing of any change in address. Notice
given by express courier requiring signature upon delivery
shall
<PAGE>
be deemed delivered on the day of receipt by the notified
party or someone who purports to sign on behalf of the
notified party.
7.6. Governing law. This Agreement shall be interpreted, construed
and enforced in accordance with the laws of the State of
Virginia, without regard to the choice of law rules of that
State.
7.7. Entire Agreement. This Agreement sets forth the entire
understanding of the parties with respect to the subject
matter hereof. It may be amended only with a writing signed by
both parties.
IN WITNESS WHEREOF, the duly authorized representatives of each of the
parties hereto have executed this Agreement as of the day and year first above
written.
University Online, Inc. ________________________
By: _______________________ By: _______________________________
Carl Tyson, President & COO
Date: _____________________ Date: _____________________________
FORM OF
ONLINE EDUCATIONAL SERVICES AGREEMENT
This Agreement is made as of the ___ day of ________, ____ by and between
University Online, Inc. ("UOL"), with its principal place of business located at
105 W. Broad Street, Suite 301, Falls Church, Virginia and _____________
________________________________________________________________________________
with its principal place of business at _______________________________________.
Recitals
--------
A. UOL, a Delaware Company, specializes in the business of developing,
publishing, and distributing multimedia educational software for
distance learning. UOL offers an on-line educational service called
"the UOL Network". The service is designed to provide an electronic
link between educational institutions and their students in their homes
or other remote locations. The service also offers a library of courses
as well as the software and methods of creating and distributing
interactive computer-based courseware for use by students in their
homes or other remote locations.
B. _________________________ is a public higher education institution
offering undergraduate and graduate degree programs to its students,
including graduate business courses and degrees.
C. UOL and ___ desire to enter into an agreement to develop and distribute
online courses to __________________________ students and other
prospective students worldwide.
1. Definitions
-----------
Whenever used in this Agreement, the following terms shall have the
meanings set forth below:
1.1. "Agreement" means this Agreement and all attached exhibits
which are incorporated by reference.
1.2. "Courseware" means the provision and management of all the
lessons, games, simulations, and the authoring and management
tools for learning and communicating for distance education
through "the UOL Network".
1.3. "the UOL Network" means UOL's online educational service which
includes e-mail, bulletin boards, asynchronous electronic
classes, enrollment, distribution of software and courseware,
testing and grading, interactive information, real-time
classes, and general administration, as specified and on the
terms set forth herein.
1.4. "Students" means those individuals will be taking the Online
Course.
<PAGE>
1.5. "Staff" means those individuals who hold full-time
non-teaching positions at the University.
1.6. "Faculty" means those individuals who hold part-time or
full-time teaching positions at University.
1.7. "Online Course" means a specific course (i.e., Financial
Accounting 600) selected from the University Catalog from
which curriculum content will be used to develop online
lessons and tests as a supplement for traditional classroom
instruction and used for evaluating the competence in
financial accounting of incoming students.
1.8. "Courseware Development Fund" is an interest bearing set-aside
account to be used for financing future courseware development
projects of the partnership formed under this Agreement.
2. Conditions
----------
As a part of this Agreement, ___ agrees that it will:
2.1. Use the UOL Network and specifically the Online Course as an
alternative method of delivery to students for its _________
______________ class offering and related activities.
Provide information to its prospective Students at the
2.2. University on the UOL Network and list information on online
programs in its catalogs, and other promotional literature as
appropriate.
2.3. Ensure that each student and faculty participating in the
online programs will have access to IBM PC compatible
computers with Windows and Internet, PPP/SLIP, and WWW access
at the university.
2.4. Provide information to UOL for inclusion in the ____________
University, _________________________________________________
_______ home page. Any information documents over a page in
length should be provided in an electronic format (MS Word or
text/ASCII files).
2.5. Provide a primary business and technical contact responsible
for management of this initiative and coordination with UOL
representatives.
2.6. Provide support to Students that are using the Online Course
materials.
As a part of this Agreement, UOL agrees that it will:
2.7. Set up a custom menu category and home page on the UOL Network
for use by Students and Faculty at ___. The menu will be named
and approved by ___ and will provide online access to
interactive lessons and courseware to faculty and students for
use of the Online Course.
<PAGE>
2.8. Hire a curriculum "Subject Matter Expert" that is approved by
___ to provide content for the Online Course. UOL will
contract with this individual directly.
2.9. Design, develop, distribute, and maintain an Online Course for
the _________________________ class in the University Catalog
for which content will be approved by ___ and
Institute-approved Subject Matter Expert retained by UOL. The
Online Course as completed in this initial phase will provide
an alternative to the __________________________ traditional
classroom-based course, evaluate competency of incoming
students, and provide a basis upon which additional Online
Course materials can be developed in the same and other
subject areas offered and selected by ___.
2.10. Make or maintain the arrangements with communications
carriers, computer software and hardware suppliers, and other
resources required to develop, market, distribute, administer,
and maintain the Courses, the UOL software, and the UOL
Network.
2.11. Provide online technology and distance learning training in
the form of a 1-day (4-6 hours) workshop for up to 20 faculty
members that will be using the Online Course materials. The
training will include an introduction into distance learning
and online technology, instruction in the set-up and use of
online software, conceptual discussions on communications and
online technology, and applications for higher education. This
training will be conducted by a professional distance educator
that is currently active in using online technologies to
deliver higher education courses to degree- or
credential-seeking students.
2.12. Provide support to the faculty members that will be using the
Online Course materials. UOL will always provide support to
the faculty using its course materials.
2.13. Utilize its best efforts to provide the UOL Network service to
all the Students and Faculty that are participating in the
Online Course seven days a week and 24 hours a day; provided,
however, that the UOL Network system will be shut down
occasionally for routine maintenance. Any shut downs will be
scheduled with every attempt to cause minimal disruption to
all the parties.
2.14. Provide access to the UOL Network for all participants of the
Online Course. Each participating faculty and student member
will have an online account with an assigned user name, group,
and password after the written request to establish the
accounts from ___ is received. Each account will be active for
the duration of the Online Course.
2.15. UOL will provide access to its 800 number technical support
hot-line for the Faculty and Staff involved with the Online
Course. (UOL will not be required to provide any direct
technical support to the Students.)
2.16. UOL will provide survey questionnaires for students so that
___ may, if it wishes, poll its student populations to help
determine the interest level and demand for online courses.
<PAGE>
3. Marketing
---------
3.1. UOL will promote, as appropriate for particular projects, the
Online Course to its distribution, academic partners, and
client base. The Courses will be published under the
partnership using the names of UOL and ___ to achieve maximum
recognition.
3.2. ___ promotes and markets the availability of the Online Course
in connection with its traditional offerings and through its
normal channels, as appropriate given the nature of the
specific project. In addition to its normal channels, ___ can
market, in conjunction with UOL, over the UOL Network to
corporations and other universities.
4. Pricing
-------
4.1. Given that it is not certain at this time exactly which
portions of the Online Course will be applicable to the
traditional classroom and which to incoming students, the
exact pricing schedule will be determined jointly at a later
date when such factors are known. UOL and ___ will jointly
determine the final pricing for the Online Course materials
later in the project as more facts are known with respect to
content amount and distribution.
4.2. Pricing for the online course will consist of two components:
(1) tuition which is paid by the student to ___ and (2) an
Online Course fee payable to UOL for distribution and
maintenance of the Online Course which is defined as "Gross
Revenues to UOL." As stated in Section 4.1., these specific
amounts will be determined later.
5. Courseware Development Fund
---------------------------
5.1. The "Gross Margin" equals Gross Revenues to UOL from providing
online access to the Online Course less any mutually agreed
upon deductions for direct costs of sales such as
communications and support and costs of development for
content, instructional design, and programming. These direct
costs, are to be netted against Gross Revenues to calculate
Gross Margin.
5.2. UOL will set aside __ percent of the Gross Margin in an
interest bearing account, to be called the "Courseware
Development Fund". The Courseware Development Fund is a
set-aside account to be used for the development of additional
online courses for the partnership. The intent of this
Courseware Development Fund is to create a self-funding
mechanism from which UOL can draw cash resources to continue
to develop online courses for the partnership without
requiring capital investment from ___ for development costs.
If, at some point in the future, the parties agree not to
develop additional courseware, the remaining balance in the
Courseware Development Fund will be dispersed equally between
UOL and ___.
<PAGE>
6. ___'s Approval Rights
---------------------
6.1. ___ has the right to participate in the final decision of how
its curriculum and content are used in the Online Course
(i.e., editorial, design, graphics, and creative input).
7. Intellectual Property Rights
----------------------------
7.1. UOL will have exclusive, royalty bearing, license to worldwide
online distribution rights to any derivative online,
electronic, or interactive versions of the Online Course
developed under the partnership as UOL will underwrite the
costs of development. The terms of the royalty bearing license
will be negotiated in good faith at a later date as part of
the license agreement.
7.2. ___ will have copyrights and hold title to the Online Course.
Revenue streams and royalties derived from the distribution of
the Online Course and payable to UOL will be distributed as
outlined in Section 5 above and determined later in the
license agreement.
8. Term of Agreement
-----------------
8.1. This Agreement will be in effect for a period of five (5)
years from the date of its execution by both parties, unless
terminated earlier as set forth in Section 10. The Agreement
may be renewed for additional periods by the mutual agreement
of both parties.
9. Termination
-----------
9.1. This Agreement may be terminated upon written notice given by
either party as follows:
a) upon the breach of a material provision of this Agreement
by either party which is not cured within 30 days of
written notice of such breach given to the breaching
party, the non-breaching party may terminate this
Agreement; and
b) upon mutual agreement of the parties, expressed in a
written document signed by both parties, this Agreement
may be terminated.
9.2. ___ may terminate this Agreement by providing 60 days notice
in writing to UOL.
10. Relationship of Parties
-----------------------
10.1. Nothing in this Agreement shall be construed so as to make
either party the agent of the other, or make either party
liable to third parties for debts or intentional or negligent
acts of the other party. Neither party shall represent itself
as having any authority or power to bind, create liability
for, otherwise act on behalf of the other party, except as
agreed to in writing by both parties.
<PAGE>
11. Confidentiality
---------------
11.1. Both parties will treat the terms of this Agreement and any
other written information exchanged between the parties that
is marked "Confidential" as confidential information and agree
not to disclose it to the public or any other party, or use
such information other than as contemplated in this Agreement.
12. Governing Law
-------------
12.1. This Agreement shall be interpreted and enforced in accordance
with the laws of the State of Virginia.
13. Notices
-------
13.1. All notices required and permitted under this Agreement shall
be in writing and shall be deemed duly given when delivered by
first class registered or certified mail, addressed to each
party at the address set forth below or at such other address
as may be hereafter designated in writing by a party.
If to UOL: John Birdsong
- --------- Chief Financial Officer
University Online, Inc.
105 W. Broad Street, Suite 301
Falls Church, VA 22046
If to ___:
- ---------
Agreed To:
Date: Date:
---------------------------- --------------------------
By: By:
------------------------------ -----------------------------
Nat Kannan
President and Chairman
University Online, Inc.
INNER CIRCLE DVLP/DIST FORM
ONLINE EDUCATIONAL SERVICES
DEVELOPMENT AND DISTRIBUTION AGREEMENT
This Agreement is made as of the day of , ,
-- ------------- ----
by and between University Online, Inc., a Delaware corporation with its
principal place of business located at 105 W. Broad Street, Falls Church,
Virginia ("UOL") and , a
----------------------------- -------------------------
corporation, with its principal place of business at
----------------------------
("Provider").
