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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 1998 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1937
For the transition period from _________ to _________
COMMISSION FILE NUMBER: 000-21665
SIMULATIONS PLUS, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA
(State or other jurisdiction of Incorporation or Organization)
95-4595609
(I.R.S. Employer identification No.)
1220 WEST AVENUE J
LANCASTER, CA 93534
(Address of principal executive offices including zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (805) 723-7723
40015 SIERRA HIGHWAY, B-110
PALMDALE, CA 93550
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The issuer's revenues for the fiscal year ending August 31, 1998 were
approximately $2,645,000.
As of December 15, 1998, the aggregate market value of the voting stock
held by non-affiliates of the issuer was approximately $1,725,000 based upon the
average closing bid and asked price of such stock on such date.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement relating to the
1998 Annual Meeting of shareholders are incorporated herein by reference into
Part III.
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SIMULATIONS PLUS, INC.
FORM 10-KSB
FOR THE FISCAL YEAR ENDED AUGUST 31, 1998
Table of Contents
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PART I.
Item 1. Description of Business 1
Item 2. Description of Property 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II.
Item 5. Market for Common Stock and Related Stockholder Matters 14
Item 6. Management's Discussion and Analysis or Plan of Operation 14
Item 7. Financial Statements 21
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 40
PART III.
Item 9. Directors, Executive Officers, Promoters and Control Persons:
Compliance with Section 16(a) of the Exchange Act 41
Item 10. Executive Compensation 42
Item 11. Security Ownership of Certain Beneficial Owners and Management 43
Item 12. Certain Relationships and Related Transactions 43
Item 13. Exhibits and Reports on Form 8-K 44
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Forward-Looking Statements
In addition to historical information, this Annual Report contains
forward-looking statements. The forward-looking statements contained herein are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those reflected in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in the section entitled "Management's Discussion and Analysis or
Plan of Operation." Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. Simulations Plus, Inc. undertakes no obligation to publicly revise
these forward-looking statements, or to reflect events or circumstances that
arise after the date hereof. Readers should carefully review the risk factors
described in other documents the Company files from time to time with the
Securities and Exchange Commission.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Simulations Plus, Inc. (the "Company" or "Simulations Plus") and its
wholly owned subsidiary, Words+, Inc. ("Words+") produce two types of products:
(1) Simulations Plus, formed in 1996, develops and produces simulation software
for use in pharmaceutical research and for education. The Company is currently
producing and developing simulation software for pharmaceutical research and for
science courses for the high school, community college, and university markets.
The Company also provides contract research services to the pharmaceutical
industry, and (2) Words+, founded in 1981, produces computer software and
specialized hardware for use by persons with disabilities, as well as a personal
productivity software program for the retail market.
DESCRIPTION OF SIMULATION SOFTWARE
The type of simulation software under development by the Company is based
on the equations of chemistry and physics that describe or "model" the behavior
of things in the real world. The Company's GastroPlus(TM) pharmaceutical
software simulates the movement, dissolution, absorption, and clearance of drug
compounds in the human gastrointestinal tract. The Company's science experiment
simulations incorporate the equations of chemistry and physics for each
experiment (optics, electrical circuits, gravity, ideal gases, acid/base
titration, etc.). For example, a simulation of a ball in a gravity experiment
might include the acceleration and deceleration of the ball due to gravity, the
deceleration of the ball due to aerodynamic drag, the kinetic energy loss (and
resultant slight heat gain by the ball and ground) each time the ball bounces,
the rotation of the ball as it spins, and other factors.
The development of simulation software involves identifying and
understanding the underlying chemistry and physics of the processes to be
simulated, breaking those processes down into the lowest practical level of
individual sub-processes at which the behaviors can be well-represented
mathematically, developing appropriate mathematical relationships/equations, and
converting them into computer subroutines. The software subroutines representing
these individual processes are then assembled into an overall simulation
program, with appropriate coordination between modules and design of
user-friendly inputs and outputs. The predictions of this program are
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then compared to known results in order to determine the validity of the model
and to calibrate the simulation to produce a useful tool for predicting new
results.
PHARMACEUTICAL SIMULATION SOFTWARE
PRODUCTS:
The Company's pharmaceutical software provides cost-effective solutions to
a number of problems in pharmaceutical research as well as in the education of
pharmacy and medical students. The Company released the Beta test version of
GastroPlus(TM) in early 1998, and after receiving comments from beta testers,
such as Parke-Davis, Novartis, and three additional large pharmaceutical firms
(who requested anonymity), a number of improvements were added to the program,
and an improved version of GastroPlus(TM) was released in August 1998.
GastroPlus(TM) incorporates an absorption model developed by the Company that
runs under Windows NT(TM), Windows 95(TM), or Windows 98(TM). The program
includes a variety of specialized analysis functions in addition to the basic
absorption and pharmacokinetics simulation. The Parameter Sensitivity Analysis
feature allows researchers to rapidly assess the importance of various
physicochemical and formulation variables on the absorption and pharmacokinetic
behavior of a drug. The Stochastic Simulation feature allows researchers to
model the effects of statistically distributed values for a variety of
physiological effects over a large population.
Sales of GastroPlus(TM) began in late August and early September 1998, with
sales as of November 30, 1998 to Pfizer, Roche, Pharmaceia and Upjohn, Zeneca,
and Astra. An additional (extra-cost) Optimization Module was released in
November 1998 and is receiving enthusiastic interest from pharmaceutical
researchers. A second module, IVIV Correlation, is in advanced development and
is expected to be released in early 1999. Two other modules are also in
development, and both are expected to be released in early 1999. These
extra-cost modules will more than double the average sale price for an annual
license. The Company is actively working over 150 leads for additional sales. No
assurances can be given, however, that any additional sales will occur as a
result of such leads or that any such sales would be profitable to the Company.
The Company executed a License Agreement with Therapeutic Systems Research
Laboratories, Inc. ("TSRL"), under which the Company was granted exclusive
rights to TSRL's proprietary absorption simulation technology, including a
database of measurements of drug permeability from nearly 60 laboratory
experiments to measure the intestinal permeability of drug compounds in human
and/or rat small intestines. The Company is also receiving consulting assistance
in the development of the simulation model from TSRL staff, including Dr. Gordon
Amidon (current President of the American Association of Pharmaceutical
Scientists and world-renowned expert in drug absorption) and Dr. John Crison.
The Company believes that the strategic advantage of exclusive access to TSRL's
technology in absorption modeling, combined with the Company's developed and
growing expertise in pharmacokinetics simulation, have resulted in
GastroPlus(TM) becoming recognized as a unique simulation and analysis
capability within the pharmaceutical industry. The Company is not aware of any
direct competition for GastroPlus(TM), though no assurances can be given that a
competitive product will not be developed in the future.
The Company has developed a companion program to GastroPlus(TM) called
QMPRPlus(TM) (Quantitative Molecular Permeability Relationships). QMPRPlus(TM)
takes as inputs the structures of molecules, and provides estimates for human
effective permeability, partition coefficient (MlogP), solubility, and
diffusivity - all inputs required by GastroPlus(TM). QMPRPlus(TM) thereby
extends the utility of GastroPlus(TM) into early drug discovery, during which
pharmaceutical companies may not have even made many of the molecules that have
been identified as potential drug candidates. By providing estimates of
physicochemical properties from structure alone, QMPRPlus(TM) coupled with
GastroPlus(TM) will allow researchers to rank order large numbers of candidate
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compounds in terms of human intestinal absorption. Those identified as having
good absorption characteristics can be given high priority in the dedication of
resources for synthesis and experimental testing, while those with low predicted
absorption characteristics can be given lower priority or can be eliminated.
Because pharmaceutical companies are dealing with millions of compounds per
year, and because the area of absorption and metabolism has become a bottleneck,
high throughput screening on the computer ("in silico") is becoming not just a
convenience, but a necessity.
The Company continues to develop the science of gastrointestinal
absorption simulation and to add new and improved features to make
GastroPlus(TM) more powerful and more vital to the pharmaceutical industry.
Among the Company's goals in this area are to provide comprehensive, highly
accurate simulations as well as related software that can save a great deal of
time and money in the development of pharmaceutical products, and to reduce the
need for animal testing in the future.
CONTRACT RESEARCH SERVICES:
The Company offers contract research services to the pharmaceutical
industry in the area of gastrointestinal absorption and related technologies.
The Company received two small study contracts in the first quarter of FY 1999
(the fiscal year ending August 31, 1999) from major pharmaceutical companies.
Management believes these contracts mark the beginning of a new source of
revenues for the Company, as well as a means to introduce the Company's software
products to new customers (both companies purchased GastroPlus(TM) after their
respective study contracts were completed). Management expects the number and
size of study contracts, which can include custom software development, to
continue to increase during the new fiscal year. As of November 30, 1998, the
Company had submitted proposals totaling over $200,000 for custom software
development and study contracts to three companies, at the request of those
companies. No assurances can be given, however, that any additional study
contracts will results from the Company's efforts in this area, or that the
Company's efforts in this area will be profitable.
PRODUCT DEVELOPMENT:
In the area of simulation software for pharmaceutical research, the
Company is currently pursuing the development of additional modules for
GastroPlus(TM) and a companion program called QMPRPlus(TM), as well as
HelixGen(TM) -- software to predict the receptor structure of certain
transmembrane proteins.
Optimization Module
The Optimization Module was released in the first quarter of FY 1999 and
has generated interest from a large number of pharmaceutical firms. The
Optimization Module provides the ability to automatically build new mathematical
models from the researcher's own data, to extract information from experimental
data, and to design formulations for immediate release and controlled release
drugs to achieve target blood concentration-time profiles.
IVIV Correlation Module
The IVIV Correlation Module, currently in development, provides in
vitro-in vivo correlation capabilities to pharmaceutical researchers. In
vitro-in vivo correlation refers to the ability to determine the relationship
between the concentration-time curve of a drug product in the blood after an
oral dose (in vivo) to the rate at which the oral dose is observed to dissolve
in a laboratory experiment (in vitro). The IVIV Correlation module will also
provide a means for pharmaceutical researchers to solve for the values of
certain important pharmacokinetic parameters from blood concentration-time data
taken after an intravenous injection or infusion of a drug product. The IVIV
Correlation Module is expected to be released during the second quarter of FY
1999.
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QMPRPlus(TM)
QMPRPlus(TM) is a program that takes a description of molecular structures
as input, and then analyzes the molecules to estimate their permeability,
solubility, and diffusivity for input to GastroPlus(TM). This capability is
important to the early drug discovery process, wherein many thousands, or even
millions, of compounds need to be screened to decide which ones will be good
candidates for more expensive synthesis and laboratory experimentation.
QMPRPlus(TM) has received considerable interest from the pharmaceutical
community at a number of trade shows and conferences attended by Company
personnel during calendar year 1998, as well as at numerous seminars presented
to researchers at their home sites. QMPRPlus(TM) is expected to be released for
sale before the end of December 1998 or in January 1999. One pharmaceutical
company in Japan has already licensed QMPRPlus(TM) and has received a beta test
version in advance of its official release. The program will be offered both as
a stand-alone program and as an optional integrated module for GastroPlus(TM).
No assurances can be given, however, that the Company will receive any
significant sales or earnings from QMPRPlus(TM).
Metabolism and Efflux Module
The Metabolism and Efflux Module will extend the simulation within
GastroPlus(TM) to include the effects of certain metabolic processes on drug
molecules, and the effects of certain proteins in intestinal cells that capture
and then return a drug molecule to the intestinal contents. Metabolism refers to
the action of certain enzymes, present within the intestinal cells, the blood,
and in the liver, that change a drug molecule either by cleaving part of it away
or by adding other atoms to it. This effect usually renders a drug molecule
ineffective, but sometimes can turn a molecule into a useful drug product after
the original molecule (in this case called a "prodrug") has been absorbed.