Recitals
A. UOL is in the business of developing, publishing and distributing
multimedia educational software for distance learning and has entered
into an agreement with _______________
. pursuant to which UOL will
develop a virtual campus and market that campus under the ________ name
and logo (the "_________ Virtual Campus".
B. Provider has developed certain course materials, described in
particular on Exhibit A hereto (collectively, the "Works"), which
Provider desires to publish electronically and distribute online,
particularly through the _________ Virtual Campus being developed by
UOL.
C. UOL and Provider desire to enter into an agreement pursuant to which
Provider will grant to UOL all rights necessary to vest in UOL the
right to develop the Works into interactive computer-based courseware
for distribution online through the _________ Virtual Campus (the
"Online Products") and to grant to UOL non-exclusive worldwide rights
to distribute the Online Products, all as set forth herein.
NOW, THEREFORE, the parties hereto agree as follows:
1. Provider Representations and Warranties
1.1 Provider hereby represents and warrants that all rights to the
Works are legally and equitably owned solely by Provider, or
that Provider has the exclusive rights to the exploitation of
the Works as contemplated hereby.
1.2 Provider hereby represents and warrants that it is not
1
<PAGE>
bound by any other agreement, restriction or obligation that
could in any way interfere or be inconsistent with the rights
and obligations set forth herein.
1.3 Provider hereby represents and warrants that the Works do not
infringe any patent known to Provider, nor infringe or violate
any copyright, trade secret or any other proprietary or other
right of any third party.
2. License
2.1 Subject to the terms and conditions of this Agreement,
Provider hereby grants to UOL the exclusive right and license
to copy, modify, format and otherwise design and develop the
Works for the creation of the Online Products.
2.2 Provider further grants to UOL for the term of this Agreement
a non-exclusive worldwide license to distribute the Online
Products electronically in an online format through UOL's
online distribution channels, it being specifically understood
and agreed that Provider shall offer the Online Products
through the _________ Virtual Campus pursuant to a separate
agreement.
3. The Online Products
3.1 UOL shall use its best efforts to design, develop and
otherwise create the Online Products at its sole cost and
expense.
3.2 As between UOL and Provider, all copyrights and other
interests in the Works are exclusively owned by Owner; all
copyrights and other interests in the Online Products shall be
owned by Provider, it being expressly understood and agreed
that UOL may offer the Online Products through its
distribution channels other than the _________ Virtual Campus
as herein provided.
4. Marketing and Distribution
4.1 For the term of this Agreement, UOL shall have a non-exclusive
worldwide right to the sale, license and distribution of the
Online Products, it being expressly understood and agreed that
Provider will offer the Online Products through the _________
Virtual Campus.
2
<PAGE>
4.2 Neither UOL nor Provider shall permit users to distribute or
redistribute the Online Products or any such derived
materials, in whole or in part, in any form or medium.
4.3 Provider shall sell, license and distribute the Online
Products through the ________ Virtual Campus and to users of
Provider's services, in their capacity as end users. Provider
and UOL shall permit each user to store, manipulate, analyze,
reformat, print and display material contained in the Online
Products only on a single personal computer under such user's
direct control. Provider and UOL shall prepare quarterly
reports in the form attached hereto as Exhibit C detailing all
sales of the Online Products during that quarter and providing
to the other party all payments in respect of such sales to
which that party is entitled under Section 5.2 below. Said
quarterly reports and related payments shall be due within 30
days of the end of the quarter to which the report relates.
5. Pricing and Royalties
5.1 Provider will determine the prices at which the Online
Products will be offered.
5.2 Provider shall pay to UOL a royalty equal to __% of the gross
revenues derived from sales of the Online Products through the
_________ Virtual Campus and otherwise and __% of the gross
revenues derived from sales of the Online Products through
UOL's other distribution channels.
5.3 Provider shall be solely responsible for payment of any and
all royalties attributable to the Works (e.g., to content,
accreditation and certification providers).
5.4 Accounting of revenues attributable to the Online Products
shall be as provided in Exhibit C hereto.
6. Term and Termination
6.1 This Agreement will be in effect from the date hereof for a
period of one years, unless sooner terminated pursuant to
Section 6.2 below. At the expiration of the initial term, this
Agreement shall be renewed automatically for one year terms
unless a party hereto
3
<PAGE>
gives sixty (60) days notice of intent to terminate at the end
of the then term.
6.2 This Agreement may be terminated, upon written notice given by
either party, upon the occurrence of any of the following
events:
(a) The breach of a material provision of this Agreement by
either party which is not cured within sixty (60) days of
written notice of such breach given to the breaching party; or
(b) The mutual agreement of the parties hereto, expressed
in a written document signed by both parties.
7. Effect of Termination
7.1 Upon the termination of this Agreement for any reason (at
expiration of its term or pursuant to Section 6.2), (a) UOL
shall be entitled to royalties from sales of the Online
Products for the duration of the copyright term(s) applicable
to the Online Product(s); and (b) Provider shall retain its
ownership of the Works.
7.2 The termination of this Agreement shall in no way effect the
continued applicability of the provisions set forth in
Sections 7.1, 8.1 and 8.2.
8. Other
8.1 Indemnification. Each party shall defend, indemnify and hold
harmless the other party and its officers, directors, owners
and employees from and against any and all loss, liability,
claims, damage, cost or expense (including attorneys' fees and
costs) relating to breach of any warranties or representations
by the indemnifying party herein, or any claims which, if
true, would contradict any warranties or representations by
the indemnifying party herein, provided that the indemnified
party must give the indemnifying party prompt notice of any
claims covered by this indemnity and the indemnifying party
shall control defense and settlement of all third party claims
hereunder.
8.2 Warranty Disclaimer and Liability Limitation. EACH PARTY
HEREBY DISCLAIMS ANY AND ALL WARRANTIES, EXPRESS OR IMPLIED,
IN REGARD TO ANY INFORMATION, PRODUCT OR
4
<PAGE>
SERVICE FURNISHED BY IT HEREUNDER, INCLUDING WITHOUT
LIMITATION ANY AND ALL IMPLIED WARRANTIES OF MERCHANTABILITY
OR FITNESS FOR A PARTICULAR PURPOSE. NEITHER PARTY SHALL BE
LIABLE UNDER ANY CIRCUMSTANCES FOR LOSS OF PROFITS OR ANY
INCIDENTAL, SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL
DAMAGES, EVEN IF IT HAS BEEN ADVISED OF THE POSSIBILITY OF
SUCH DAMAGES, EXCEPT FOR ANY EXPRESS INDEMNITY OBLIGATIONS
HEREUNDER.
8.3 Arbitration. Any claim, dispute or controversy arising out of
or in connection with or relating to this Agreement or the
breach or alleged breach thereof, shall be solely and finally
settled by arbitration as herein provided. Except as they may
be modified by the parties' mutual agreement, the commercial
arbitration rules of the American Arbitration Association (the
"Rules") shall govern any arbitration contemplated by this
Section 8.3. The arbitration shall be conducted where best
suited for the resolution of the dispute in light of the
convenience of the parties and their documents and witnesses.
The arbitration shall be conducted by one arbitrator who shall
be selected in accordance with the Rules. Nothing herein
contained shall limit the right of either party to seek to
obtain in any court of competent jurisdiction any interim
relief or provisional remedy, including injunctive relief.
Seeking or obtaining such interim relief or provisional remedy
in a court shall not be deemed a waiver of this agreement to
arbitrate. Any award rendered by the arbitrator shall be final
and not subject to judicial review. Judgment on the award of
the panel may be entered and the prevailing party may seek
enforcement thereof in any court having jurisdiction over the
parties or their assets.
8.4 Assignability. This Agreement may not be assigned, sublicensed
or transferred by either party without the prior written
consent of the other party.
8.5 Notices. All notices hereunder shall be given in writing at
the addresses set forth above. The parties shall promptly
notify each other in writing of any change in address. Notice
given by express courier requiring signature upon delivery
shall be deemed delivered on the day of receipt by the
notified party or someone who purports to sign on behalf of
the notified party.
5
<PAGE>
8.6 Governing law. This Agreement shall be interpreted, construed
and enforced in accordance with the laws of the State of
Virginia, without regard to the choice of law rules of that
State.
8.7 Entire Agreement. This Agreement sets forth the entire
understanding of the parties with respect to the subject
matter hereof. It may be amended only with a writing signed
by both parties.
University Online, Inc. Provider
By: ________________________ By: ___________________________
6
EXHIBIT 10.19
AGREEMENT BETWEEN AUTODESK, INC.
AND UNIVERSITY ONLINE, INC.
This Agreement made and effective as of April 15, 1996, (the "Effective
Date") by and between Autodesk, Inc. ("Autodesk"), a Delaware corporation, with
its principal place of business at 111 McInnis Parkway, San Rafael, CA 94903,
and University Online, Inc. ("UOL") with its principal place of business at 105
West Broad Street, Suite 301, Falls Church, Virginia 22046.
RECITALS
WHEREAS, Autodesk is a producer of computer-aided design, multimedia,
and other software; and
WHEREAS, UOL is in the business of developing, publishing, and
distributing multimedia educational software through local area networks and
wide area networks, such as the Internet and the World Wide Web; and
WHEREAS, Autodesk desires to grant to UOL certain rights to use certain
Autodesk trademarks and to render certain other assistance in connection with
UOL's Internet activities; and
NOW, THEREFORE, in consideration of the mutual covenants herein, the
parties agree as follows:
1. Definitions
1.1 "Autodesk Virtual Campus" shall mean a campus-like graphical user
interface located on the Internet which a student or learning professional may
access to obtain information about about Autodesk products and other related
subject areas through the Internet.
1.2 "Student Management System" shall mean a system acquired or
developed by UOL to track and record enrollment, testing, grading,
recordkeeping, maintenance, registration and reporting necessary to provide
proper information to students, faculty, and Content Providers on the Autodesk
Virtual Campus. The Student Management System incorporates courseware that was
built using the development guidelines and templates of the Autodesk Virtual
Campus.
1.3 "Net Revenues" shall mean revenues to UOL derived from (i)
interactive courseware that runs on the Student Management System; (ii) revenues
derived from Products and Services that are downloaded from the Autodesk Virtual
Campus or ordered and shipped to customers through the Autodesk Virtual Campus
less costs paid by UOL to Content Providers, resellers, distributors,
individuals, credit card issuers, and consultants for such Products and Services
and (iii) Fees collected by UOL that are derived from advertising, promotion,
promotional links to other Internet addresses, or other revenue-generating
activities related to activities on the Autodesk Virtual Campus.
1.4 Products and Services, shall mean all items, except courseware
delivered through the Student Management System, including but not limited to
books, CD ROM's, and images.
1.5 Content Provider shall mean individuals, institutions, and
organizations that provide Productsand Services or courseware.
*[]CONFIDENTIAL TREATMENT REQUESTED; CERTAIN INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SEC.
<PAGE>
2. License Grant
2.1 Autodesk hereby grants to UOL a non-exclusive right and license to
use the Autodesk name and registered logo in connection with the operation,
advertising and marketing of the Autodesk Virtual Campus. Either separately or
in conjunction with any UOL trademark or trade name, UOL agrees to include any
notices that Autodesk may reasonably request and to use the Autodesk name and
logo in accordance with guidelines as set forth in the Guidelines for Design
Corporate Identity Manual dated Summer 1995 provided by Autodesk, which Autodesk
may update, revise, or replace from time to time and shall provide to UOL. All
Autodesk trademarks and tradenames and shall remain the exclusive property of
Autodesk.
2.2 UOL agrees that any use by UOL of the Autodesk name and logo shall
be subject to review and approval in advance by Autodesk, in Autodesk's sole
discretion. Autodesk shall retain the right to demand immediate modification,
revision or cessation of use of the Autodesk name and logo in the event Autodesk
determines that the licensed trademarks are being used improperly or that the
content of the Autodesk Virtual Campus is of unacceptable quality such that it
is no longer in Autodesk's best interests to be associated with the Autodesk
Virtual Campus. Without limiting the generality of the foregoing, UOL shall not
use the Autodesk name or logo in any manner that, in Autodesk's determination,
may cause embarrassment to Autodesk or may damage Autodesk's reputation.
2.3 The right to use the Autodesk name and logo may not be licensed,
sold or assigned by UOL.
3. Competitive Accounts Restriction
3.1 UOL shall maintain the technical capability to prevent certain UOL
accounts, specified in Exhibit A ("Competitive Accounts"), from linking to the
Autodesk Virtual Campus. These technical security requirements shall include
separate hardware servers and communications lines. The Autodesk Virtual Campus
shall have its own unique Internet domain and shall allow UOL to prevent users
of the site from seeing UOL's other servers. Each server included under the
Autodesk Virtual Campus shall have its own unique TCP/IP address and shall be
addressable by means of a central server with a URL such as "www.xxx.com." The
on-line display of UOL's name on any of the server's pages shall be agreed upon
by both parties.
3.2 UOL shall not link or allow to be linked products that are
competitive to Autodesk's computer-aided design, imaging, or animation products.
Autodesk shall have the right to add additional accounts that are directly
competitive with Autodesk products to Exhibit A by written notice to UOL.
3.3 Autodesk confirms, that during the term of the Agreement,
Autodesk's Education Department in the Americas, and only that department, shall
not enter into a similar business relationship concerning the development of a
virtual campus for the Internet. The territory covered by Autodesk's Education
Department in the Americas is the U.S., Canada, Mexico, Central America, and
South America.
Notwithstanding the above, nothing in this Section 3 shall be
construed to prevent Autodesk, or any subdivision or department thereof, except
the Education Department in the Americas from (i) providing products and
services whether through a virtual campus or otherwise, through the Internet or
other channels; or (ii) licensing or acquiring products and services for the
purpose of providing such products and services through the Internet or other
channels.
UOL agrees that during the term of the Agreement it shall not
enter into a similar business relationship concerning the development of a
virtual campus for the Internet with the companies then-current version of
Exhibit A in the United States, Canada, Mexico, Central America, and South
America.
4. Development
4.1 UOL shall be responsible for all costs related to the development
and operation of the Autodesk Virtual Campus, including but not limited to
software, hardware, and telecommunications.
2
<PAGE>
4.2 Autodesk shall provide staff support to review and approve the
Autodesk Virtual Campus design specification on an ongoing basis. Revision One
of the specification shall be completed as set forth in Exhibit B, ("Milestone
Schedule"). Milestone dates are subject to the execution of this Agreement by
April 15, 1996. If the execution of the Agreement occurs after April 15, 1996
the milestone dates will be changed as agreed upon by both parties.
5. Support
UOL shall be solely responsible for providing support to Content
Providers and customers but shall not be obligated to provide support services
free of charge and shall have the option to subcontract such support services.
6. Marketing
6.1 UOL shall be responsible for all "directed" marketing costs for the
Autodesk Virtual Campus, as set forth in Exhibit C. UOL must have Autodesk's
prior written approval to make changes to Exhibit C, which shall not be
unreasonably withheld.
6.2 UOL shall also fund marketing and promotional activities to Content
Providers and potential customers and provide a summary on a quarterly basis of
marketing and promotional activities to Autodesk.
6.3 Autodesk shall perform certain marketing activities related to
promoting the Autodesk Virtual Campus, as set forth in Exhibit D.
6.4 Autodesk may, as appropriate, provide to UOL evaluation,
demonstration, and training disks and documentation for use in promotion of the
Autodesk Virtual Campus. An initial list of these materials are set forth in
Exhibit E. UOL shall electronically distribute such materials free of charge.
Autodesk shall have the right to update Exhibit E by written notice. All such
materials shall remain the exclusive property of Autodesk. UOL shall not remove
any copyright or trademark notices contained in such materials.
6.5 Autodesk shall provide UOL with a designated contact on an ongoing
basis to insure that the Autodesk Virtual Campus has the most current education
marketing information and is properly linked to the Autodesk Education Internet
site.
6.6 Autodesk shall assist UOL in linking where appropriate to
Autodesk's Internet web pages and shall provide promotional Internet links where
appropriate to the Autodesk Virtual Campus on the Internet. UOL shall reimburse
Autodesk for all costs incurred from the development of the link or the
development of a UOL promotional presence on Autodesk's Internet web page but
shall not be required to pay marketing, advertising or other fees to Autodesk
for providing the web link during the term of this Agreement.
7. Royalties
7.1 In consideration of the trademark rights granted hereunder and of
the other obligations assumed by Autodesk, UOL shall pay Autodesk a royalty of
[ ] percent ([ ]%) of Net Revenues.*
7.2 Royalties shall not be owed for the Autodesk documentation or
Autodesk demonstration, evaluation, or training disks distributed through the
Autodesk Virtual Campus. These materials are identified in Exhibit E. Autodesk
may by notification to UOL change, add, or delete materials.
7.3 Royalties shall be due and payable within twenty (20) days after
the close of each calendar quarter.
7.4 UOL shall provide Autodesk a royalty report identifying the Net
Revenue, the number of transactions , a description of the transaction, the
selling price, the number of demonstration, evaluation, and training disks
distributed within thirty (30) days after the close of each calendar quarter. If
the royalty report is provided
*[]CONFIDENTIAL TREATMENT REQUESTED; CERTAIN INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SEC.
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<PAGE>
through electronic communication, Autodesk shall provide UOL with a designated
contact in the Autodesk Finance department.
7.5 Autodesk shall have the right upon reasonable notice to inspect and
audit UOL's records no more than twice annually for purposes of verification of
royalty reports. Any such audit shall be conducted by Autodesk or its
representatives during normal business hours at UOL's location and UOL shall
cooperate fully in such audit. Autodesk shall be responsible for all fees and
expenses for any such audits, provided, however, that, if the result of the
audit identifies an underpayment of 10% or more to Autodesk, the audit fees and
expenses shall be paid by UOL.
8. Disclaimers
8.1 Autodesk makes no endorsement of the products or courseware that
are the subject of this Agreement. UOL agrees that UOL shall be solely
responsible for the content of the Autodesk Virtual Campus and any products sold
by UOL.
8.2 Autodesk does not warrant the Autodesk documentation or Autodesk
demonstration, evaluation, or training disks that may be provided under
Paragraph 6.4. UOL SHALL NOT MAKE OR PASS ON TO ANY PARTY ANY WARRANTY OR
REPRESENTATION ON BEHALF OF AUTODESK. AUTODESK EXPRESSLY DISCLAIMS ANY IMPLIED
WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE, MERCHANTABILITY OR
NON-INFRINGEMENT.
8.3 EXCEPT AS EXPRESSLY STATED HEREIN, NEITHER PARTY HAS MADE ANY
WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED BY OPERATION OF LAW OR
OTHERWISE, CONCERNING THE SOFTWARE TO BE PROVIDED HEREUNDER, THE SCOPE OR
DURATION OF ANY MARKETING EFFORT WHICH AUTODESK MAY UNDERTAKE, OR THE SUCCESS OF
ANY SUCH MARKETING EFFORT. NEITHER PARTY HAS RELIED ON ANY EXPRESS OR IMPLIED
REPRESENTATION OF THE OTHER PARTY, WRITTEN OR ORAL, AS AN INDUCEMENT TO ENTERING
INTO THIS AGREEMENT.
8.4 UOL shall ensure that the following statement is prominently
displayed on the Autodesk Virtual Campus prior to customer purchase of any
Product or Service:
"The Autodesk Virtual Campus is independently operated by
Univesity Online, Inc. Autodesk makes no endorsement of the products or services
provided hereunder and does not guarantee the performance of such products and
services.Responsibility or liability for the performance (or failure to perform)
of any product or service shall remain solely with University Online, Inc."
9. Indemnity
UOL shall defend and hold Autodesk harmless from any action, claim,
lawsuit or proceeding of whatever nature related to or arising from the Autodesk
Virtual Campus and any sales, marketing, or distribution activities connected
with the Autodesk Virtual Campus.
10. Termination
10.1 Term. The term of the Agreement shall commence upon the Effective
Date and shall continue for [ ] years and [ ] months unless terminated
earlier in accordance with the terms of this Agreement.* Autodesk shall have the
option to renew the term for an additional [ ] [ ] years upon thirty (30) days
written* notice to UOL before the expiration of the initial term.
10.2 Termination for Cause. Subject to Autodesk's right of immediate
termination set forth in Paragraph 10, either party may terminate this Agreement
upon thirty (30) days written notice of a breach if such breach is not cured
within sixty (60) days from notification, provided however that, Autodesk may
terminate this Agreement upon ten (10) days' written notice for UOL's failure to
remit royalty payments when due.
*[]CONFIDENTIAL TREATMENT REQUESTED; CERTAIN INFORMATION OMITTED AND FILED
SEPARATELY WITH THE SEC.
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10.3 Termination for Insolvency. Autodesk may terminate this Agreement
immediately upon written notice (i) upon the institution by or against UOL of
insolvency, receivership or bankruptcy proceedings or any other proceedings for
the settlement of UOL's debts, (ii) upon UOL making an assignment for the
benefit of creditors or (iii) upon UOL' dissolution or ceasing to conduct
business in the normal course.
10.4 Return of Materials. All Autodesk information, data, photographs,
samples, literature, and sales aids of every kind shall remain the property of
Autodesk. Within thirty (30) days after the termination of this Agreement, UOL
shall return all such items as Autodesk may direct, at Autodesk's shipping
expense.
10.5 All UOL information, data, photographs, samples, literature, and
sales aids of any kind shall remain the property of UOL. Within thirty (30) days
after the termination of this Agreement, Autodesk shall return all such items as
UOL may direct, at UOL's shipping expense.
10.6 Survival of Terms. These terms and conditions of this Agreement
which by their nature should survive, shall survive and continue after any
termination of this Agreement.
10.7 Effect of Termination. Upon the termination of this Agreement for
any reason (at expiration of its term or pursuant to Sections 10.2 or 10.3), UOL
shall retain all right, title and interest in and to the Autodesk Virtual Campus
(which henceforth shall no longer be called the Autodesk Virtual Campus), with
all rights to exploit the virtual campus without renumeration or accountability
to Autodesk; the right and license granted to UOL in Section 2.1 for the use of
Autodesk's trademarks shall terminate and be of no further force or effect; UOL
shall immediately cease use of the Autodesk trademarks; and all royalties and
other payments from UOL to Autodesk shall immediately cease.