Efflux refers to a process wherein a drug molecule is captured by a protein
embedded in the cell wall of the intestine, but is later returned to the
interior of the intestine by the protein releasing it. Both metabolism and
efflux are important processes for certain types of drug molecules, so there is
considerable interest within the pharmaceutical industry in modeling
(simulating) the mechanisms by which these processes occur during and subsequent
to intestinal absorption of the drug molecules. The Company expects to release
the Metabolism and Efflux Module during the second or third quarter of FY 1999.
HelixGen(TM)
HelixGen(TM) is a program that predicts the 3-dimensional geometry (i.e.,
the position of each atom) of a special class of proteins known as G-coupled
transmembrane proteins. This type of protein serves as a channel for passage of
certain molecules through the walls of nerve cells and other cells, and is a
target for the majority of neurogenic drugs. Drugs that bind to these sites can
prevent the flow of molecules into and out of the cell, and in so doing may
relieve pain, reduce tremors, improve memory, or other such nerve-related
functions. The ability to predict the geometry of these proteins will enable
researchers to identify likely new drug molecules that could bind to these sites
in the computer, prior to actually synthesizing the molecule for experimental
testing. Development of HelixGen was largely postponed in late 1997 in order to
focus on GastroPlus(TM) and QMPRPlus(TM). Full development of the program is
expected to resume in early 1999.
MARKETING AND DISTRIBUTION:
The Company markets its pharmaceutical simulation software products, and
research services based on its simulations, to pharmaceutical and bio-tech
companies, and to the research companies that serve them, through attendance and
presentations at scientific meetings, exhibits at trade shows, seminars at
pharmaceutical companies and government agencies, advertising in selected
publications, and through its web pages on the Internet. The Company is building
an in-house sales and marketing team for its products and services and will also
explore sales and marketing agreements with firms that provide research services
and equipment that are complementary to the Company's existing and proposed
(i.e., in development) pharmaceutical products and services. The
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Company also uses its web pages on the Internet for such activities as providing
product information, providing software updates, and as a forum for user
feedback and information exchange. The Company will also explore distribution
through university bookstores for the Academic version of GastroPlus(TM) for
students in pharmacy and medicine.
In August 1998, The Company signed a distribution agreement with Teijin
Systems Technology Ltd. (TST), a division of Teijin Limited of Tokyo, Japan.
Under the terms of the agreement, TST received exclusive distribution rights to
Simulations Plus' GastroPlus(TM) and QMPRPlus(TM) software for pharmaceutical
research and education in Japan.
PRODUCTION:
The Company's major products are designed and developed by its development
team at its Lancaster, California facility. The chief materials and components
used in simulation software products include CD-ROMs and instruction books.
CD-ROM production is performed in-house for low-volume products, and is
contracted to third parties for high volume products.
COMPETITION:
In providing simulation-software-based screening, testing and research
services to the pharmaceutical industry, and in marketing simulation software
for these purposes, the Company competes against a number of established
companies that provide screening, testing and research services and products to
these industries that are not based on simulation software. The Company's
competitors in this field include companies with financial, personnel, research
and marketing resources that are greater than those of the Company. While there
is currently no competitive product to GastroPlus(TM), QMPRPlus(TM), or
HelixGen(TM), competition can be expected at some time in the future.
Major pharmaceutical companies conduct these efforts through their
internal development staffs and through outsourcing some of this work. Smaller
companies need to outsource a greater percentage of this research. The Company
is aware of a few other companies that are presently developing simulation
software or simulation-software-based services to the pharmaceutical industries
for the purposes of screening compounds, but is not aware of the development of
any directly competitively software to GastroPlus(TM), QMPRPlus(TM), or
HelixGen(TM).
The Company is not aware of any significant competition in the area of
gastrointestinal absorption simulation. The Company is aware of one company in
England that produces animation software for education in pharmacy and medicine,
but is not aware of any commercial effort by any company to produce and sell a
gastrointestinal absorption simulation program for pharmaceutical research. The
Company is aware of one other company called Navicyte that is developing an
absorption simulation, but information obtained by the Company indicates that
this simulation is not a product for sale, but rather is incorporated into
larger development efforts as part of a consortium approach. Information
obtained by the company indicates that Navicyte has only three customers. One of
those has already licensed GastroPlus(TM), and a second is expected to order
before the end of 1998 or in very early 1999.
The Company believes the key factors in competing in this field are its
ability to develop simulation software and related products and services to
effectively predict the absorption and pharmacokinetic behavior of a large
number of compounds, its ability to develop and maintain a proprietary database
of results of physical experiments that will serve as a basis for simulated
studies, and its ability to develop and maintain relationships
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with research and development departments of pharmaceutical companies and
government agencies. There can be no assurances that the Company will be
successful in providing these key factors.
EDUCATIONAL SIMULATION SOFTWARE
PRODUCTS:
The Company is producing and developing a series of interactive
educational simulation software programs for the school and home study markets.
The Company's initial products, which have won awards from educational software
testers, include simulations of laboratory experiments for Physical Science and
Chemistry courses under the umbrella name FutureLab(TM). The Company released
its first three FutureLab(TM) titles in May 1997 (Optics for Physical Science,
Gravity for Physical Science, and Circuits for Physical Science), and a new
title, IdealGas for Chemistry in November 1997, all for Windows-based computers.
In August 1998, after a conversion effort that took over one year for some labs,
the Company released new versions of all of these titles as well as Universal
Gravitation for Physical Science for both Windows and Macintosh computers.
Macintosh computers account for 40-50% of the educational market. Additional
educational simulation topics to be developed include Titration for Chemistry
which is near completion, as well as as future titles for Chemical Equilibria,
Genetics for Biology, Heat, Magnetism, Friction, Kinematics and Dynamics, Earth
and Space Science, Properties of Matter, Atoms and Bonding, Chemical Reactions,
Forces, Forces in Fluids, Waves, Sound, Electric Charges and Currents, Simple
Machines, and additional titles for high school Physics, Chemistry and Biology
courses.
FutureLab(TM) educational software programs simulate science experiments
for high school and college level science and engineering classes. These
simulations enable students to conduct experiments on a personal computer
instead of in a traditional laboratory, thereby increasing safety, decreasing
costs, and providing expanded learning opportunities by allowing simulations of
situations not possible in a traditional laboratory environment. FutureLab(TM)
software has received recognition from Computers in Physics magazine, which
declared it a winner in its Eighth Annual Software Contest, as well as from two
educational institutions who perform rigorous educational software evaluation.
PRODUCT DEVELOPMENT:
In the area of educational simulations, the Company's R&D activities
include continuing the development of science experiment simulation software for
high school and university-level science courses. The level of this effort was
reduced in August 1998 in order to conserve resources. This development effort
is now at a level of two engineers plus support from marketing and graphic arts
personnel as required. Current sales and the National Science Foundation grant
provide support for this level of effort. At the high school level, anticipated
new titles include simulated experiments for courses in Physical Science,
Physics, Chemistry, Biology and Earth Science. At the university level,
anticipated titles include more sophisticated simulations for Physics,
Chemistry, and Biology, as well as titles for studies in Engineering and
Medicine such as Heat Transfer, Fluid Mechanics, Thermodynamics, Gas Dynamics,
Kinematics and Dynamics, and Electronic Circuits.
In 1996, the Company received a Phase I Small Business Innovation Research
(SBIR) grant from the National Science Foundation for Approximately $51,000. In
October 1997, the Company was awarded a $300,000 Phase II follow-on grant which
will be funded in four equal payments of $75,000 every six months for an
eighteen month period. The first payment was received in October 1997. The
second payment was received in April 1998, and a third payment was received in
October 1998. This grant is funded to further develop software to
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allow physically-disabled science students to perform simulated laboratory
experiments on a computer with minimal physical input. The Company is using its
expertise and technology in designing and building computer access products for
the physically-disabled, as well as its expertise in developing scientific
educational simulation software, in developing these programs. These programs
are also designed to be used by able-bodied students but will incorporate the
Company's proprietary technology for physically-disabled persons so that the
same programs will be attractive to and used by both physically-disabled and
able-bodied persons. Field testing of the switch-activated versions of
FutureLab(TM) programs will take place in early 1999. The Company has also
developed a 3D robot arm simulation as part of the NSF grant effort, and this
will also be field tested in early 1999.
MARKETING AND DISTRIBUTION:
The Company markets its science experiment simulation software products
through a growing list of over 30 software resellers, through exhibits and
presentations at conferences and trade shows, through its Internet web page, and
through advertising in selected publications. The Company is also investigating
forming one or more alliances with major textbook publishers and with additional
educational software distributors. As of August 1998, the Company has reduced
its marketing efforts in this area in order to concentrate more of its resources
on the pharmaceutical software market. The Company is relying on its resellers
to provide the majority of the marketing and sales efforts for its educational
software products.
PRODUCTION:
The Company's educational software products are designed and developed by
its development team at its Lancaster, California facility. The Company
contracts the production of CD-ROMs to third parties. The chief materials and
components used in simulation software products include CD-ROMs and instruction
books.
COMPETITION:
The educational software industry in which the Company operates is highly
competitive. The Company competes against publishers and suppliers of textbook
educational materials that have been, and will continue to be, the primary
educational resource used in these markets. The Company also competes against
educational software publishers who provide software products that are
interactive but most are not true simulation software. Most education software
publishers compete in the grades below 9th grade, addressing primarily reading
and math skills. The Company competes primarily in the middle school, high
school, and college markets addressing primarily science and math subjects. A
smaller number of software publishers are addressing these markets, although
existing competitors may broaden their product lines to these markets, and
additional competitors may enter these markets.
The Company is aware of several companies publishing various types of
educational simulation software including HyperCube, Glencore, Corel, Logal
Educational Software and Systems, and Knowledge Revolution. Logal is the only
company of which the Company is currently aware that is producing a range of
educational simulation software that competes directly with the Company's
current and planned educational simulation software products. The Company
expects that high school and college science and math textbook publishers and
other companies may also be developing simulation software products and that
additional competitors may enter this field. Information gathered by the Company
at conferences for science teachers and school administrators indicates that
these customers and potential customers prefer the Company's products over those
offered by Logal almost unanimously, for those titles which have been released
by the Company to date.
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DISABILITY PRODUCTS
PRODUCTS:
The Company's wholly owned subsidiary, Words+, Inc. has been in business
since 1981. Words+ is a technology leader in designing and developing
augmentative and alternative communication computer software and hardware
devices for persons who cannot speak due to physical disabilities. Words+ also
produces computer access products that enable physically disabled persons to
operate a computer. Words+ products enable a disabled person to operate a
computer and to communicate through a voice synthesizer, through movements as
slight as the blink of an eye. Words+ developed and produces the software for
the computerized communication system used by the world-famous theoretical
physicist, Professor Stephen Hawking, Lucasian Professor of Mathematics at the
University of Cambridge in England, and the author of the best-selling book A
Brief History of Time. Words+ markets its products throughout the United States
and to other countries through a direct sales staff and independent dealers.
Words+ introduced a fully integrated, portable, lightweight
personal-computer-based communication system that is meeting favorable market
acceptance.