11. Publicity
All public announcements, press releases or other press contact made by
either party respecting the relationship established by this Agreement or
regarding the terms and conditions hereof shall be subject to the prior review
and approval of the other party, which approval shall not be unreasonably
withheld.
12. Limitation of Liability
THE PARTIES AGREE THAT IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE
OTHER PARTY, UNDER ANY THEORY OF LIABILITY, WHETHER IN AN ACTION BASED ON A
CONTRACT, TORT (INCLUDING NEGLIGENCE) OR ANY OTHER LEGAL THEORY, HOWEVER
ARISING, FOR ANY COSTS OF PROCUREMENT OF SUBSTITUTE GOODS OR SERVICES OR FOR ANY
LOSS OF USE, INTERRUPTION OF BUSINESS, OR INDIRECT, SPECIAL, INCIDENTAL, OR
CONSEQUENTIAL DAMAGES OF ANY KIND, WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF
THE POSSIBILITY OF SUCH DAMAGE.
13. Confidentiality
Both parties shall hold as confidential any information which the one
party obtains from the other party in the performance of this Agreement and
which is marked or noted as confidential. Neither party shall, without the prior
written consent of the other party, publish or disclose such information or
authorize anyone else to publish or disclose such information, unless and until
such information has ceased to be confidential. Notwithstanding anything to the
contrary set forth herein, the following information shall not be deemed
confidential under this Agreement:
(a) Information which is in the public domain,
(b) Information which is received by the non-disclosing party without
any breach of the non-disclosing party's obligations hereunder,
(c) Any information which is independently developed by the
non-disclosing party without reference to or without any use of the disclosing
party's confidential information, or
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<PAGE>
(d) Any information which is required by law to be disclosed.
Notwithstanding the foregoing, UOL may disclose terms of this Agreement
to potential third-party investors solely in connection with efforts to obtain
funding for UOL, provided that such third parties have executed a nondisclosure
agreement which includes restrictions on the disclosure of confidential
information substantially similar to the restrictions set forth herein.
The parties hereto acknowledge and agree that UOL may contract with a
third party to provide some or all of the funding required by UOL to accomplish
the development and operation of the Autodesk Virtual Campus. Other provisions
in this Agreement to the contrary notwithstanding, Autodesk acknowledges and
agrees that such third party may engage in financing efforts for the Autodesk
Virtual Campus project as described in this Agreement, which efforts will
require the disclosure to potential investors of the substance of this
Agreement. UOL agrees that all such disclosures will be subject to the prior
review and approval of Autodesk as contemplated by Section 11 above, and
Autodesk agrees to review and comment on such submissions promptly.
14. Miscellaneous Provisions
(a) This Agreement is made under and shall be construed in accordance
with the laws of the State of California, without regard to the conflict of law
provisions thereof.
(b) In the event legal action is undertaken to enforce or interpret the
terms of this Agreement, the prevailing party in such action shall be entitled
to recover reasonable attorneys' fees and costs incurred in addition to any
other relief to which it may be entitled.
(c) UOL may not assign or transfer any of its rights or
responsibilities set forth herein without the express written consent of
Autodesk.
(d) The Exhibits attached hereto and referenced herein are hereby
incorporated herein as part of this Agreement by this reference.
(e) This document and any referenced documents represent the entire
agreement between the parties as to the matters set forth and integrates all
prior discussions or understandings between them. This Agreement may only be
modified or amended in writing by a document signed by an authorized
representative of both Autodesk and UOL.
(f) The failure of either party to insist, in any one or more
instances, upon the performance of any of the terms, covenants or conditions of
this Agreement or to exercise any right hereunder, shall not be construed as a
waiver of the future performance of any such term, covenant or condition or the
future exercise of such right.
(g) Independent Contractors. It is agreed that the relationship between
the parties is that of independent contractors, and nothing contained in this
Agreement shall be construed or implied to create the relationship of partners,
joint venturers, agent and principal, employer and employee, or any relationship
other than that of independent contractors. At no time shall either party make
any commitments or incur any charges or expenses for or in the name of the other
party.
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<PAGE>
15. Notices
(a) All notices given in connection with this Agreement shall be in
writing. Notice may be given by mailing the same by United States mail,
certified or registered, return receipt requested, first class postage prepaid,
or by sending the same by Federal Express or equivalent courier service,
addressed as follows:
(i) If to Autodesk: Autodesk, Inc.
111 McInnis Parkway
San Rafael, CA 94903
Attention: Legal Department
(ii) If to UOL: University Online, Inc.
105 West Broad Street, Suite 301
Falls Church, Virginia 22046
Attention: John Birdsong, CFO
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
AUTODESK, INC. UNIVERSITY ONLINE, INC.
By: _________________________________ By: __________________________________
Print Name: _________________________ Print Name: __________________________
Title: _______________________________ Title: _______________________________
Date: ____________________________ Date: ______________________________
7
PROJECT FINANCING AND DEVELOPMENT AGREEMENT
This PROJECT FINANCING AND DEVELOPMENT AGREEMENT (the "Agreement"),
effective as of ___________ 1996 (the "Effective Date"), is made by and between
InternetU, Inc., a New Jersey corporation having its principal place of business
at 648 Winthorp Road, Teaneck, New Jersey 07866 ("InternetU"), and University
Online, Inc., a Delaware corporation having its principal place of business at
105 West Broad Street, Suite 301, Falls Church, Virginia 22046 ("UOL").
RECITALS
WHEREAS, UOL is in the business of developing, publishing, and
distributing multimedia educational software through local area networks and
wide area networks, such as the Internet and the World Wide Web;
WHEREAS, UOL has entered into an agreement with Autodesk, Inc.
("Autodesk") dated effective as of April 15, 1996 (the "Autodesk/UOL
Agreement"), pursuant to which Autodesk has licensed to UOL rights to use
certain Autodesk trademarks and UOL has undertaken to develop the Autodesk
Virtual Campus (as that term is defined below);
WHEREAS, the Autodesk/UOL Agreement acknowledges that UOL may contract
with a third party to provide some or all of the funding required by UOL to
accomplish the development, operation and marketing of the Autodesk Virtual
Campus;
WHEREAS, InternetU has been formed for the purpose of commercially
exploiting opportunities in connection with the Internet, including the Autodesk
Virtual Campus;
WHEREAS, InternetU and UOL desire to enter into a project financing
agreement related to the Autodesk Virtual Campus pursuant to which the specific
terms and conditions of such financing by InternetU may be set forth, including
the consideration to InternetU of such financing; and
WHEREAS, InternetU and UOL executed a letter agreement dated January
22, 1996 and now intend this agreement to replace and supersede that letter
agreement.
NOW, THEREFORE, the parties agree as follows:
1. DEFINITIONS
1.1 "Autodesk Virtual Campus" shall mean a campus-like graphical user
interface located on the Internet that a student or learning professional may
access to obtain information about Autodesk, Inc. products and other related
subject areas through the Internet as contemplated by the Autodesk/UOL
Agreement.
1.2 "Content Provider" shall mean those individuals, institutions and
organizations that provide Products and Services or Courseware.
1.3 "Courseware" shall mean interactive courseware that runs on the
Student Management System.
* [ ] CONFIDENTIAL TREATMENT REQUESTED; CERTAIN INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SEC.
<PAGE>
1.4 "Net Revenue" shall mean revenues derived from (a) Courseware
delivered through the Autodesk Virtual Campus; (b) Products and Services that
are downloaded from the Autodesk Virtual Campus, or ordered and shipped to
customers through the Autodesk Virtual Campus, less costs paid by UOL to (i)
Content Providers, resellers, distributors, individuals and consultants offering
Products and Services (which costs shall not include UOL general administrative
costs), and (ii) credit card issuers for transaction processing fees and (c)
advertising, promotion, promotional links from the Autodesk Virtual Campus to
other Internet addresses, or other revenue-generating activities related to the
Autodesk Virtual Campus.
1.5 "Products or Services" shall mean all items offered on the
Autodesk Virtual Campus, except Courseware delivered through the Student
Management System of the Autodesk Virtual Campus, including but not limited to
books, CD ROMs and images.
1.6 "Student Management System" shall mean the system established to
track and record student enrollment, testing, grading, record keeping,
maintenance, and registration for the Autodesk Virtual Campus and to report
relevant information to students, faculty and Content Providers on the Autodesk
Virtual Campus.
2. DEVELOPMENT PROGRAM FINANCING
2.1 Funding Obligations. Subject to the terms of this Agreement,
InternetU hereby agrees to provide to UOL certain cash payments to be used by
UOL for the development, operation and marketing of the Autodesk Virtual Campus,
all as more specifically set forth in this Section 2.
2.2 Schedule of Payments. Subject to the fulfillment by UOL of the
milestones set forth below, as such may be amended from time to time by the
mutual agreement of the parties hereto, InternetU hereby agrees to make cash
payments to UOL in the following amounts on or before the dates and upon the
fulfillment by UOL of the milestone(s) here indicated:
2
<PAGE>
<TABLE>
<CAPTION>
Amount Payment Date Milestone
<S> <C> <C>
$ [ ] October 15, 1996 Final specification and white paper
for Virtual Campus delivered to
InternetU; procurement of dedicated
servers, software and
telecommunications equipment; 6-12
major partners signed up under Key
Partner Program
$ [ ] November 15, 1996 Beta merchandising system in place
$ [ ] January 31, 1997 Final development of fully
interactive online course delivery
product/tools; marketing of beta
tools to developers. First
interactive online courses
available; marketing campaign to
professional learners
$ [ ] May 31, 1997 Continued effectiveness of
Autodesk/UOL Agreement
$ [ ] September 30, 1997 Continued effectiveness of
--------- Autodesk/UOL Agreement
$[ ]
</TABLE>
The parties acknowledge that the first three milestones set forth in this
Section 2.2 are based on the milestones to be achieved by UOL which are set
forth in the Autodesk/UOL Agreement, as such may be amended from time to time.
UOL represents that it has fully satisfied all requirements specified in the
October 15, 1996 milestone.
2.3 Effect of Missed Milestone. In the event UOL fails to meet the
milestone applicable to a particular payment as set forth above, and such
failure is not excused hereunder, InternetU may withhold the relevant payment
until such time as UOL fulfills the applicable milestone. InternetU may, at its
discretion, make any payment otherwise required under this Agreement
notwithstanding a missed milestone by UOL. For the purposes of this Agreement
(and particularly this Section 2.3), acceptance by Autodesk of a milestone shall
be deemed to be completion of such milestone for this Agreement and extension of
a milestone deadline by Autodesk under the Autodesk/UOL Agreement shall operate
to extend the milestone date under this Agreement and, accordingly, the
corresponding date for satisfaction of the payment obligation hereunder shall be
extended. In the event UOL fails to meet a milestone for purposes of the
Autodesk/UOL Agreement and Autodesk declines to extend the deadline, InternetU
may withhold the relevant payment; UOL shall have [
* [ ] CONFIDENTIAL TREATMENT REQUESTED; CERTAIN INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SEC.
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] days to meet the unfulfilled milestone or to negotiate a comparable new
project plan milestone with Autodesk; the use of such revised plan for the
InternetU funding obligation milestones shall be subject to the prior approval
of InternetU. If InternetU declines to approve such project plan, it shall be
released from further funding obligations under this Agreement upon its
termination of this Agreement pursuant to Section 10.5 below, subject to the
survival provisions of Section 10.6 below. In the event that during the [
] day cure period provided by this Section 2.3, UOL is able
to fulfill its comparable milestone under the Autodesk/UOL Agreement to the
satisfaction of Autodesk, InternetU agrees that UOL will be deemed to have met
the milestone hereunder, UOL shall be entitled to the full milestone payment and
InternetU shall have no termination rights under Section 10.5 with respect to
that milestone. In the event that UOL is unable to meet any of the first three
milestones within the [ ]-day cure period, then (i) the ownership interest of
UOL in the source code for the Autodesk Virtual Campus (as otherwise would apply
under Section 5.3) shall be reduced and (ii) the royalties to which UOL would
otherwise be entitled from the Autodesk Campus shall be reduced to UOL (and thus
paid to InternetU), each in accordance with the schedule set forth on SCHEDULE
2.3 attached hereto.
2.4 Effect of Missed or Partial Payment. In the event InternetU fails
to make any portion of a payment when such payment is due as set forth above,
then (i) the ownership interest of InternetU in the source code for the Autodesk
Virtual Campus (as otherwise would apply under Section 5.3) and (ii) the
royalties otherwise payable to InternetU as set forth in Section 5.1 below each
shall be reduced in accordance with the schedule set forth on SCHEDULE 2.4. Any
such reductions taken will correspond with the proportion of the payment amount
InternetU failed to make as it related to the aggregate payments then due. In
the event InternetU fails to make at least a partial payment of $[ ] in
respect of any three milestone payments as required by Section 2.2 above, UOL
may, in its discretion, invoke the termination provisions of Section 10.5 below.
The parties hereto expressly acknowledge and agree that there shall be no cure
period in respect of a missed payment, but InternetU shall have thirty (30) days
after making a timely payment of at least $[ ] within which to pay the
difference between the full milestone payment and such [$ ] (or such
greater amount as actually paid) before a reduction in ownership rights of the
source code and in the royalties otherwise payable to InternetU. If, in respect
of any milestone, InternetU offers to UOL $[ ] or more (but less than the
amount stipulated for that particular milestone), UOL may not refuse the
payment. Any consequential reduction in warrants granted to InternetU, reduction
in revenue stream or reduction in interest in the source code shall be based
solely on the amount not paid by InternetU on or before the last day of the
30-day grace period. InternetU shall be entitled to the proportionate amount of
warrants, revenue stream and source code interest relevant to the partial
payment made by InternetU.
2.5 UOL's Use of Funding Supplied by InternetU. UOL shall utilize all
funds provided by InternetU under this Agreement for the sole purpose of paying
for the development, marketing and operational expenses incurred and to be
incurred by UOL under the Autodesk/UOL Agreement. These expenses shall include,
but are not limited to those associated with writing the source code, purchasing
hardware and marketing the Autodesk Virtual Campus. UOL expressly agrees that it
will not, without the prior written consent of InternetU, use any of the funds
provided hereunder by InternetU to reimburse Autodesk for expenses related to
Autodesk's obligations under the Autodesk/UOL Agreement. InternetU acknowledges
and agrees that it shall have no direct ownership interest in any of the
hardware or other assets relating to the Autodesk Virtual Campus, except as set
forth in Section 5 below.
* [ ] CONFIDENTIAL TREATMENT REQUESTED; CERTAIN INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SEC.
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<PAGE>
2.6 Payment method. All payments required under this Section 2 shall
be made by wire transfer of immediately available funds to an account of UOL
pursuant to wire instructions delivered to InternetU by UOL at least three
business days in advance of a required payment. If such wire instructions are
not so given, InternetU may make that payment with a bank check mailed to the
offices of UOL.
3. INTERNETU FINANCING EFFORTS
3.1 Offers to Third Parties. UOL acknowledges that InternetU will
obtain some or all of the funding required by InternetU to make the payments to
UOL as set forth in this Agreement from third parties. InternetU agrees that it
will limit the persons from whom it will solicit funds for such purpose to
persons who are resellers of Autodesk products and services; provided, however,
that InternetU may make such solicitations to persons who qualify as "accredited
investors" (as that term is defined in Regulation D promulgated under the
Securities Act of 1933, as amended) and with whom principals or representatives
of InternetU have a prior relationship (or are affiliates of such persons), so
long as InternetU discloses the names and relationship of such persons to UOL
prior to any such solicitation and InternetU obtains from such persons written
representations with respect to the nature of the investment as more
particularly set forth in SCHEDULE 3.1 hereto.
3.2 Conduct of Financing Efforts. InternetU agrees that it will
conduct all of its financing efforts in compliance with all federal and
applicable state securities laws and that it will not hold itself out in any
way, directly or indirectly, as a broker, selling agent or finder for the sale
of UOL securities. InternetU agrees to provide to UOL in advance of their use,
copies of all soliciting material to be used by InternetU that includes
references to UOL, the Autodesk/UOL Agreement or this Agreement. UOL shall have
the right to approve all such materials prior to their use. InternetU
acknowledges and agrees that UOL must submit such materials to Autodesk for its
prior review and approval pursuant to the requirements of the Autodesk/UOL
Agreement and UOL agrees to use its best efforts to obtain such approvals.
3.3 Eligible Investors. To the extent the funding will be provided by
third party investors in InternetU, InternetU agrees that it will sell its
securities only to persons who are qualified "accredited investors" as that term
is defined in Regulation D promulgated by the Securities and Exchange Commission
under the Securities Act of 1933, as amended (the "1933 Act").
3.4 Benefits to Investors. UOL and InternetU agree to make available
to third party investors the following:
(a) Policy and Procedure Committee. The parties hereto
shall establish a Policy and Procedure Committee
which shall make recommendations as to desirable
policies and procedures for access to the Autodesk
Virtual Campus by vendors and resellers. The
Committee shall consist of six persons, three persons
appointed by UOL and three persons appointed by
InternetU, which persons may include investors.
5
<PAGE>
(b) Advertising on the Autodesk Virtual Campus. Each
investor shall be offered preferred advertising space
at a discount from advertising rates offered to
unrelated third parties, as follows: an investment of
$23,000 shall entitle the investor to a 25% discount
for one year; an investment of $46,000 shall entitle
the investor to a 50% discount for one year; an
investment of $69,000 shall entitle the investor to a
discount of 50% for the first year and 25% for the
next year; and an investment of $92,000 shall entitle
the investor to a 50% discount for two years. After
these periods, the investors will be given the right
to continue in the preferred advertising space at a
10% discount from the then full rate.
4. COMMON STOCK PURCHASE WARRANTS
4.1 Common Stock Purchase Warrants. UOL hereby agrees to issue to
InternetU warrants to purchase the Common Stock of UOL, par value $.01 per
share, pursuant to the following schedule:
Number of Shares Date of Issuance
---------------- -----------------------------
166,666 October 15, 1996
166,666 November 15, 1996
166,666 January 31, 1997
166,666 May 31, 1997
194,444 September 30, 1997
-------
861,108
4.2 Terms of Warrants. The exercise price for the Common Stock
underlying the warrants shall be $1.80 per share. Each warrant shall expire
three years after the Effective Date of this Agreement. Other terms and
conditions of the warrants issued pursuant to this Section 4 shall be
substantially as set forth in the form of Warrant set forth hereto as Exhibit A.
4.3 Effect of Missed or Partial Payment by InternetU. If a scheduled
payment by InternetU as required by Section 2.2 is not made when due, UOL shall
be under no obligation to issue the warrant of the corresponding date as set
forth above. If InternetU fails to make the full required payment as set forth
in Section 2.2, but makes a partial payment, UOL may, in its discretion, reduce
the number of shares subject to the corresponding warrant by the proportionate
amount of the deficient payment to the full amount of the payment due. A partial
payment of at least $[ ] by InternetU will not afford UOL with a right of
termination under Section 10.5.
4.4 Investor Representations. InternetU understands and acknowledges
that neither the warrants to be issued under this Agreement nor the shares of
Common Stock for which they may be exercised have been registered under the 1933
Act or the securities laws of any
* [ ] CONFIDENTIAL TREATMENT REQUESTED; CERTAIN INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SEC.
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<PAGE>
state in reliance on exemptions therefrom. InternetU agrees to make such
investor representations as may be reasonably required to facilitate reliance on
such exemptions from registration at the time the warrants are issued and at the
time the shares of Common Stock are issued pursuant to exercise of such warrants
unless such shares are subject to a then effective registration statement.
5. SHARING OF ROYALTIES AND OWNERSHIP OF CAMPUS
5.1 Royalties. Subject to the provisions of Section 2.4, InternetU
shall be entitled to [ ] percent ([ ]%) of the Net Revenues generated by
the license or sale of Courseware through the Autodesk Virtual Campus; [ ]
percent ([ ]%) of the Net Revenues from the sale of Products or Services on the
Autodesk Virtual Campus; and [ ] percent ([ ]%) of the Net Revenues from
fees derived from all other activities related to the Autodesk Virtual Campus.
In the event of the termination or expiration of the Autodesk/UOL Agreement and
any successor agreement such that Autodesk is no longer participating in the
Autodesk Virtual Campus, or in the event the revenues to be shared by Autodesk
from the Autodesk Virtual Campus are reduced, revenues that otherwise would have
been paid to Autodesk shall be allocated as follows: [ ]% of such funds shall
be expended for actual marketing efforts related specifically to promotion of
the Virtual Campus; [ ]% of such funds shall be retained by UOL; and of the
remaining [ ]% of the funds, UOL shall pay to InternetU that portion of the
[ ]% which is equivalent to the proportionate amount of the payments made by
InternetU pursuant to Section 2.1 above (i.e., if InternetU has made 100% of the
payments theretofore required by Section 2.1, it shall be entitled to 100% of
the [ ]%; if InternetU has made only 50% of the payments required by Section
2.1, it shall be entitled to only 50% of the [ ]% and the remaining 50% shall
be retained by UOL).
5.2 InternetU Marketing Contribution and UOL Ongoing Obligations.
InternetU agrees that at least [ ] percent ([ ]%) of the revenues to which it
is entitled under this Agreement will be used for marketing expenses
attributable to promoting the Autodesk Virtual Campus. InternetU and UOL
acknowledge that the actual allocation of InternetU's revenue towards marketing
may be greater than [ ] percent ([ ]%). UOL agrees that after the completion
of the development of the Autodesk Virtual Campus, UOL will use its best efforts
to maintain the existence of a Virtual Campus to serve the Autodesk market on
the Internet, capable of performing transactions and, for the term of the
Autodesk/UOL Agreement, UOL will fulfill its marketing obligations as required
by the Autodesk/UOL Agreement.
5.3 Source Code for Autodesk Virtual Campus. UOL and InternetU will
jointly own the source code for the Autodesk Virtual Campus; unless such
ownership interest has been reduced as the result of one or more missed
milestones by UOL or missed or partial milestone payments by InternetU,
InternetU shall own an equal share of such source code. The source code shall be
placed in escrow pursuant to the terms of an escrow agreement in substantially
the form attached hereto as Exhibit B. InternetU agrees to pay all expenses to
initiate such escrow and all expenses to maintain such escrow, provided that UOL
will reimburse InternetU for half the expenses up to a maximum cost to UOL of
$1,550 the first year and $1,050 each year thereafter. Neither party shall be
entitled to license, transfer, sell or otherwise encumber the ownership rights
to the source code, or enter into negotiations concerning same, without the
prior written consent of the other party. InternetU expressly acknowledges and
agrees that its interest in the Autodesk Virtual Campus source code is limited
to the exploitation of such
* [ ] CONFIDENTIAL TREATMENT REQUESTED; CERTAIN INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SEC.