E Z Keys for Windows(TM)
One of the Company's primary software products is E Z Keys for Windows ("E
Z Keys(TM)"), which is a program that operates on a Windows-based personal
computer. When coupled with specially-designed input devices, E Z Keys enables
even severely disabled persons to operate a personal computer, to generate voice
messages through a voice synthesizer, and to operate most Windows-based software
application programs. Input motion by the user can be as slight as the blink of
an eye, or simple eye movement by persons who cannot blink. E Z Keys is one of
the two Words+ programs used by Professor Stephen Hawking for computer access
and communication. In May 1997, the Company released E Z Keys for Windows 95,
the current version of which is also compatible with Windows 98.
Talking Screen for Windows(TM)
Talking Screen for Windows ("Talking Screen(TM)") is a software program
that operates on a Windows-based personal computer and is designed for persons,
usually children, who cannot read and write at the level necessary to adequately
operate E Z Keys. Talking Screen provides a system of pages of pictographic and
photographic symbols by which the user can produce speech output messages
through a voice synthesizer, play recorded sounds and video files, and operate
controllers for lights, electrical appliances and other equipment. Like E Z
Keys, Talking Screen can be operated through a wide range of alternative input
devices.
PegasusLITE(TM)
PegasusLITE(TM) is a fully-integrated, portable, microprocessor-based
communication system that weights just four and one-half pounds, which is
significantly smaller and lighter in weight, as well as more powerful, than
comparable competitive devices. PegasusLITE currently incorporates a 486DX-5
microprocessor running at 133 MHz, Windows 95(TM) operating system, 16 MB RAM,
340 MB hard disk drive, 256 color LCD display with build-in touch window, PCMCIA
slot for a floppy disk drive and optional accessories, Windows sound system, and
a software voice synthesizer that can provide male, female or child's voices.
PegasusLITE measures approximately 8.75" x 12.75" x 1.65". PegasusLITE can
operate either E Z Keys for Windows or Talking Screen for Windows, although it
is used primarily with Talking Screen.
Freedom2000
Words+ released a new communication system called Freedom 2000 in February
1998. It allows persons with disabilities who read at a second-grade level and
above to speak and write through alternative input methods
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(rather than traditional keyboard and mouse). Freedom 2000 with E Z Keys gives
the users the ability not only to speak and write, but also to play games and
control various items in their environment, such as TV's and telephones. High
level users are also able to deliver lectures to large groups, use the Internet,
and send e-mail. New orders for Words+ products during the last two quarters are
at record annualized levels and Freedom 2000 orders constitute a significant
portion of these new orders.
MessageMate
The Company produces a series of products called MessageMates, which are
hand-held, dedicated communication devices that store recorded speech or sound
on integrated circuit chips. The user plays these recorded sounds by touching
one of the keys on the membrane keyboard if they are able to use a keyboard, or
by using a switch (such as the IST Switch described below) and scanning to
select a position on the keyboard. MessageMates are small, lightweight (1 to
1.75 lbs.), easy-to-use communication devices with up to four minutes of
recorded messages. They are known for their extremely rugged design and long
battery life. The MessageMate 20 holds twenty messages, the MessageMate 40 holds
forty messages, and the Mini-MessageMate holds eight messages. In October 1997,
the Company released a new model, the Multi-Level MessageMate 40, which holds up
to 144 messages in four levels, and provides up to ten minutes of total
recording time. Since MessageMates use recorded messages, they can be used in
any language. The Company has significant sales of MessageMate in foreign
markets and sales of MessageMates in foreign markets are increasing.
Infrared/Sound/Touch (IST) Switch
Many Words+ customers cannot operate a keyboard or mouse. For some of
these persons, the Company has designed and produces a special device called the
Infrared/Sound/Touch Switch ("IST Switch"), that enables the person to operate a
personal computer or a dedicated communication device with the slightest
movement or pressure, including, for example, eye blink, or just eye movement.
The IST is activated by infrared reflection, touch, or sound, and transmits a
momentary "on" signal to the computer upon detecting these signals. This switch
has been in production since 1983, and thousands of physically disabled persons
around the world have used it.
Miscellaneous
Words+ also sells a number of other miscellaneous and peripheral devices,
some of which it designs and produces and others it buys and resells. These
include:
- - MicroCommPac - Communication hardware package designed for use with a
notebook computer that provides switch interface and audio amplification.
- - U-Control - Wireless infrared remote control device that allows the user
to control functions and appliances in the home and work environment such
as lights, stereo and television equipment, and other appliances.
- - Simplicity Wheelchair Mount - Company-designed and produced wheelchair
mount for portable computers and other devices.
PRODUCT DEVELOPMENT:
The Company believes it has been an industry technology leader in
introducing and improving augmentative and alternative communication and
computer access software and devices for disabled persons and intends to
continue to be at the forefront of the development of new products. The Company
will continue to enhance its major software products, E Z Keys and Talking
Screen, as well as its growing line of hardware products. The Company will also
consider acquisitions of other products, businesses and companies that are
complementary to its existing augmentative and alternative communication and
computer access business lines.
9
<PAGE> 12
MARKETING AND DISTRIBUTION:
The Company markets augmentative and alternative communication products
through a network of employee representatives and independent dealers.
At the present time the Company has seven independent dealers in the U.S.,
four in Australia and one each in Canada, England, Norway, The Netherlands, New
Zealand, Japan, Finland and Malaysia. The Company also has three
salary-commission sales persons in the U.S.: one each in Southern California,
Maine, and Maryland, and the Company employs four inside sales/support persons
who answer telephone inquiries on the Company's 800 line and who provide
technical support.
The Company directs its marketing efforts to speech pathologists,
occupational therapists, special education teachers, disabled persons and
relatives of disabled persons. The Company maintains a mailing list of over
37,000 persons made up of these professionals, consumers and relatives and mails
various marketing materials to this list. These materials include the Company's
newsletter, its catalog of products and announcements regarding new and enhanced
products.
The Company participates in industry conferences held throughout the U.S.
and in other countries that are attended by speech pathologists, occupational
and physical therapists, special education teachers, parents and consumers. The
Company and others in the industry demonstrate their products at these
conferences and present technical papers that describe the application of their
technologies and research studies on the effectiveness of their products. The
Communication Aids Manufacturers Association (CAMA) organizes tours of
representatives of companies in this field that travel throughout the country
providing seminars and workshops for professionals, consumers and parents in the
field. The Company advertises in selected publications of interest to persons in
this market.
The Company estimates that for approximately 50% of its sales of
augmentative and alternative communication software and hardware, some or all of
the purchase price is provided by third parties such as Medicaid, school special
education budgets, private insurance or other governmental or charitable
assistance. The Company's personnel provide advice and assistance to customers
and prospective customers on obtaining third-party financial assistance for
purchasing the Company's products. No assurances can be given that such third
party support will continue to be available for the purchase of the Company's
products for those in need of them.
PRODUCTION:
Disability software products are either loaded onto hard drives by the
Company or copied to diskettes for sale to customers. Microprocessors that are
part of dedicated devices are purchased by the Company and incorporated into its
products by the Company. Many software customers buy their notebook personal
computers from the Company, which the Company purchases at wholesale prices and
resells at a markup. Cases, printed circuit boards, labels and other components
of products such as PegasusLITE, MessageMate and CommPac are designed by the
Company. The Company outsources the extrusion, machining and manufacturing of
certain components. All final assembly and testing is done by the Company at its
facility.
The Company incorporates a tablet-style computer manufactured by Epson
America in its PegasusLITE product. The Company has no written agreements with
Epson America other than purchase orders that it submits to Epson America to
purchase such computers. The Company and other of Epson America's customers
provide projections to Epson America to purchase such computers in order to
allow Epson America to estimate the number of units of such computer that it
should manufacture in each of its production runs.
10
<PAGE> 13
The Company's products are shipped from its Lancaster, California facility
either directly to the customer or to the salesperson or dealer. The outside
salesperson or dealer either delivers the product or visits the customer after
delivery to provide training.
COMPETITION:
The augmentative and alternative communication industry in which the
Company operates is highly competitive and some of the Company's competitors
have greater financial and personnel resources than the Company. The industry is
made up of six major competitors including the Company, and a number of smaller
ones. The Company believes that the five other major competitors each have
revenues ranging from $3 Million to $20 Million so that there are no large
companies in this industry. Two of these companies primarily produce
personal-computer-based software systems for Apple Macintosh and the others
produce dedicated communication devices and/or paper products.
The Company believes that the competition in this industry is based
primarily on the quality of products, quality of customer training and technical
support, and quality and size of sales forces. Price is a competitive factor but
the Company believes price is not as important to the customer as obtaining the
product most suited to the customer along with strong after-sale support. The
Company believes that it is a leader in the industry in developing and producing
the most technologically-advanced products and in providing quality customer
training and technical support. The prices of the Company's products are among
the highest in the industry and the Company has one of the smallest sales forces
and dealer networks in the industry. The Company believes it is positioned to
continue to be a leader in the development and production of the highest quality
technology and that it will be able to develop one of the strongest sales forces
in the industry by increasing the number of sales representatives. The Company
believes that the sales of its products can increase significantly due to these
factors and the expected continuing expansion of the size of this market.
However, there are few barriers to entry in the form of proprietary or patented
technology or trade secrets in this industry. While the Company believes that
cost of product development and the need for specialized knowledge and
experience in this industry would present some deterrence for new competition,
other companies may enter this industry, including companies with substantially
greater financial resources than the Company. Further, companies already in this
industry may increase their market share through increased technology
development and marketing efforts.
PERSONAL PRODUCTIVITY SOFTWARE
PRODUCT - ABBREVIATE!:
Words+ released a new productivity software program called Abbreviate! in
November 1997 at COMDEX. The Company took the abbreviation technology
incorporated into the E Z Keys for Windows software used by Professor Stephen
Hawking and thousands of others around the world, and turned it into a program
that can be used by anyone with the ability to use a standard keyboard. While
many word processors provide a similar "Quick Correct" feature, the advantage
Abbreviate! has over such features is that it runs in the background and works
with almost all Windows applications. Thus, Abbreviate! allows the user to
create a personal library of frequently-used abbreviations, each with its own
special keystroke combination, for use in virtually any Windows-based program,
e.g., fax, e-mail, word processing, database, Internet chat rooms, and
spreadsheets. The Company is currently pursuing distribution relationships with
a number of major software manufacturers for Abbreviate!. No assurances can be
given that the Company will successfully complete any such distribution
relationships or if completed that they will be on terms that are favorable to
the Company. Abbreviate! was
11
<PAGE> 14
named PC Week magazine's "Tool of the Week" in their December 1, 1997 issue, and
won Win95 magazine's Editor's Choice Award in March 1998.
MARKETING AND DISTRIBUTION:
The Company's Abbreviate! software program was introduced in November 1997
at COMDEX. The Company is currently selling the program itself through a variety
of Internet channels, including its own web site (www.abbreviate.com). The
Company is also contacting large software manufacturers and distributors in an
effort to secure distribution agreements for Abbreviate!. While sales have been
constant at a low level, no assurance can be given as to whether this new
product will be successful. Further, no assurances can be given that the Company
will successfully complete distribution relationships or if completed that they
will be on terms that are favorable to the Company.
PRODUCTION AND DISTRIBUTION:
The Abbreviate! personal productivity software program is currently
manufactured at the Company's Lancaster, California facility. If sales
volume warrants and higher volume capacity is required, the Company will
investigate outside sources for fulfillment.
COMPETITION:
A few products compete with Abbreviate! in the retail market; however, the
Company is not aware of any other product that works with virtually any software
in Windows 95 without the need to create special links to the software. The
Company has priced Abbreviate! significantly less than competitor SmarType and
InstantText. The Company enlisted the help of several medical transcriptionists
as beta testers for the product, and the feedback received from those testers
and additional medical transcriptionists, who are familiar with competitive
products, has been very favorable.