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source code in the market served by Autodesk. Notwithstanding any other
provisions of this Agreement, InternetU shall have no rights whatsoever to
exploitation of the generic platforms and related software created, acquired or
otherwise utilized by UOL in connection with the Autodesk Virtual Campus, it
being expressly understood and agreed that, as between UOL and InternetU, such
platforms and related software are the sole and exclusive property of UOL. UOL
expressly agrees that InternetU shall be under no obligation to pay to UOL any
additional royalties or fees in connection with the platforms and related
software which are the sole and exclusive property of UOL but which are included
in the Autodesk Virtual Campus so long as the use by InternetU is limited to the
Autodesk Virtual Campus. Notwithstanding any other provision of this Agreement,
UOL acknowledges that InternetU shall have the right to develop independently
other campuses, and engage in other activities, including without limitation
activities similar to those contemplated by this Agreement, with other parties,
so long as InternetU is not using UOL confidential or proprietary information or
technology.
6. PAYMENTS, BOOKS, AND RECORDS
6.1 Payment Method. Payments to InternetU of royalties under Section 5
above shall be made on a monthly basis in arrears.
6.2 Records; Inspection. UOL shall keep complete, true, and accurate
books of account and records for the purpose of determining the royalty amounts
payable under this Agreement. Such books and records shall be kept at UOL's
principal place of business. InternetU may inspect such books and records to
confirm the royalty payments paid and payable to InternetU under this Agreement.
Such inspections may be done by InternetU's independent certified public
accountant at InternetU's sole cost and expense no more than twice each calendar
year, at reasonable times as mutually agreed. The certified public accountant
will be obliged to execute a reasonable confidentiality agreement on terms
consistent with Article 8 hereof prior to commencing any such inspection. In the
event an inspection reveals a variation or error producing an increase exceeding
ten percent (10%) of the amount stated as having been due by UOL for any period
covered by the inspection, all costs relating to the inspection for such period
and any unpaid amounts that are discovered shall be paid by UOL. InternetU's
independent certified public accountant will report to InternetU as to whether
or not there has been an underpayment and, if so, the amount thereof. No
additional information discerned by the certified public accountant during the
course of their inspection may be disclosed to InternetU.
7. REPRESENTATIONS AND WARRANTIES
7.1 InternetU.
(a) Organization; Good Standing; Corporate Power. InternetU is
a corporation duly organized, validly existing and in good standing under the
laws of the State of New Jersey, has all requisite corporate power and authority
to own, lease and operate its properties and to carry on its business as now
being conducted, to execute and deliver this Agreement, to perform its
obligations hereunder and to consummate the transactions contemplated hereby.
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(b) Authority. The execution, delivery and performance of this
Agreement has been duly and validly authorized by all necessary corporate action
on the part of InternetU, and this Agreement will be, upon such execution and
delivery, duly executed and will constitute legal, valid and binding obligations
of InternetU, enforceable against InternetU in accordance with their respective
terms.
(c) No Conflicts. The execution, delivery and performance by
InternetU of this Agreement does not and will not violate, conflict with or
result in the breach of any agreement, instrument, judgment, judicial decree or
order, or any provision of federal or state law to which InternetU is a party or
by which InternetU or any of its assets are bound.
(d) No Consent. No consent or approval by, or any notification
of or filing with, any person (governmental or private) is required in
connection with the execution, delivery and performance by InternetU of this
Agreement.
(e) Absence of Litigation. There are no judicial,
administrative or other legal proceedings or governmental investigations pending
against InternetU or its principals with respect to the execution or performance
of InternetU's obligations under this Agreement or involving its business or
assets and, to the best of InternetU's knowledge, there are no such proceedings
or investigations threatened.
(f) Compliance with Laws. InternetU has complied in all
material respects with all laws (statutory or otherwise), rules, regulations,
ordinances, orders, writs, injunctions, judgments, decrees and awards of all
governmental and regulatory authorities (collectively the "Laws") relating to
the operation of its business and assets. InternetU has not received any
notification of any asserted present or past failure of InternetU so to comply
with any Law and no such violation of any Law exists.
7.2 UOL.
(a) Organization; Good Standing; Corporate Power. UOL is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, has all requisite corporate power and authority to
own, lease and operate its properties and to carry on its business as now being
conducted, to execute and deliver this Agreement, to perform its obligations
hereunder and to consummate the transactions contemplated hereby. UOL represents
and warrants that it has provided to InternetU a true and complete copy of UOL's
certificate of incorporation and bylaws, each in effect on the date hereof.
(b) Authority. The execution, delivery and performance of this
Agreement, including the issuance of warrants as contemplated by Article 4, has
been duly and validly authorized by all necessary corporate action on the part
of UOL, and this Agreement will be, upon such execution and delivery, duly
executed and will constitute legal, valid and binding obligations of UOL,
enforceable against UOL in accordance with their respective terms.
(c) No Conflicts. The execution, delivery and performance by
UOL is this Agreement does not and will not violate, conflict with or result in
the breach of any agreement, instrument, judgment, judicial decree or order, or
any provision of federal or state law to which UOL is a party or by which UOL or
any of its assets are bound.
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(d) No Consent. No consent or approval by, or any notification
of or filing with, any person (governmental or private) is required in
connection with the execution, delivery and performance by UOL of this
Agreement.
(e) Intangible Assets. To the best of UOL's knowledge, UOL
owns or possesses adequate rights to develop, manufacture, license, provide and
market its products and services using all patents, patent applications,
trademarks, service marks, copyrights, trade secrets, confidential information,
processes and formulations used or proposed to be used in the conduct of its
business related to this Agreement (collectively the "Intangibles"); to the best
of UOL's knowledge, UOL has not infringed and is not infringing upon the rights
of others with respect to Intangibles; and UOL has not received any notice of
conflict with the asserted rights of others with respect to Intangibles which
could, singly or in the aggregate, materially adversely affect its business as
presently conducted or the prospects, financial condition or results of
operations of UOL, and UOL knows of no basis therefor; and to the best of UOL's
knowledge, no others have infringed upon the Intangibles of UOL.
(f) Absence of Litigation. There are no judicial,
administrative or other legal proceedings or governmental investigations pending
against UOL with respect to the right of UOL to enter into or perform its
obligations under this Agreement or involving its business or assets, and, to
the best of UOL's knowledge, there are no such proceedings or investigations
threatened.
(g) Compliance with Laws. UOL has complied in all material
respects with all laws (statutory or otherwise), rules, regulations, ordinances,
orders, writs, injunctions, judgments, decrees and awards of all governmental
and regulatory authorities (collectively the "Laws") relating to the operation
of its business and assets and the development, marketing and operation of the
Autodesk Virtual Campus. UOL has not received any notification of any asserted
present or past failure of UOL so to comply with any Law and no such violation
of any Law exists.
(h) Financial Statements. Attached hereto as Exhibit C are the
draft audited balance sheets of UOL as of December 31, 1995 and 1994, and the
accompanying draft Report of Independent Auditors, as well as the draft
quarterly financials for each of the first two quarters of fiscal 1996. Such
financial statements fairly present the financial condition of UOL at December
31, 1995 and 1994, respectively, and, in respect of the quarterly reports, at
March 31, 1996 and June 30, 1996, and were prepared in accordance with generally
accepted accounting principles.
(i) No Adverse Changes. Since December 31, 1995, there has not
been any material adverse change in the financial condition, assets,
liabilities, business or resulting operations of UOL.
(j) Taxes. UOL has filed all federal, state and local taxes
and other returns and reports which were required to be filed in respect of all
taxes, levies, license, registration and permit fees, charges or withholding of
any nature whatsoever, and has paid all applicable taxes, levies and assessments
which are due; and except for taxes which are not yet due and payable, there are
no taxes, levies or assessments which will be payable by UOL in respect of any
period prior to the date hereof; UOL is not in default in the payment of any
taxes due
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or payable or of any assessments received in respect thereof; and there are no
unpaid assessments or proposals for additional federal, state or local taxes for
which UOL does not have adequate reserves, nor does UOL know of any basis
therefor.
(k) Assets. The assets and properties of UOL include all
assets and properties which are or will be material to the conduct of UOL's
business as presently contemplated.
(l) Capitalization, etc. As of the date hereof, UOL's
authorized capitalization consists of (a) 36,000,000 shares of Common Stock, par
value $0.01 per share, of which 9,777,524 shares are issued and outstanding and
(b) 34,000,000 shares of Preferred Stock, par value $0.01 per share, of which
12,000,000 shares have been designated "Series A Preferred Stock" (and there are
now outstanding 4,742,406 of such Series A Preferred Stock), 6,000,000 shares
have been designated "Series B Preferred Stock" (and there are now none
outstanding) and 6,000,000 shares have been designated "Series B-1 Preferred
Stock" (and there are now outstanding 2,187,500 of such Series B-1 Preferred
Stock). The Common Stock issuable upon exercise of the Warrants to be acquired
pursuant to this agreement have been duly and validly reserved for issuance and,
upon issuance, will be duly and validly issued, fully paid and non-assessable
and will be free of restrictions on transfer, except pursuant to applicable
federal and state securities laws. All corporate action on the part of UOL and
stockholders thereof, if necessary, for the authorization, execution and
delivery of this agreement and the Warrants contemplated hereby, and the
authorization, issuance or reservation for issuance of such Warrants and the
Common Stock issuable upon exercise thereof has been taken. Except as set forth
on SCHEDULE 7.2 or as contemplated by the Warrants issuable hereunder, there are
no outstanding options, warrants, rights (including conversion or pre-emptive
rights) or agreements for the purchase or acquisition from UOL of any shares of
its capital stock or any rights which permit or allow a holder of securities of
UOL to cause UOL to file a registration statement or which permit or allow the
holder thereof to include securities of UOL in a registration statement filed by
UOL.
7.3 Disclaimer of Warranties. EXCEPT AS EXPRESSLY STATED HEREIN,
NEITHER PARTY HAS MADE ANY WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED BY
OPERATION OF LAW OR OTHERWISE, CONCERNING THE PRODUCT TO BE DEVELOPED BY UOL,
THE SCOPE OR DURATION OF ANY MARKETING EFFORTS THAT THE PARTIES MAY UNDERTAKE,
OR THE SUCCESS OF SUCH MARKETING EFFORT. NEITHER PARTY HAS RELIED ON ANY EXPRESS
OR IMPLIED REPRESENTATION OF THE OTHER PARTY, WRITTEN OR ORAL, AS AN INDUCEMENT
TO ENTERING INTO THIS AGREEMENT EXCEPT AS SPECIFICALLY SET FORTH IN THIS
AGREEMENT.
8. CONFIDENTIALITY
8.1 ______ Confidential Information. Except as expressly provided
herein, the parties agree that, for the term of this Agreement and for two (2)
years thereafter, the receiving party shall keep completely confidential and
shall not publish or otherwise disclose and shall not use for any purpose except
for the purposes contemplated by this Agreement, any information that is marked
or noted as confidential and furnished to it by the disclosing party hereto
pursuant to this Agreement, except that to the extent that it can be established
by the receiving party by
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competent proof that such confidential information (a) was already known to the
receiving party, other than under an obligation of confidentiality, at the time
of disclosure, as evidenced by its written records; (b) was generally available
to the public or otherwise part of the public domain at the time of its
disclosure to the receiving party; (c) became generally available to the public
or otherwise part of the public domain after its disclosure and other than
through any act or omission of the receiving party in breach of this Agreement;
(d) was independently developed by the receiving party as demonstrated by
documented evidence prepared contemporaneously with such independent
development; or (e) was subsequently lawfully disclosed to the receiving party
by a person other than a party hereto.