TRAINING AND TECHNICAL SUPPORT
The Company believes customer training and technical support are important
factors in customer satisfaction for its pharmaceutical and disability products
and the Company believes it is an industry leader in providing customer training
and technical support. For pharmaceutical software, the Company provides
in-house seminars at the customer's site to demonstrate GastroPlus(TM) and
QMPRPlus(TM). During FY 1998, the company delivered such seminars in several
locations around the U.S. and in Japan. During the first quarter of FY 1999, the
Company delivered seven seminars in Japan to over 150 scientists from over 40
different companies. The Company also conducted seminars at approximately 15
pharmaceutical and related research companies in the U.S. These seminars serve
as initial training in the event the potential customer decides to license the
software. Strong technical support is provided after the sale in the form of
telephone, fax, and e-mail assistance to users, as well as an ongoing process of
software upgrades to ensure the product remains at the cutting edge of
technology. Software licenses are on an annual basis, and include all upgrades
to the modules licensed by the customer during the license year.
For Disability Products, the Company's salesperson or dealer provides
initial training to the customer -- typically two to four hours on major
products and one to two hours on certain other products. This training is
typically provided not only to the user of the product but also to the person's
speech pathologists, teachers, parents and others who will be helping the user.
This initial training is provided as a part of the price of the product. The
Company and its dealers charge a fee for additional training and service calls.
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<PAGE> 15
Technical support for both Simulation Software and Disability Products is
provided by the Company's inside sales and support staff based at its
headquarters facilities in Lancaster, California. The Company provides no-charge
toll telephone support offering unlimited 800 number and E-mail support for all
of its simulation software and disability products.
EMPLOYEES
As of August 31, 1998, the Company employed 39 full-time and 2 part-time
employees, including 8 in research and development, 13 in marketing and sales,
11 in administration and accounting, 8 in production and 1 in repair. Three
current employees hold Ph.D.'s in their respective science or engineering
disciplines. Four additional employees hold Master's degrees. The Company
believes that its future success will depend, in part, on its ability to
continue to attract, hire and retain qualified personnel. The competition for
such personnel in the augmentative and alternative communication device and
computer software industry is intense. None of the Company's employees is
represented by a labor union, and the Company has never experienced a work
stoppage. The Company believes that its relations with its employees are good.
Since the end of FY 1997, Company has hired three additional engineers in
research and development to accelerate the development of new educational
software titles and the conversion to C++ for both Windows and Macintosh
platforms. However, this conversion effort, begun in May 1997, required
significantly longer time and greater resources than anticipated. In August 1998
the Company decided to focus on pharmaceutical software and to minimize
educational software development. A layoff of a number of educational software
developers, as well as temporary salary reductions for senior management were
instituted in order to reduce expenses.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company moved its office location from Palmdale, California to
Lancaster, California in July 1998, expanding its office space from
approximately 11,800 square feet to approximately 15,600 square feet. Lease on
the office space currently occupied by the Company will expire in August 2001.
The Company realized a savings of approximately $40,000 per year through the
lease it negotiated on this new property.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation and is not aware of any
pending or threatened litigation against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fiscal
year ended August 31, 1998.
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<PAGE> 16
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock began trading on the Nasdaq SmallCap Market
("NASDAQ") on June 18, 1997 under the symbol "SIMU". According to records of the
Company's transfer agent, the Company had at least 18 stockholders of record and
818 beneficial owners as of August 31, 1998. The following table sets for the
low and high sale prices for the Common Stock as reported by Nasdaq.
<TABLE>
<CAPTION>
LOW HIGH
SALES PRICE SALES PRICE
----------- -----------
<S> <C> <C>
Fiscal 1998:
Quarter ended August 31, 1998 ........... 1.500 5.250
Quarter ended May 31, 1998 .............. 3.500 7.375
Quarter ended February 28, 1998 ......... 4.250 8.500
Quarter ended November 30, 1997 ......... 5.000 5.750
Fiscal 1997:
Quarter ended August 31, 1997
(from 6/18/97) ....................... 5.000 6.125
</TABLE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
The following sets forth selected items from the Company's statements of
operations (in thousands) and the percentages that such items bear to net sales
for the fiscal years ended August 31, 1998 ("FY98"), August 31, 1997 ("FY97")
and August 31, 1996 ("FY 96").
<TABLE>
<CAPTION>
Year Ended August 31,
------------------------------------------------------------------------------
1998 1997 1996
----------------------- --------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 2,645 100.0% $ 2,493 100.0% $2,601 100.0%
Cost of sales 1,756 66.4 1,252 50.2 1,289 49.6
Selling, general, and administrative 2,683 101.4 2,277 91.3 1,190 45.8
Research and development 390 14.7 133 5.4 108 4.1
Total operating expenses 3,073 116.1 2,410 96.7 1,298 49.9
Income (loss) from operations (2,184) (82.5) (1,169) (46.9) 14 0.5
Income from grant 150 5.7 17 0.7 34 1.3
Interest income 58 2.2 26 1.0 -- --
Interest expense 16 0.6 69 2.8 10 0.4
Financing costs -- -- 280 11.2 -- --
Gain (loss) in investment, at equity (75) 2.8 -- -- -- --
Provision for (benefit from) income taxes 2 0.2 (39) (1.6) 15 0.5
Net income (loss) (2,069) (78.2)% (1,436) (57.6)% 23 0.9%
</TABLE>
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<PAGE> 17
FY 98 COMPARED WITH FY 97
Net Sales
Net sales for FY98 increased by $152,000 or 6.1%, to $2,645,000 compared
to $2,493,000 for FY 97. Management attributes the majority of this increase
primarily to two factors: (1) an approximately $40,000 increase in educational
software sales, and (2) a $98,000 increase in sales of Freedom 2000, a
communication system. Another $14,000 was comprised of an overall increase in
IST and Simplicity sales offset by a decrease in MultiVoice and MessageMate
sales.
Cost of Sales
Cost of sales for FY98 increased by $504,000 or 40.2% to $1,756,000 from
$1,252,000 in FY97. As a percentage of sales, cost of sales was 66.4% for the FY
98, compared to 50.2% for the FY97, indicating a 16.2% increase. Management
attributes this increase in cost of sales primarily to the amortization of
capitalized educational software which increased by $452,000 or 1412.5% to
$484,000 compared to $32,000 in FY97. The remaining $52,000 increase was due to
the increase in net sales. Of the $452,000 increase, $350,000 was a non-cash
charge for amortization of capitalized educational software development costs.
Without this additional charge, cost of sales as a percentage of net sales would
have been 53.2%, compared to 50.2% in FY 97. Management attributes the increase
of 3.0% to the higher amortization of capitalized software development costs,
without which cost of sales would have been 49.3%, or 0.9% lower than FY 1997.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for FY 98 increased by
$406,000, or 17.8% to $2,683,000, compared to $2,277,000 for FY 97. As a
percentage of net sales, selling, general and administrative expenses increased
by 10.1% to 101.4% in FY 98 from 91.3% in FY 97. Management attributes this
increase primarily to the expansion of sales force in Words+, including
salaries, equipment, travel expenses, and tradeshows. Other significant increase
in expenses are consultation fees, higher depreciation amounts, business
insurance and health insurance, wages and payroll taxes, moving expenses to the
new facility, ads and associated printing costs, public relation costs and
amortization costs on investments in commercial bonds.
Research and Development
The Company incurred approximately $1,015,000 of research and development
costs for FY98, of which approximately $625,000 was capitalized and $390,000 was
expensed. For FY97, the Company incurred approximately $765,000 of research and
development costs for FY 97, of which approximately $632,000 was capitalized and
approximately $133,000 was expensed. The 32.7% increase in research and
development expenditure is due primarily to the unexpectedly long development
time for work associated with the conversion of educational software to the C++
programming language necessary for compatibility on both Windows and Macintosh
computers.
Income from Grant
For FY 98, the Company received $150,000, the first two semi-annual
payments of a $300,000 Phase II SBIR grant from the National Science Foundation
to develop software to allow physically-disabled students to perform simulated
laboratory experiments on a computer. For FY 97, the Company received the last
one-third of a Phase I SBIR grant in the amount of $17,000.
Interest Expense
Interest expense for FY 98 decreased $53,000, or 76.8% to $ 16,000. This
decrease is primarily due to the interest charges incurred for the Bridge Notes
and notes issued in August and September 1996 for which the Company does not
have such an obligation in this fiscal year.
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<PAGE> 18
Financing Costs
Financing costs for FY 98 were $0 compared to $280,000 for FY97. The
$280,000 for FY97 was due to the issuance of 280,000 warrants in connection with
notes payable issued in December 1996 and January 1997. This financing cost was
being amortized over the term of the notes and the unamortized portion at the
time of the completion of the Company's initial public offering was charged to
earnings. The warrants entitled the holder to purchase one share of the
Company's Common Stock for $2.50 per share. The Company issued these warrants
which had an exercise price that the Company estimated to be $1.00 less than the
fair value of the Company's Common Stock at the date of grant. Accordingly, the
Company recognized an additional financing cost of $280,000 in FY97.
Loss on investment in HealthWeb, Inc., at Equity
The Company incurred approximately $75,000 of expenses in forming a joint
venture called HealthWeb, Inc. to provide health information through its
Internet web site HealthData.com. The Company holds 4,500,000 (50%) shares of
the 9,000,000 shares issued in HealthWeb, Inc., which is a California
corporation. Because of limited resources, the Company discontinued its support
of HealthWeb, Inc. and currently HealthWeb, Inc. is in a state of nonoperation.
Income Taxes
Income taxes were $2 for FY98. For FY97 the Company recorded a tax benefit
of $39,000 because the Company received tax refund claims from government
agencies.
Net Loss
Net loss for FY98 increased $633,000, or 44.1%, to the net loss of
$2,069,000 compared to the net loss of $1,436,000 for FY97. Management
attributes this decline primarily to the non-cash writeoff of $350,000 for
capitalized educational software, the increase in selling, general and
administrative expenses for aggressive sales expansion and related costs, and
the loss incurred on the investment in HealthWeb, Inc.
FY 97 COMPARED WITH FY 96
Net Sales
Net sales decreased by $108,000 or 4.2%, to $2,493,000 compared to
$2,601,000 for FY 96. Management attributes the majority of this reduction to
the changeover from the MultiVoice hardware voice synthesizer to the Eloquence
software voice synthesizer. MultiVoice sales accounted for $120,000 in the 1996
period, but only $14,000 in the 1997 period. Lower Talking Screen software
sales, somewhat offset by higher computer sales, accounted for the majority of
the remainder of $2,000 difference in net sales for the two periods.
Cost of Sales
Cost of sales for FY 97 declined by $37,000 or 2.9% from $1,289,000 in FY
96. As a percentage of sales, cost of sales was 50.2% for the 1997 period,
compared to 49.6% for the 1996 period. Management attributes this slight
percentage change in gross margin primarily to two factors: (1) an approximately
2% decline in cost from the changeover from the MultiVoice to the Eloquence
software voice synthesizer, which somewhat offset by, (2) higher computer sales
which has higher percentage in cost.
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<PAGE> 19
Selling, General and Administrative Expenses
Selling, general and administrative expenses for FY 97 increased by
$1,087,000, or 91.3% to $2,277,000 compared to $1,190,000 for FY 96. As a
percentage of net sales, selling, general and administrative expenses increased
by 45.5% to 91.3% in FY 97 from 45.8% in FY 96. Management attributes this
increase primarily to the expansion of the Company's simulation software efforts
as the Company added office space, furniture and equipment, and additional
staff, including recruiting and hiring costs, commencing in September 1996 in
contemplation of receiving funding from the closing of a public offering that
was scheduled to close in November 1996 but which did not close because the
underwriter of such offering had failed to reach agreement with its clearing
agent regarding the amount of capital that such clearing agent required such
underwriter to maintain in connection with such offering. A portion of the
increase was also due to higher professional fees, increases in salaries and
wages, increased printing and advertising costs.
Research and Development
The Company incurred approximately $765,000 of research and development
costs for FY 97, of which approximately $632,000 was capitalized and
approximately $133,000 was expensed. For FY 96, the Company incurred
approximately $215,000 of research and development costs, of which approximately
$107,000 was capitalized and approximately $108,000 was expensed. The 255.8%
increase in research and development expenditures for FY 97 is due to the
expanded development work on educational and pharmaceutical simulation software
begun in September 1996.
Income from Grant
For FY 97, the Company received $17,000, the last one-third of a $51,000
Phase I SBIR grant from the National Science Foundation to develop software to
allow physically-disabled students to perform simulated laboratory experiments
on a computer. For FY 96, the Company received the first two-thirds of this
grant. (A follow-on $300,000 Phase II SBIR grant was awarded to the Company in
October 1997.)
Interest Expense
Interest expense for FY 97 increased $59,000, or 590.0%, to $69,000 from
$10,000 in FY 96. This increase is primarily due to the interest charges
incurred for the Bridge Notes and notes issued in August and September 1996.
Financing Costs
Financing costs for FY 97 were $280,000 compared to $0 for FY 96. The
increase is due to the issuance of 280,000 warrants in connection with notes
payable issued in December 1996 and January 1997. This financing cost was being
amortized over the term of the notes and the unamortized portion at the time of
the completion of the IPO was charged to earnings. The warrants entitled the
holder to purchase one share of the Company's Common Stock for $2.50 per share.
The Company issued these warrants which had an exercise price that the Company
estimated to be $1.00 less than the fair value of the Company's Common Stock at
the date of grant. Accordingly, the Company recognized an additional financing
cost of $280,000.
Income Taxes
Income taxes decreased $54,000, or 360.0% to the tax benefit of $39,000
from the provision of $15,000 for FY 96 because of the Company's decreased
earnings.
17
<PAGE> 20
Net Income
Net income for FY 97 declined by $1,459,000, or 6,343.5%, to the net loss
of $1,436,000 compared to the net income of $23,000. Management attributes this
decline primarily to the decrease in Net Sales, the increase in Selling, General
and Administrative expenses incurred by the Company for its research and
development efforts, and the increased financing costs and interest expenses
compared to FY 96.
SEASONALITY
Sales of the Company's disability products exhibit relatively mild
seasonal fluctuations. The following table sets forth net sales information for
each of the Company's last 12 calendar quarters. This unaudited net sales
information has been prepared on the same basis as the annual information
presented elsewhere in this Form 10-KSB and, in the opinion of management,
reflects all adjustments (consisting of normal recurring entries) necessary for
a fair presentation of the information presented. Net sales for any quarter are
not necessarily indicative of sales for any future period.
<TABLE>
<CAPTION>
Net Sales
-----------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
(in thousands)
FY
<S> <C> <C> <C> <C> <C>
1996 . . . . . . . . . . . . 733 628 621 619 2,601
1997 . . . . . . . . . . . . 541 679 560 713 2,493
1998 . . . . . . . . . . . . 543 560 730 812 2,645
</TABLE>
In general, management believes sales to schools are seasonal, with
greater sales to schools during the Company's third and fourth fiscal quarter
(March-May and June-August). There is not sufficient historical data at this
time to allow a detailed analysis of the seasonality of educational simulation
software. Sales of pharmaceutical simulations, which began in the first calendar
quarter of 1999, are not expected to show significant seasonal behavior.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of capital have been cash flows from its
operations, a bank line of credit, a government grant, cash loans from the
officers on an as-needed basis, accruing and not paying full salaries to certain
executive officers and managers, and the remaining proceeds from the Company's
initial public offering.
The Company has available a $100,000 revolving line of credit from a bank.
Interest is payable on a monthly basis at the bank's prime rate plus 3.0%. The
interest rate was 11.50% at both August 31, 1998 and 1997. At August 31, 1998,
the outstanding balance under the revolving line of credit was approximately
$97,000, and at August 31, 1997, the outstanding balance under the revolving
line of credit was $0, with $100,000 available on that date. The revolving line
of credit is not secured by any of the assets of the Company but is
18
<PAGE> 21
personally guaranteed by Mr. Walter S. Woltosz, the Company's Chief Executive
Officer, President and Chairman of the Board of Directors.
Beginning in August 1998, certain executive officers and managers accepted
reduced salaries on a temporary basis in order to protect the cash assets of the
Company. The unpaid portions of salaries are being accrued and will be paid at
such future time as management deems the Company's cash flow and cash reserves
are sufficient to make such payment without adverse effects to the Company's
financial position. As of November 30, 1998 the Company had accrued
approximately $52,000 of unpaid salaries.
In October 1997, the Company was awarded a follow-on $300,000 Phase II
SBIR grant from the National Science Foundation, the purpose of which was to
help fund the Company's development of educational simulation software for the
school and home study markets. The grant is being paid in four equal payments of
$75,000 semi-annually. The first three payments on such grant were received in
October 1997, February 1998 and October 1998.
The Company believes that existing capital and anticipated funds from
operations, cost reductions from downsizing certain segments of operations, and
temporary salary reductions for senior management will be sufficient to meet its
anticipated cash needs for working capital and capital expenditures for at least
the next 13 months. However, if anticipated funds from operations are
insufficient to satisfy the Company's capital requirements, the Company may have
to sell additional equity or debt securities or obtain expanded credit
facilities. In the event such financing is needed in the future, there can be no
assurance that such financing will be available to the Company, or, if
available, that it will be in amounts and on terms acceptable to the Company. If
cash flows from operations are insufficient to continue operations at the
current level, and if no additional financing is obtained, then management may
restructure the Company in a way to preserve its pharmaceutical and disability
businesses while maintaining expenses within operating cash flows.
In order to maintain quotation of its securities on the NASDAQ SmallCap
Market ("NASDAQ"), the Company has to maintain certain minimum financial
requirements. As of August 31, 1998 the Company has ceased to meet one of the
requirements for continued listing, namely the Company's net tangible assets as
of August 31, 1998 were $1,284,000 which is below the $2,000,000 required by the
NASDAQ. Further, as of November 30, 1998 the market value of the Company's
public float was below the $4,000,000 required for continued NASDAQ listing. If
the Company is unable to increase its net tangible assets and the market value
of its public float to meet the NASDAQ's requirements for continued listing, the
Company's securities may be delisted from NASDAQ. In such event, trading, if
any, in the shares of Common Stock would thereafter be conducted in the
over-the-counter markets in the so-called "pink sheets" or on the NASD's
"Electronic Bulletin Board". Consequently, the liquidity of the Company's
securities could be impaired, not only in the number of securities which could
be bought and sold, but also through delays in the timing of the transactions,
reductions in security analysts' and the news media's coverage of the Company,
and lower prices for the Company's securities than otherwise might be attained.
If the Company's securities were to be delisted from NASDAQ, they could
become subject to Rule 15g-9 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), which imposes additional sales practice
requirements on broker-dealers which sell such securities to persons other than
established customers and "accredited investors" (generally, individuals with
net worths in excess of $1,0000,000 or annual incomes exceeding $200,000, or
$300,000 together with their spouses). For transactions covered by this rule, a
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written
19
<PAGE> 22
consent to the transaction prior to the sale. Consequently, the rule may
adversely affect the ability of broker-dealers to sell the Company's securities
acquired in the secondary market.
Securities and Exchange Commission ("Commission") regulations define a
"penny stock" to be any non-NASDAQ equity security that has a market price (as
therein defined) of less than $5.00 per share or with an exercise price of less
than $5.00 per share, subject to certain exceptions. For any transaction
involving a penny stock, unless exempt, the rules require delivery, prior to any
transaction in a penny stock, of a disclosure schedule prepared by the
Commission relating to the penny stock market. Disclosure is also required to be
made about commissions payable to both the broker-dealer and the registered
representative and current quotations for the securities. Finally, monthly
statements are required to be sent disclosing recent price information for the
penny stock held in the account and information on the limited market in penny
stocks.
The foregoing required penny stock restrictions will not apply to the
Company's securities if such securities are listed on NASDAQ and have certain
price and volume information provided on a current and continuing basis or meet
certain minimum tangible assets or average revenue criteria. There can be no
assurance that the Company's securities will qualify for exemption from these
restrictions. In any event, even if the Company's securities were exempt from
such restrictions, it would remain subject to Section 15(b)(6) of the Exchange
Act, which gives the Commission the authority to prohibit any person that is
engaged in unlawful conduct while participating in a distribution of penny stock
from associating with a broker-dealer or participating in the distribution of a
penny stock, if the Commission finds that such a restriction would be in the
public interest. If the Company's securities were subject to the rules on penny
stocks, the market liquidity for the Company's securities would be severely
adversely affected.
YEAR 2000 COMPLIANCE
The Company has completed a comprehensive review of its computer systems
to identify all software applications that could be affected by the inability of
many existing computer systems to process time-sensitive data accurately beyond
the year 1999 (referred to as the "Year 2000" issue). The Company is also
continuing to monitor its computer systems and the adequacy of the processes and
progress of third-party vendors of systems that may be affected by the Year 2000
issue. The Company is dependent on third-party computer systems and
applications, particularly with respect to such critical tasks as accounting,
billing and buying, and it also relies on its own computer systems. The Company
expects to complete its Year 2000 compliance program by mid-1999 and anticipates
that its total additional expenditures on such program will not exceed $5,000.
However, the Company may experience cost overruns in the future, which could
have a material adverse effect on its business, results of operations and
financial condition. While management believes the Company's procedures are
designed to be successful, because of the complexity of the Year 2000 issue and
the interdependence of organizations using computer systems, the Company's
efforts, or those of third parties with whom it interacts, may not be
satisfactorily completed in a timely fashion. If the Company fails to adequately
address the Year 2000 issue, then its business, results of operations and
financial condition could be materially adversely affected.
20
<PAGE> 23
ITEM 7. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Simulations Plus, Inc.