8.2 Permitted Use and Disclosures. Each party hereto may use or
disclose information disclosed to it by the other party to the extent such use
or disclosure is reasonably necessary in prosecuting or defending litigation,
complying with applicable governmental regulations or otherwise submitting
information to tax or other government authorities, or otherwise exercising its
rights hereunder; provided that if a party is required to make any such
disclosure of another party's confidential information, other than pursuant to a
confidentiality agreement, it will give reasonable advance notice to the latter
party of such disclosure and will use its best efforts to secure confidential
treatment of such information prior to its disclosure (whether through
protective orders or otherwise).
8.3 Public Disclosure. Except as otherwise required by law, neither
party shall issue a press release or make any other public oral or written
disclosure of the terms of this Agreement or the results of the development and
funding project contemplated hereby without prior approval of the other party,
it being expressly acknowledged that InternetU will be seeking UOL's prior
approval with respect to certain of such information in disclosure to be
provided to potential investors.
9. INDEMNIFICATION
9.1 Indemnification of InternetU. UOL shall indemnify, defend and hold
harmless InternetU and the directors, officers, employees, agents and counsel of
InternetU and the successors and assigns of any of the foregoing (the "InternetU
Indemnitees"), from and against any and all liabilities, damages, losses, costs
or expenses (including reasonable attorneys' and professional fees and expenses
and other expenses of litigation and arbitration) resulting from a claim, suit
or proceeding brought by a third party against an InternetU Indemnitee, arising
from or occurring (i) as a result of a breach of any of UOL's representations
and warranties as set forth herein, or (ii) as a result of a breach by UOL of
any of its obligations hereunder.
9.2 Indemnification of UOL. InternetU shall indemnify, defend and hold
harmless UOL and the directors, officers, employees, agents and counsel of UOL
and the successors and assigns of any of the foregoing (the "UOL Indemnitees"),
from and against any and all liabilities, damages, losses, costs or expenses
(including reasonable attorneys' and professional fees and expenses and other
expenses of litigation and arbitration) resulting from a claim, suit or
proceeding brought by a third party against a UOL Indemnitee, arising from or
occurring (i) as a result of a breach of any of InternetU's representations and
warranties of InternetU set forth herein, or (ii) as a result of a breach of any
of InternetU's obligations hereunder, or (iii) as a result of InternetU's
financing efforts contemplated by Section 3 above, provided, however, that
InternetU shall have no obligation to indemnify the UOL Indemnitees for claims
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based on information provided by UOL or Autodesk and included in information
provided by InternetU to potential investors.
9.3 Procedure. A party (the "Indemnitee") that intends to claim
indemnification under this Section 9 shall promptly notify the other party (the
"Indemnitor") in writing of any loss, claim, damage, liability, or action in
respect of which the Indemnitee or any of its directors, officers, employees, or
agents intend to claim such indemnification, and the Indemnitor shall have the
right to participate in, and, to the extent the Indemnitor so desires, to assume
the defense thereof. The indemnity agreement in this Section 9 shall not apply
to amounts paid in the settlement of any loss, claim, damage, liability or
action if such settlement is effected without the consent of the Indemnitor,
which consent shall not be withheld or delayed unreasonably. The failure to
deliver written notice to the Indemnitor within a reasonable time after the
commencement of any such action, if prejudicial to its ability to defend such
action, shall relieve such Indemnitor of any liability to the Indemnitee under
Section 9. At the Indemnitor's request, the Indemnitee under this Section 9, its
employees and agents, shall cooperate fully with the Indemnitor and its legal
representatives in the investigation of any action, claim, or liability covered
by this indemnification and provide full information with respect thereto.
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10. TERMINATION
10.1 Term. This Agreement shall commence as of the Effective Date and
shall continue until terminated pursuant to this Section 10.
10.2 Termination of Autodesk/UOL Agreement.
(a) Termination for Convenience. In the event of the
termination (or nonrenewal) of the Autodesk/UOL Agreement, either party may give
the other party written notice of its intention to terminate this Agreement for
any reason or no reason (hereafter referred to as a "Termination for
Convenience"), which termination shall take effect ten days after the date of
such written notice.
(b) Effect of Termination for Convenience. Upon a Termination
for Convenience, the non-terminating party shall have the right to exploit the
source code in respect of the Autodesk market without the further involvement of
the terminating party and revenues otherwise payable to the terminating party
from merchants offering Products and Services on the Autodesk Virtual Campus at
the time of the Termination for Convenience, shall be reduced by one-half.
Revenues thereafter generated in respect of additional merchants offering
Products or Services on the Virtual Campus shall be the sole property of the
non-terminating party. The source code shall then be released to the
non-terminating party subject to the terms of the escrow agreement. The
terminating party in a Termination for Convenience agrees not to seek to
restrict the use of the source code on and after the effective date of the
Termination for Convenience.
10.3 Breach.
(a) Termination for Breach. Either party to this Agreement may
terminate this Agreement in the event the other party shall have materially
breached or defaulted in the performance of any of its material obligations
hereunder, and such default shall have continued for thirty (30) days after
written notice thereof was provided to the breaching party by the non-breaching
party. Any termination shall become effective at the end of such thirty (30)
days unless the breaching party (or any other party acting on its behalf), has
cured any such breach or default prior to the expiration of the thirty (30) day
period; provided, however, if either party receives notification from the other
of a material breach and the party alleged to be in breach notifies the other
that it disputes the asserted material breach, then the matter shall be
submitted to arbitration pursuant to Section 12.2 of this Agreement. In such
event, no termination shall become effective unless the arbitrators have
determined that a material breach occurred and the breaching party fails to cure
such breach within thirty (30) days as applicable after the conclusion of such
an arbitration proceeding. The parties hereto expressly acknowledge and agree
that this Section 10.3 shall not apply to Section 2.2; breach of Section 2.2 by
UOL shall be governed by Section 2.3 and breach of Section 2.2 by InternetU
shall be governed by Section 2.4 (see Section 10.5 below). The parties hereto
expressly agree that breach by either party of its obligations under Section 5.2
shall be deemed material and may give rise to termination by the non-breaching
party if not cured as herein provided.
(b) Effect of Termination for Breach. The parties expressly
agree that the provisions of Section 10.2(b) above ("Effect of Termination for
Convenience") shall apply
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in the event of a termination for breach pursuant to this Section 10.3 and the
non-breaching party shall have the rights of the non-terminating party as set
forth in Section 10.2(b).
10.4 Termination for Insolvency. If a voluntary or involuntary
proceeding by or against a party are instituted in bankruptcy under any
insolvency law, or a receiver or custodian is appointed for such party, or
proceedings are instituted by or against such party for corporate reorganization
or the dissolution of such party, which proceedings, if involuntary, shall not
have been dismissed within sixty (60) days after the date of filing, or if such
party makes an assignment for the benefit of creditors, or substantially all of
the assets of such party are seized or attached and not released within sixty
(60) days thereafter, the other party may immediately terminate this Agreement
effective upon notice of such termination.
10.5 Permissive Termination.
(a) In the event UOL fails to meet a milestone as set forth in
Section 2.3 and InternetU is entitled to terminate this Agreement as provided
therein, InternetU may terminate this Agreement upon the giving of written
notice thereof. The source code may then be released to InternetU subject to the
terms of the escrow agreement.
(b) In the event InternetU fails to make all or at least
$[ ] of any three required payments as set forth in Section 2.2, UOL may
terminate this Agreement as provided in Section 2.4. Such termination shall be
effective immediately upon the giving of written notice thereof and there shall
be no cure period. The source code will then be released to UOL subject to the
terms of the escrow agreement.
10.6 Other Effects of Termination.
(a) In the event of termination of this Agreement by the
mutual agreement of the parties, the parties will continue to jointly own the
source code (in such ownership amounts as provided in this Agreement) and may
pursue exploitation of such source code pursuant to such other agreements
between the parties as they may determine, consistent with the provisions of
Section 5. Only Sections 8, 9, 12.2 and 12.3 of this Agreement shall survive
such termination.
(b) In the event of termination of this Agreement pursuant to
Section 10.2 or Section 10.3 above, Sections 6, 8, 9, 12.2 and 12.3 of this
Agreement shall survive such termination.
(c) In the event of termination pursuant to Section 10.4, the
provisions of Sections 5.1 and 5.3 (as modified by Sections 2.3 and 2.4) and
Sections 6, 8, 9, 12.2 and 12.3 of this Agreement shall survive such termination
and the terminating party shall have the right, subject to applicable law, to
use the source code in a manner consistent with this Agreement and subject to
the Autodesk/UOL Agreement. If InternetU is the terminating party, the source
code may then be released from the escrow to InternetU, subject to the terms of
the escrow agreement.
(d) In the event of termination pursuant to Section 10.5, only
the provisions of Sections 5.1 and 5.3 (as modified by Sections 2.3 and 2.4) and
Sections 6, 8, 9, 12.2 and 12.3 of this Agreement shall survive.
* [ ] CONFIDENTIAL TREATMENT REQUESTED; CERTAIN INFORMATION OMITTED AND
FILED SEPARATELY WITH THE SEC.
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10.7 Accrued Obligations. Termination of this Agreement for any reason
shall not release any party hereto from any liability which, at the time of such
termination, has already accrued to the other party or which is attributable to
such termination, nor shall it preclude either party from pursuing all rights
and remedies it may have hereunder or at law or in equity with respect to any
breach of this Agreement.
10.8 Return of Confidential Information. Upon any termination of this
agreement, InternetU and UOL shall promptly return to the other party all
confidential information received from the other party (except one copy which
may be retained for archival purposes), and shall no longer be entitled to use
any such confidential information for any purpose.
10.9 "Release Conditions". Termination of this Agreement pursuant to
Section 10.2, Section 10.3, 10.4 or 10.5 shall give rise to the release from
escrow of the source code as provided in such Sections. Each such termination
shall be a "Release Condition" as contemplated under the escrow agreement.
11. UOL INITIAL PUBLIC OFFERING
11.1 Impact of UOL Initial Public Offering. In the event UOL files with
the Securities and Exchange Commission a Registration Statement for the initial
public offering of its Common Stock (an "IPO") in 1996, payments under Section 2
shall be accelerated pursuant to the following terms:
(a) Half of the remaining payments required under Section 2
shall be due and payable to UOL upon the consummation of the IPO; and
(b) The remaining half of the payment amounts will be due and
payable four months after the consummation of the IPO.
11.2 Acceleration of Warrant Issuances. If and when payments are
accelerated, the same acceleration shall apply to the issuance of the
corresponding warrants contemplated by Section 3.
12. MISCELLANEOUS
12.1 Governing Law. This Agreement and any dispute arising from the
performance or breach hereof shall be governed by and construed and enforced in
accordance with the laws of the state of Virginia, without reference to
conflicts of laws principles.
12.2 Arbitration. Any dispute under this Agreement which is not settled
by mutual consent shall be finally settled by binding arbitration, conducted in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association by three (3) arbitrators appointed in accordance with said rules.