We have audited the accompanying consolidated balance sheet of Simulations Plus,
Inc. (a California corporation) and subsidiary as of August 31, 1998, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the two years in the period ended August 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Simulations Plus,
Inc. and subsidiary as of August 31, 1998, and the consolidated results of their
operations and their consolidated cash flows for each of the two years in the
period ended August 31, 1998 in conformity with generally accepted accounting
principles.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
November 5, 1998
21
<PAGE> 24
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AUGUST 31, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 198,154
Accounts receivable, net of allowance for doubtful
accounts of $16,130 375,770
Income tax receivable 28,941
Inventory 348,675
-----------
Total current assets 951,540
CAPITALIZED COMPUTER SOFTWARE DEVELOPMENT COSTS, net
of accumulated amortization of $739,713 823,127
FURNITURE AND EQUIPMENT, net 190,203
OTHER ASSETS 45,988
-----------
TOTAL ASSETS $ 2,010,858
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 97,128
Accounts payable 334,759
Accrued payroll and other expenses 185,383
Accrued warranty and service costs 48,496
Current portion of capitalized lease obligations 30,365
-----------
Total current liabilities 696,131
CAPITALIZED LEASE OBLIGATIONS, net of current portion 30,935
-----------
Total liabilities 727,066
-----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $0.001 par value
20,000,000 shares authorized
3,350,000 shares issued and outstanding 3,350
Additional paid-in capital 4,595,771
Accumulated deficit (3,315,329)
-----------
Total shareholders' equity 1,283,792
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,010,858
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE> 25
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED AUGUST 31,
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
NET SALES $ 2,645,159 $ 2,493,101
COST OF SALES 1,755,905 1,252,343
----------- ----------
GROSS PROFIT 889,254 1,240,758
----------- ----------
OPERATING EXPENSES
Selling, general, and administrative 2,683,282 2,277,022
Research and development 390,446 133,023
----------- -----------
Total operating expenses 3,073,728 2,410,045
----------- -----------
LOSS FROM OPERATIONS (2,184,474) (1,169,287)
----------- -----------
OTHER INCOME (EXPENSE)
Interest income 58,215 25,709
Income from grant 150,000 17,159
Interest expense (16,447) (68,858)
Loss in investment of Healthweb, Inc., at equity (74,933) --
Financing costs -- (280,000)
----------- -----------
Total other income (expense) 116,835 (305,990)
----------- -----------
LOSS BEFORE PROVISION FOR (BENEFIT FROM) INCOME TAXES (2,067,639) (1,475,277)
PROVISION FOR (BENEFIT FROM) INCOME TAXES 1,600 (38,800)
----------- -----------
NET LOSS $(2,069,239) $(1,436,477)
=========== ===========
BASIC LOSS PER SHARE $ (0.62) $ (0.57)
=========== ===========
DILUTED LOSS PER SHARE $ (0.62) $ (0.57)
=========== ===========
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING 3,350,000 2,527,370
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE> 26
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED AUGUST 31,
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings
------------------------- Paid-in (Accumulated
Shares Amount Capital (Deficit) Total
---------- ---------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, AUGUST 31, 1996 2,200,000 $ 2,200 $ -- $ 190,387 $ 192,587
SALE OF COMMON STOCK
IN INITIAL PUBLIC OFFERING 1,150,000 1,150 5,748,850 5,750,000
OFFERING COSTS (1,433,079) (1,433,079)
ISSUANCE OF WARRANTS
FOR FINANCING COSTS 280,000 280,000
NET LOSS (1,436,477) (1,436,477)
---------- ---------- ----------- ----------- -----------
BALANCE, AUGUST 31, 1997 3,350,000 3,350 4,595,771 (1,246,090) 3,353,031
NET LOSS (2,069,239) (2,069,239)
---------- ---------- ----------- ----------- -----------
BALANCE, AUGUST 31, 1998 3,350,000 $ 3,350 $ 4,595,771 $(3,315,329) $ 1,283,792
========== ========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE> 27
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31,
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,069,239) $ (1,436,477)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization of furniture and equipment 67,794 31,777
Amortization of capitalized software development costs 564,299 108,087
Deferred taxes -- 380
Loss in investment of Healthweb, Inc., at equity 74,933 --
Issuance of warrants for financing activities -- 280,000
(Increase) decrease in
Accounts receivable (719) (125,637)
Income tax receivable 28,485 (22,149)
Inventory (172,570) (130,736)
Other assets (10,992) (9,057)
Increase (decrease) in
Accounts payable 194,217 (36,946)
Accrued compensation due to officer -- (150,000)
Accrued payroll and other expenses 34,674 77,245
Accrued warranty and service costs (3,363) 13,418
------------ ------------
Net cash used in operating activities (1,292,481) (1,400,095)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of furniture and equipment (20,858) (80,409)
Capitalized computer software development cost (640,706) (631,865)
Advances to Healthweb, Inc., at equity (74,933) --
------------ ------------
Net cash used in investing activities (736,497) (712,274)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit -- 201,603
Payments on line of credit 97,128 (295,142)
Payments on capitalized lease obligations (26,757) (22,482)
Increase in deferred offering costs -- (1,338,949)
Proceeds from notes payable -- 1,400,000
Payments on notes payable -- (1,600,000)
Payments to officer -- (40,000)
Proceeds from officer -- 40,000
Proceeds from the sale of common stock -- 5,750,000
------------ ------------
Net cash provided by financing activities 70,371 4,095,030
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE> 28
SIMULATIONS PLUS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED AUGUST 31,
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net increase (decrease) in cash and cash equivalents $(1,958,607) $1,982,661
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,156,761 174,100
----------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 198,154 $2,156,761
=========== ==========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During the years ended August 31, 1998 and 1997, the Company paid $1,600 and
$10,354, respectively, in income taxes and $16,447 and $137,608, respectively,
in interest. During the year ended August 31, 1997, the Company received $28,985
in income tax refunds.
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
The Company entered into capital lease obligations of $6,473 and $85,952 during
the years ended August 31, 1998 and 1997, respectively, and transferred $46,693
and $7,420 of computer hardware from inventory to furniture and equipment during
the years ended August 31, 1998 and 1997, respectively.
NOTE 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Simulations Plus, Inc. was incorporated on July 17, 1996. On August 29,
1996, the shareholders of Words+, Inc. exchanged their 2,000 shares of
Words+, Inc. common stock for 2,200,000 shares of Simulations Plus,
Inc. common stock, and Words+, Inc. became a wholly-owned subsidiary of
Simulations Plus, Inc. (collectively, the "Company"). The effect of the
stock-for-stock exchange is presented retroactively in the accompanying
consolidated financial statements. All intercompany accounts and
transactions have been eliminated.
Line of Business
The Company designs and develops computer software and manufactures
augmentative communication devices and computer access products that
provide a voice for those who cannot speak and allow physically-disabled
persons to operate a standard computer. The Company also designs
interactive, educational software programs that simulate science
experiments conducted in high school science classes. In addition, the
Company is developing pharmaceutical simulation software to promote
cost-effective solutions to a number of problems in pharmaceutical
research and in the education of pharmacy and medical students.
Basis of Presentation
The accompanying financial statements have been prepared in accordance
with generally
The accompanying notes are an integral part of these financial statements.
26
<PAGE> 29
accepted accounting principles which contemplate continuation of the
Company as a going concern. However, the Company has sustained substantial
losses from operations in recent years. In addition, the Company has used,
rather than provide, cash in its operations.
The Company believes that existing capital and anticipated funds from
operations, cost reductions from downsizing certain segments of
operations, and temporary salary reductions for senior management will be
sufficient to meet its anticipated cash needs for working capital and
capital expenditures for at least the next 13 months. Thereafter, if cash
generated from operations is insufficient to satisfy the Company's capital
requirements, the Company may have to sell additional equity or debt
securities or obtain expanded credit facilities. In the event such
financing is needed in the future, there can be no assurance that such
financing will be available to the Company, or, if available, that it will
be in amounts and on terms acceptable to the Company. If cash flows from
operations are insufficient to continue operations at the current level,
and if no additional financing is obtained, then management will
restructure the Company in a way to preserve its pharmaceutical and
disability businesses while maintaining expenses within operating cash
flows.
27
<PAGE> 30
NOTE 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosures of contingent assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly-liquid investments purchased with original maturities of three
months or less to be cash equivalents.
Inventory
Inventory is stated at the lower of cost (first-in, first-out basis) or
market and consists primarily of computers and peripheral computer
equipment.
Furniture and Equipment
Furniture and equipment, including equipment under capital leases, are
recorded at cost, less accumulated depreciation and amortization.
Depreciation and amortization are provided using the straight-line method
over the estimated useful lives as follows:
<TABLE>
<S> <C>
Equipment 5 years
Computer equipment 3 to 7 years
Furniture and fixtures 5 to 7 years
Leasehold improvements 5 years
</TABLE>
Maintenance and minor replacements are charged to expense as incurred.
Gains and losses on disposals are included in the results of operations.
Advertising
The Company expenses advertising costs as incurred. Advertising costs for
the years ended August 31, 1998 and 1997 were $66,537 and $88,422,
respectively.
Research and Development Costs
Research and development costs are charged to expense as incurred until
technological feasibility has been established. These costs consist
primarily of salaries and direct payroll related costs.
28
<PAGE> 31
NOTE 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Software Development Costs
Software development costs are capitalized in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Cost
of Computer Software to be Sold, Leased, or Otherwise Marketed."
Capitalization of software development costs begins upon the establishment
of technological feasibility and is discontinued when the product is
available for sale. The establishment of technological feasibility and the
ongoing assessment for recoverability of capitalized software development
costs require considerable judgment by management with respect to certain
external factors including, but not limited to, technological feasibility,
anticipated future gross revenues, estimated economic life, and changes in
software and hardware technologies. Capitalized software development costs
are comprised primarily of salaries and direct payroll related costs and
the purchase of existing software to be used in the Company's software
products.
Amortization of capitalized software development costs is provided on a
product-by-product basis on the straight-line method over the estimated
economic life of the products (not to exceed three years). Management
periodically compares estimated net realizable value by product with the
amount of software development costs capitalized for that product to
ensure the amount capitalized is not in excess of the amount to be
recovered through revenues. Any such excess of capitalized software
development costs to expected net realizable value is expensed at that
time.
Revenue Recognition
The Company recognizes revenues related to software licenses and software
maintenance in accordance with the American Institute of Certified Public
Accountants ("AICPA") Statements of Position No. 97-2, "Software Revenue
Recognition." Product revenue is recorded at the time of shipment, net of
estimated allowances and returns. Post-contract customer support ("PCS")
obligations are insignificant; therefore, revenue for PCS is recognized at
the time of shipment, and the costs of providing such support services are
accrued and amortized over the obligation period. The Company provides,
for a fee, additional training and service calls to its customers and
recognizes revenue at the time the training or service call is provided.
29
<PAGE> 32
NOTE 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred income
taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount expected to be
realized. The provision for income taxes represents the tax payable for
the period and the change during the period in deferred tax assets and
liabilities.
Fair Value of Financial Instruments
The Company measures its financial assets and liabilities in accordance
with generally accepted accounting principles. For certain of the
Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable, accrued payroll and other expenses,
and accrued warranty and service costs, the carrying amounts approximate
fair value due to their short maturities. The amounts shown for
capitalized lease obligations also approximate fair value because current
interest rates offered to the Company for leases of similar maturities are
substantially the same.
Stock Options and Warrants
During 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123, "Accounting for Stock-Based Compensation," which defines a fair
value based method of accounting for stock-based compensation. However,
SFAS No. 123 allows an entity to continue to measure compensation cost
related to stock and stock options issued to employees using the intrinsic
method of accounting prescribed by Accounting Principles Board Opinion No.
25 ("APB 25"), "Accounting for Stock Issued to Employees." Entities
electing to remain with the accounting method of APB 25 must make pro
forma disclosures of net income and earnings per share, as if the fair
value method of accounting defined in SFAS No. 123 had been applied. The
Company has elected to account for its stock-based compensation to
employees under APB 25.
30
<PAGE> 33
NOTE 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net Loss per Share
The Company reports earnings per share in accordance with SFAS No. 128,
"Earnings per Share." Basic earnings per share is computed by dividing
income available to common shareholders by the weighted-average number of
common shares available. Diluted earnings per share is computed similar to
basic earnings per share except that the denominator is increased to
include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the
additional common shares were dilutive. Because the Company has incurred
net losses, basic and diluted loss per share are the same.
Concentrations and Uncertainties
International sales accounted for 12% and 17% of net sales for the years
ended August 31, 1998 and 1997, respectively. Amounts due from Medicaid
represented 25% of the net accounts receivable balance at August 31, 1998.
The Company operates in the computer software industry which is highly
competitive and changes rapidly. The Company's operating results could be
significantly affected by its ability to develop new products and find new
distribution channels for new and existing products.
The Company does not manufacture certain of its components including the
computer that is used in one of the Company's products. Such computer is
sourced by the Company from a single vendor. The Company also uses a
number of pictographic symbols that are used in its software products
which are licensed from a third party. The inability of the Company to
obtain computers used in its products or to renew its licensing agreement
to use pictographic symbols could negatively impact the Company's
financial position, results of operations, and cash flows.
Recently Issued Accounting Pronouncements
The FASB issued SFAS No. 130, "Reporting Comprehensive Income," which is
effective for financial statements with fiscal years beginning after
December 15, 1997. Earlier application is permitted. SFAS No. 130
establishes standards for reporting and display of comprehensive income
and its components in a full set of general-purpose financial statements.
The Company does not expect adoption of SFAS No. 130 to have a material
impact, if any, on its financial position or results of operations.
31
<PAGE> 34
NOTE 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently Issued Accounting Pronouncements (Continued)
The FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," effective for fiscal years beginning after
December 15, 1997. SFAS No. 131 requires a company to report certain
information about its operating segments including factors used to
identify the reportable segments and types of products and services from
which each reportable segment derives its revenues. The Company does not
anticipate any material change in the manner that it reports its segment
information under this new pronouncement.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Post-Retirement Benefits." The Company does not
expect adoption of SFAS No. 132 to have a material impact, if any, on its
financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement established accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities and is effective for fiscal years beginning after June 15,
1999. The Company does not expect adoption of SFAS No. 133 to have a
material impact, if any, on its financial position or results of
operations.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise." The Company does
not expect adoption of SFAS No. 134 to have a material impact, if any, on
its financial position or results of operations.
NOTE 2 - CASH AND CASH EQUIVALENTS
The Company maintains cash deposits at banks located in California.
Deposits at each bank are insured by the Federal Deposit Insurance
Corporation up to $100,000. As of August 31, 1998, uninsured portions of
balances held at banks aggregated to $4,230. In addition, the Company also
had on deposit with a high-quality financial institution cash and cash
equivalents in the amount of $158,357 that are uninsured. The Company has
not experienced any losses in such accounts and believes it is not exposed
to any significant credit risk on cash and cash equivalents.
32
<PAGE> 35
NOTE 3 - FURNITURE AND EQUIPMENT
Furniture and equipment at August 31, 1998 consisted of the following:
<TABLE>
<S> <C>
Equipment $ 44,004
Computer equipment 363,715
Furniture and fixtures 45,036
Leasehold improvements 5,900
----------
458,655
Less accumulated depreciation and amortization 268,452
----------
TOTAL $ 190,203
==========
</TABLE>
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain facilities for its corporate and operations
offices under a non-cancelable operating lease agreement that expires in
2001. The Company also leases certain office and computer equipment under
non-cancelable capital lease arrangements.
Future minimum lease payments under non-cancelable capital and operating
leases with initial or remaining terms of one year or more are as follows:
<TABLE>
<CAPTION>
Year Ending Operating Capital
August 31, Leases Leases
----------- ----------- ----------
<S> <C> <C>
1999 $ 120,000 $ 37,319
2000 131,040 31,811
2001 140,400 2,254
----------- ----------
$ 391,440 71,384
===========
Less amount representing interest 10,084
----------
61,300
Less current portion 30,365
----------
LONG-TERM PORTION $ 30,935
==========
</TABLE>
Included in furniture and equipment is capitalized leased equipment of
$142,217 with accumulated amortization of $89,584 at August 31, 1998.
33
<PAGE> 36
NOTE 4 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Leases (Continued)
Rent expense was $173,209 and $142,195 for the years ended August 31, 1998
and 1997, respectively.
Employee Agreement
The Company entered into an employment agreement with its president that
extends until August 31, 1999. The employment agreement provides for an
annual salary of $150,000 and an annual bonus based on the Company's
performance not to exceed $150,000.
License Agreement
The Company entered into an agreement with Therapeutic Systems Research
Laboratory ("TSRL") to jointly develop simulation of the absorption of
drug compounds in the gastrointestinal tract. Upon execution of a
definitive License Agreement, TSRL received a one-time payment of $75,000,
plus a royalty of 20% of net sales of the absorption simulation.
Listing on Stock Exchange
In order to maintain quotation of its securities on the NASDAQ SmallCap
Market ("NASDAQ"), the Company has to maintain certain minimum financial
requirements. As of August 31, 1998, the Company has ceased to meet one of
the requirements for continued listing, namely the Company's net tangible
assets as of August 31, 1998 were $1,284,000 which is below the $2,000,000
required by the NASDAQ. Further, as of November 30, 1998, the market value
of the Company's public float was below the $4,000,000 required for
continued NASDAQ listing. If the Company is unable to increase its net
tangible assets and the market value of its public float to meet the
NASDAQ's requirements for continued listing, the Company's securities may
be delisted from NASDAQ. In such event, trading, if any, in the shares of
common stock would thereafter be conducted in the over-the-counter markets
in the so-called "peek sheets" or on the NASD's "Electronic Bulletin
Board." Consequently, the liquidity of the Company's securities could be
impaired, not only in the number of securities which could be bought and
sold, but also through delays in the timing of the transactions,
reductions in security analysts' and the news media's coverage of the
Company, and lower prices for the Company's securities than otherwise
might be attained.
34
<PAGE> 37
NOTE 5 - INCOME TAXES
A reconciliation of the expected income tax (benefit) computed using the
federal statutory income tax rate to the Company's effective income tax
rate is as follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Income tax computed at federal
statutory tax rate (34.0)% (34.0)%
State taxes, net of federal benefit 0.1 0.1
Change in valuation allowance 34.0 31.1
Other -- 0.2
------ ------
TOTAL 0.1% (2.6)%
====== ======
</TABLE>
Significant components of the Company's deferred tax assets and
liabilities for income taxes at August 31 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
----------- ---------
<S> <C> <C>
Deferred tax assets
Accrued payroll and other expenses $ 40,989 $ 32,715
Accrued warranty and service costs 19,318 20,744
Net operating loss carryforward 1,456,886 625,498
Other 22,667 6,000
----------- ---------
1,539,860 684,957
Valuation allowance 1,202,018 378,756
----------- ---------
337,842 306,201
----------- ---------
Deferred tax liabilities
Fixed assets (9,958) (7,513)
Capitalized computer software
development costs (327,884) (298,688)
----------- ---------
(337,842) (306,201)
----------- ---------
NET DEFERRED TAX ASSET $ -- $ --
=========== =========
</TABLE>
The Company's valuation allowance increased $823,262 during the year ended
August 31, 1998. At August 31, 1998, the Company had net operating loss
carryforwards of approximately $3,900,000 and $2,000,000 for federal and
state, respectively, that expire throughout the year 2018.
35
<PAGE> 38
NOTE 5 - INCOME TAXES (CONTINUED)
The components of the income tax provision (benefit) for the years ended
August 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Current
Federal $ -- $(40,780)
State 1,600 1,600
-------- --------
1,600 (39,180)
-------- --------
Deferred
Federal -- 293
State -- 87
-------- --------
-- 380
-------- --------
TOTAL $ 1,600 $(38,800)
======== ========
</TABLE>
NOTE 6 - SHAREHOLDERS' EQUITY
Issuance of Common Stock
In June 1997, the Company completed a stock offering where it sold
1,150,000 shares of common stock at $5.00 per share. Gross proceeds from
the sale were $5,750,000 and the Company incurred offering costs of
$1,433,079.
Warrants
In August and September 1996, the Company entered into two Subscription
Agreements whereby the Company issued 100,000 and 150,000 warrants,
respectively, to purchase shares of common stock. The warrants are
exercisable at $4.00 per share and expire five years from the date of
grant.
In January 1997, the Company entered into Subscription Agreements whereby
the Company issued notes in the amount of $1,100,000 and issued 280,000
warrants to purchase common stock. The warrants are exercisable at $2.50
per share, are subject to a 12-month, lock-up period, and expire five
years from the grant date. The notes were repaid upon the completion of
the Company's stock offering. The Company determined that the fair value
of these warrants at the date of grant was $3.50 per warrant due to the
time between grant date and the expected completion of the stock offering
based on the condition of the Company on the grant date and the 12-month,
lock-up period (from the date of the stock offering) associated with these
warrants. Accordingly, the Company has recognized additional financing
costs associated with the $1,100,000 notes of $280,000 which was being
amortized over the term of the notes. The unamortized portion of this
additional financing cost upon the completion of the stock offering was
charged to earnings.
36
<PAGE> 39
NOTE 6 - SHAREHOLDERS' EQUITY (CONTINUED)
Stock Option Plan
In September 1996, the board of directors adopted and the shareholders
approved the 1996 Stock Option Plan (the "Option Plan") under which a
total of 250,000 shares of common stock has been reserved for issuance. As
of August 31, 1998, 50,000 shares have been granted. The Option Plan
terminates in 2006, subject to earlier termination by the board of
directors.
The Company has adopted only the disclosure provisions of SFAS No. 123. It
applies APB 25 and related interpretations in accounting for its plans and
does not recognize compensation expense for its stock-based compensation
plans other than for restricted stock and options issued to outside third
parties. If the Company had elected to recognize compensation expense
based upon the fair value at the grant date for awards under this plan
consistent with the methodology prescribed by SFAS No. 123, the Company's
net loss and loss per share would be reduced to the pro forma amounts
indicated below for the year ended August 31, 1998:
<TABLE>
<S> <C>
Net loss
As reported $(2,069,239)
Pro forma $(2,069,239)
Basic and diluted loss per common share
As reported $ (0.62)
Pro forma $ (0.62)
</TABLE>
The fair value of these options was estimated at the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions for the year ended August 31, 1998: dividend yield of 0%;
expected volatility of 65%; risk-free interest rate of 5%; and expected
life of 5 years. The weighted-average fair value of options granted during
the year ended August 31, 1998 was $4.25, and the weighted-average
exercise price was $4.25.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of
the fair value of its employee stock options.
37
<PAGE> 40
NOTE 6 - SHAREHOLDERS' EQUITY (CONTINUED)
Stock Option Plan (Continued)
<TABLE>
<CAPTION>
Weighted-
Average
Exercise
Number Price
of Shares Per Share
--------- ---------
<S> <C> <C>
Outstanding, August 31, 1997 -- $ --
Granted 50,000 $4.25
Expired/canceled (6,260) $4.25
-------
OUTSTANDING, AUGUST 31, 1998 43,740 $4.25
=======
EXERCISABLE, AUGUST 31, 1998 -- $ --
=======
</TABLE>
The weighted-average remaining contractual life of options outstanding
issued under the Plan is seven years at August 31, 1998.
NOTE 7 - RELATED PARTY TRANSACTIONS
As of August 31, 1996, accrued compensation due to officer was $150,000
which represents accrued salary due to the Company's president. The amount
due does not accrue interest and was repaid from proceeds received in
connection with the Company's stock offering.
In connection with the Company's stock offering, the Company agreed to
grant to its president 300,000 warrants to purchase up to 300,000 shares
of the Company's common stock. The number of warrants to be granted will
be based on net income for the year ended August 31, 1998, but cannot
exceed 300,000 warrants. All such warrants granted will be exercisable for
a period of five years at an exercise price of $5.00 per share. Any
difference between the price of the Company common stock and the exercise
price of $5.00 per share on the measurement date will be recorded as an
expense in accordance with APB 25.
In January 1997, the Company's president borrowed $40,000 from the
Company. The amount bears interest at 10% per annum and was repaid upon
the completion of the Company's stock offering.