The arbitration shall be held in the location most convenient to the parties and
the subject matter of the dispute. The costs of the arbitration, including
administrative and arbitrator's fees, and attorneys' and witness' fees shall be
borne by the losing party. The decision of the panel shall be rendered in
writing. A disputed
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performance or suspended performance pending the resolution of arbitration must
be completed within thirty (30) days following the final decision of the
arbitrators or within such other reasonable period as the arbitrators determine
in their written decision. Any arbitration subject to this Section shall be
completed within six (6) months from the filing of notice of a request for such
arbitration.
12.3 Financial Reports. UOL covenants and agrees that for as long as
InternetU holds securities of UOL, commencing on the date hereof:
(a) it shall furnish to InternetU as soon as practicable, and
in any event within 90 days after the end of each fiscal year of UOL, an annual
report of UOL, including an audited consolidated balance sheet as at the end of
such fiscal year and audited consolidated statements of income, stockholders'
equity and changes in financial position, together with notes thereto, for such
fiscal year, setting forth in comparative form corresponding figures for the
preceding fiscal year, all of which shall be correct and complete and shall
fairly present the financial position of UOL and any subsidiaries at the date
thereof and the results of their operations for the period then ended. The
financial statements shall be accompanied by a report thereon of nationally
recognized independent certified public accountants to the effect that such
financial statements have been prepared in accordance with generally accepted
accounting principles.
(b) it shall furnish to InternetU as soon as practicable and
in any event within 45 days after the end of each fiscal quarter, the quarterly
report of UOL and any subsidiaries, consisting of an unaudited consolidated
balance sheet as at the end of such fiscal quarter and unaudited consolidated
statements of income, stockholders' equity and changes in financial position,
together with notes thereto, for such fiscal quarter and for the fiscal year to
date, setting forth in each case in comparative form the corresponding figures
for the preceding year. All such reports shall be certified to by the chief
financial officer of UOL to be correct and complete, to fairly present the
financial condition of UOL and any subsidiaries as of the date thereof and the
results of their operations for the period then ended and to have been prepared
in accordance with generally accepted accounting principles consistently
applied, except for normal year-end adjustments.
12.4 Waiver. Neither party may waive or release any of its rights or
interests in this Agreement except in writing. The failure of either party to
assert a right hereunder or to insist upon compliance with any term or condition
of this Agreement shall not constitute a waiver of the right or excuse a similar
subsequent failure to perform any such term or condition.
12.5 Assignment. The rights, obligations, and options granted pursuant
to this Agreement shall not be assignable by either party to any third party
without prior written consent of the non-assigning party; provided, however,
that either party may assign its rights and delegate its duties hereunder to its
successor in interest by way of a reincorporation pursuant to the laws of the
state of its reincorporation. In addition, InternetU shall be permitted to make
distributions in kind of UOL securities to the stockholders of InternetU pro
rata in accordance with their ownership interests therein, provided that all
transfer restrictions applicable to InternetU shall apply to the transferees of
such securities.
12.6 Independent Contractors. The relationship of the parties hereto is
that of independent contractors. The parties are not deemed to be agents,
partners, or joint venturers
17
<PAGE>
of the others for any purpose as a result of this Agreement or the transactions
contemplated thereby.
12.7 Notices. All notices, requests and other communications hereunder
shall be in writing and shall be personally delivered or sent by telecopy or
other electronic facsimile transmission or by registered or certified mail,
return receipt requested, postage prepaid, in each case to the respective
address specified below, or such other address as may be specified in writing to
the other parties hereto:
InternetU: InternetU, Inc.
648 Winthorp Road
Teaneck, New Jersey 07866
UOL: University Online, Inc.
105 West Broad Street, Suite 301
Falls Church, Virginia 22046
12.8 Severability. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall otherwise continue in full force and
effect without said provision.
12.9 Force Majeure. Non-performance of any party shall be excused to
the extent that performance is rendered impossible by strike, fire, earthquake,
flood, governmental acts or orders or restrictions, failure of suppliers, or any
other reason where failure to perform is beyond the reasonable control and not
caused by the negligence, intentional conduct or misconduct of the
non-performing party.
12.10 Complete Agreement. This Agreement, together with all Exhibits
hereto, constitutes the entire agreement, both written and oral, between the
parties with respect to the subject matter hereof, and that all prior agreements
respecting the subject matter hereof, either written or oral, expressed or
implied, are merged and canceled, and are null and void and of no effect. No
amendment or changes hereof or addition hereto shall be effective or binding on
either of the parties hereto unless reduced to writing and executed by the
respective duly authorized representatives of InternetU and UOL.
12.11 Headings. The captions to the Sections and paragraphs hereof are
not a part of this Agreement, but are included merely for convenience of
reference only and shall not affect its meaning or interpretation.
12.12 Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed to be an original and both together shall be
deemed to be one and the same agreements.
IN WITNESS WHEREOF each of the parties hereto has caused this Agreement
to be duly executed by their authorized representatives and delivered in
duplicate as of the date first written above.
InternetU, Inc. University Online, Inc.
18
<PAGE>
By: ______________________________ By: __________________________________
Name: ____________________________ Name: ________________________________
Title: ___________________________ Title: _______________________________
19
EXHIBIT 11.1
UOL PUBLISHING, INC.
STATEMENT RE: COMPUTATION OF PER SHARE LOSS
<TABLE>
<CAPTION>
Year ended December 31, Six months ended
1993 1994 1995 1995 1996
--------- --------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Net loss per share:
Weighted average shares of common stock
outstanding..................................... 384,370 420,143 776,882 764,213 791,507
Shares of Series A and Series B Preferred Stock
and Preferred Stock Dividends issued during
the twelve months period prior to the initial
filing of the S-1 (using the treasury stock
method)......................................... 191,646 191,646 191,646 191,646 191,646
Shares of Common Stock issued during the twelve
month period prior to the initial filing of the
S-1 (using the treasury stock method)........... 3,469 3,469 3,469 3,469 3,469
Common equivalent shares from options, warrants
and convertible debt issued during the twelve
month period prior to the initial filing of the
S-1 (using the treasury stock method)........... 84,055 84,055 84,055 84,055 84,055
--------- --------- ----------- ---------- -----------
Total........................................... 663,540 699,313 1,056,052 1,043,383 1,070,677
========= ========= =========== ========== ===========
Net loss ....................................... $(413,503) $(687,258) $(2,239,641) $ (682,011) $(1,144,075)
Accrued dividends to preferred stockholders .... -- -- (174,830) (55,940) (127,710)
--------- --------- ----------- ---------- -----------
Net loss attributable to common stockholders .. $(413,503) $(687,258 $(2,414,471) $ (737,951) $(1,271,785)
--------- --------- ----------- ---------- -----------
Net loss per share.............................. $ (0.62) $ (0.98) $ (2.29) $ (0.71) $ (1.19)
========= ========= =========== ========== ===========
Pro forma net loss per share:
Weighted average shares of common stock
outstanding:.................................... -- -- 776,882 -- 791,508
Shares of Series A and Series B Preferred Stock
and Preferred Stock Dividend issued during the
twelve month period prior the the initial filing
of the S-1 (using the treasury stock method)..... -- -- 191,646 -- 191,646
Shares of Common Stock issued during the twelve
month period prior to the initial filing of the
S-1 (using the treasury stock method)........... -- -- 3,469 -- 3,469
Common equivalent shares from options, warrants
and convertible debt issued during the twelve
month period prior to the initial filing of the
S-1 (using the treasury stock method)........... -- -- 84,055 -- 84,055
Common equivalent shares from preferred stock
converted upon completion of offering........... -- -- 286,536 -- 398,751
--------- --------- ----------- ---------- -----------
Total........................................... -- -- 1,342,588 -- 1,469,429
========= ========= =========== ========== ===========
Net loss........................................ -- -- $(2,239,641) -- $(1,144,075)
Accrued dividends to preferred stockholders .... -- -- (174,830) -- (127,710)
--------- --------- ----------- ---------- -----------
Net loss attributable to common stockholders ... -- -- $(2,414,471) -- $(1,271,785)
========= ========= =========== ========== ===========
Net loss per share.............................. -- -- $ (1.80) -- $ (0.87)
========= ========= =========== ========== ===========
</TABLE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
Cognitive Training Associates, Inc., a Texas corporation.
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports of UOL Publishing, Inc. (formerly University Online,
Inc.) dated July 10, 1996 (except Note 13, as to which the date is September
__, 1996), in the Registration Statement (Form S-1 No. 333________ ) and
related Prospectus of UOL Publishing, Inc. for the registration of 1,334,000
shares of its common stock.
Vienna, Virginia
September , 1996
Ernst & Young LLP
- --------------------------------------------------------------------------------
The foregoing consent is in the form that will be signed upon the completion of
the restatement of the capital amounts for the reverse stock split as described
in Note 13 to the financial statements.
Vienna, Virginia
September 16, 1996
/s/ Ernst & Young LLP
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report of Cognitive Training Associates, Inc. dated July 17,
1996 (except Note 9, as to which the date is August 1, 1996), in the UOL
Publishing, Inc. Registration Statement (Form S-1 No. 333________ ) and
related Prospectus of UOL Publishing, Inc. (formerly University Online, Inc.)
for the registration of 1,334,000 shares of its common stock.
Vienna, Virginia
September , 1996
Ernst & Young LLP
- --------------------------------------------------------------------------------
The foregoing consent is in the form that will be signed upon the completion of
the restatement of the capital amounts in Note 9 for the reverse stock split as
described in Note 13 to UOL Publishing, Inc.'s financial statements.
Vienna, Virginia
September 16, 1996
/s/ Ernst & Young LLP
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report of CYBIS (a division of Control Data Systems, Inc.)
dated August 23, 1996, in UOL Publishing, Inc.'s Registration Statement (Form
S-1 No. 333________) and related Prospectus of UOL Publishing, Inc. for the
registration of 1,334,000 shares of its common stock.
Vienna, Virginia
September 16, 1996
/s/ Ernst & Young LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS AS OF DECEMBER 31, 1995 AND JUNE 30, 1996 AND FOR
THE YEAR ENDED DECEMBER 31, 1995 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
IS REFERENCED TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 JUN-30-1996
<EXCHANGE-RATE> 1 1
<CASH> 104,178 190,951
<SECURITIES> 0 0
<RECEIVABLES> 374,262 375,157
<ALLOWANCES> 19,950 30,500
<INVENTORY> 0 0
<CURRENT-ASSETS> 484,540 560,896
<PP&E> 197,093 205,905
<DEPRECIATION> 68,960 87,394
<TOTAL-ASSETS> 612,673 679,407
<CURRENT-LIABILITIES> 1,887,002 2,562,813
<BONDS> 0 0
0 0
3,842 4,048
<COMMON> 7,890 7,942
<OTHER-SE> (1,286,061) (1,895,396)
<TOTAL-LIABILITY-AND-EQUITY> 612,673 679,407
<SALES> 547,679 231,747
<TOTAL-REVENUES> 547,679 231,747
<CGS> 93,630 45,976
<TOTAL-COSTS> 93,630 45,976
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (75,570) (33,388)
<INCOME-PRETAX> (2,239,641) (1,144,075)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,239,641) (1,144,075)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,239,641) (1,144,075)
<EPS-PRIMARY> (2.29) (1.19)
<EPS-DILUTED> 0 0
</TABLE>