38
<PAGE> 41
NOTE 8 - LINE OF CREDIT
The Company has available an unsecured $100,000 revolving line of credit
from a bank with interest payable on a monthly basis at prime (8.5% at
August 31, 1998) plus 3%. The line is personally guaranteed by the
Company's president. As of August 31, 1998, the amount drawn against the
line of credit was $97,128.
NOTE 9 - SUBSEQUENT EVENT
In October 1998, the Company granted 212,000 stock options to various
employees at an exercise price of $1.31 per share, which was the fair
market value at the date of grant.
39
<PAGE> 42
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
40
<PAGE> 43
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The directors, executive officers and key employees of the Company and
their ages and positions held with the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
DIRECTORS AND EXECUTIVE
OFFICES:
Walter S. Woltosz 53 Chairman of the Board, Chief Executive Officer and
President of the Company and Words+.
Virginia E. Woltosz 47 Senior Vice President, Secretary and Director of the
Company and Words+.
Dr. David Z. D'Argenio 48 Director and Consultant to the Company
Dr. Richard Weiss 63 Director
Ronald F. Creeley 47 Vice President, Marketing and Sales of the Company
Momoko A. Beran 46 Chief Financial Officer of the Company and Words+
CERTAIN KEY EMPLOYEES AND
CONSULTANTS:
Dr. Michael Bolger 47 Director of Life Sciences
</TABLE>
Walter S. Woltosz is a co-founder of the Company and has served as its
Chief Executive Officer and President and as Chairman of the Board of Directors
since its incorporation in July 1996. Mr. Woltosz is also a co-founder of Words+
and has served as its Chief Executive Officer and President since its
incorporation in 1981.
Virginia E. Woltosz is a co-founder of the Company and has served as
its Senior Vice President and Secretary since its incorporation in July
1996. Mrs. Woltosz is also a co-founder of Words+ and has served as its Vice
President, Secretary and Treasurer since its incorporation in 1981. Virginia
E. Woltosz is the wife of Walter S. Woltosz.
Ronald F. Creeley joined the Company in February 1997 as its Vice
President, Marketing and Sales. Prior to joining the Company, Mr. Creeley had
been Marketing Director at Union Pen Company, Time Resources, and New England
Business Services, Inc., with experience in marketing and research.
Dr. David Z. D'Argenio started to serve as a Director of the Company in
June 1997. He is currently Professor and Chairman of Biomedical Engineering at
the University of Southern California
41
<PAGE> 44
("USC"), and has been on the faculty at USC since 1979. He also serves as the
Co-Director of the Biomedical Simulations Resource Project at USC, a project
funded by the National Institutes of Health since 1985.
Dr. Richard R. Weiss started to serve as a Director of the Company in
June 1997. From October 1994 to the present, Dr. Weiss has acted as a
consultant to a number of aerospace companies and to the U.S. Department of
Defense through his own consulting entity, Richard R. Weiss Consulting
Services. From June 1993 through July 1994, Dr. Weiss was employed by the
U.S. Department of Defense as its Deputy Director, Space Launch & Technology.
Momoko A. Beran joined Words+ in June 1993 as Director of Accounting and
was named the Company's Chief Financial Officer in July 1996.
Certain Key Employees and Consultants:
Dr. Michael B. Bolger is the Director, Life Sciences for the Company,
having joined the Company in October 1996. Dr. Bolger is also an Associate
Professor of Pharmacy at the University of Southern California, and was a
co-founder and former director of CoCensys, Inc., a pharmaceutical firm in
Irvine, California. He is the author of 16 computer programs related to
molecular chemistry, pharmacokinetics, cellular growth, and data reduction in
pharmacology and related areas, including the Cyber Patient, drug shelf life,
and HelixGen(TM) simulation programs the Company acquired in 1996.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT:
Section 16(a) of the Securities Exchange Act of 1934 as amended (the
"Exchange Act") requires the Company's officers and directors, and persons who
own more than ten percent of its Common Stock to file reports of ownership and
changes of ownership with the Securities and Exchange Commission and NASDAQ.
Such persons are also required to furnish the Company with copies of all Section
16(a) forms they file.
Based solely on the Company's review of the copies of those forms received
by the Company, or written representations from such persons that no Forms 5
were required to be filed, it appears that all reports due were timely filed.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
paid or accrued for the fiscal year ended August 31, 1998, 1997 and 1996 by the
Company to or for the benefit of the Company's President. No other executive
officers of the Company received total annual compensation for the fiscal year
ended August 31, 1998, 1997 and 1996 that exceeded $100,000. As permitted under
the rules of the Securities and Exchange Commission, no amounts are shown in the
table below with respect to any perquisites paid to named officer because the
aggregate amount of such perquisites (e.g., auto allowance) did not exceed the
lessor of (i) $50,000 or (ii) 10% of the total annual salary and bonus of a
named officer.
42
<PAGE> 45
<TABLE>
<CAPTION>
NAME AND FISCAL
PRINCIPAL POSITION SALARY YEAR
------------------ -------- ------
<S> <C> <C>
Walter S. Woltosz....................................... $ 82,500 1996
President and Chief Executive Officer................... $300,000* 1997
$143,750 1998
</TABLE>
- ----------
* Includes $150,000 accrued but unpaid compensation paid from proceeds of the
Company's Initial Public Offering.
EMPLOYMENT AND OTHER COMPENSATION AGREEMENTS
The Company has an employment agreement with Walter Woltosz commencing
September 1, 1996 that extends until August 31, 1999. The agreement provides for
an annual salary of $150,000. Pursuant to such agreement, Mr. Woltosz is
entitled to such health insurance and other benefits that are not inconsistent
with that which the Company customarily provides to its other management
employees and to reimbursement of customary, ordinary and necessary business
expenses incurred in connection with the rendering of services to the Company.
The agreement also provides that the Company may terminate the agreement upon 30
days written notice if termination is without cause and that the Company's only
obligation to Mr. Woltosz would be for a payment equal to the greater of (i) 12
months of salary or (ii) the remainder of the term of the employment agreement
from the date of notice of termination. Further, the agreement provides that the
Company may terminate the agreement for cause (as defined) and that the
Company's only obligation to Mr. Woltosz would be limited to the payment of Mr.
Woltosz' salary and benefits through and until the effective date of any such
termination.
Commencing with the Company's fiscal year ending 1997 and for each fiscal
year thereafter, Walter and Virginia Woltosz are entitled to receive bonuses not
to exceed $150,000 and $60,000, respectively, equal to 5% of the Company's net
annual income before taxes. In addition, if the closing price of the Company's
Common Stock averages in excess of $10 per share for a period of 20 consecutive
trading days during any fiscal year, then the Company will grant to each of Mr.
and Mrs. Woltosz options under the 1996 Stock Option Plan, exercisable for five
years, to purchase 50 shares of Common Stock for each $1,000 of net income
before taxes that the Company earns with respect to such fiscal year (up to a
Maximum of 60,000 options each until August 31, 1999) at an exercise price equal
to the market value per share as of the date of grant.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from the
Company's definitive proxy statement (the "Proxy Statement") for its 1998 annual
stockholders' meeting, which hereby incorporated by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 12 will be contained in the Proxy
Statement, which is incorporated by reference.
43
<PAGE> 46
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report as required by
Item 601 of Regulation S-B:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------
<S> <C>
3.1 Articles of Incorporation of the Registrant(1)
3.2 Amended and Restated Bylaws of the Registrant(1)
4.1 Articles of Incorporation of the Registrant (incorporated by
reference to Exhibit 3.1 hereof) and Bylaws of the Registrant
(incorporated by reference to Exhibit 3.2 hereof)
4.2 Form of Common Stock Certificate(1)
4.3 Share Exchange Agreement(1)
10.1 Simulations Plus, Inc. 1996 Stock Option Plan (the "Option Plan") and
terms of agreements relating thereto(1)+
10.2 Subscription Agreement with Patricia Ann O'Neil(1)
10.3 Security Agreement with Patricia Ann O'Neil(1)
10.4 Promissory Note made by the Registrant in favor of Patricia Ann
O'Neil(1)
10.5 Warrants to purchase 150,000 shares of Common Stock of the Registrant
issued to Patricia Ann O'Neil(1)
10.6 First Amendment to Agreement with Patricia Ann O'Neil(1)
10.7 Subscription Agreement with Fernando Zamudio(1)
10.8 Security Agreement with Fernando Zamudio(1)
10.9 Promissory Note made by the Registrant in favor of Fernando
Zamudio(1)
10.10 Warrant to purchase 100,000 shares of Common Stock of the Registrant
issued to Fernando Zamudio(1)
10.11 Employment Agreement by and between the Registrant and Walter S.
Woltosz(1)+
10.12 Performance Warrant Agreement by and between the Registrant and
Walter S. Woltosz + Virginia E. Woltosz(2)+
10.13 Software Acquisition Agreement by and Between the Registrant and
Michael B. Bolger(1)
10.14 Sublease Agreement dated May 7, 1993 by and between the Registrant
and Westholme Partners (along with Consent to Sublease and master
lease agreement)(1)
10.15 Lease Agreements dated August 22, 1996 by and between Words+, Inc.
and Abbey-Sierra LLC(1)
10.16 Form of 10% Amended and Restated Promissory Note issued in connection
with the Registrant's Private Placement(2)
10.17 Form of Subscription Agreement relative to the Registrant's Private
Placement(1)
10.18 Form of Lock-Up Agreement with Bridge Lenders(2)
10.19 Form of Indemnification Agreement(1)
10.20 Form of Lock-Up Agreement with the Woltosz'(2)
10.21 Letter of Intent by and between the Registrant and Therapeutic
Systems Research Laboratories(1)
10.22 Form of Representative's Warrant to be issued by the Registrant in
favor of the Representative(2)
10.23 Form of Warrant issued to Bridge Lenders(2)
10.24 License Agreement by and between the Registrant and Therapeutic
Systems Research Laboratories(3)
10.25 Grant Award Letter from National Science Foundation(4)
</TABLE>
44
<PAGE> 47
<TABLE>
<S> <C>
10.26 Distribution Agreement with Teijin Systems Technology LTD.(4)
10.27 Lease Agreements by and between Simulations Plus, Inc. and Martin
Properties, Inc.(4)
10.28 Software OEM Agreement for Assistive Market Developer by and between
Words+, Inc. and Digital Equipment Corporation.(4)
10.29 Purchase Agreement by and between Words+, Inc. and Epson America,
Inc.(4)
27.1 Financial Data Schedule(4)
</TABLE>
(1) Incorporated by reference to the Company's Registration Statement on Form
SB-2 (Registration No. 333-6680) filed on March 25, 1997 (the
"Registration Statement").
(2) Incorporated by reference to Pre-Effective Amendment No. 1 to the
Registration Statement filed on May 27, 1997.
(3) Incorporated by reference to the Company's Form 10-KSB for the fiscal year
ended August 31, 1997.
(4) Filed herewith.
+ Management Contract or Compensatory Plan.
(b) Reports on Form 8-K
None.
45
<PAGE> 48
SIGNATURES
Pursuant to the requirements of Section 13or15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Palmdale, State of California, On December 14, 1998.
SIMULATIONS PLUS, INC.
By /s/ MOMOKO A. BERAN
-----------------------------------
Momoko A. Beran
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Registrant
and in the capacities indicated on December 14, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ WALTER S. WOLTOSZ Chairman of the Board of Directors
- ------------------------------------ and Chief Executive Officer
Walter S. Woltosz
/s/ VIRGINIA E. WOLTOSZ Vice President, Secretary and Director of the
- ------------------------------------ Company and Words+
Virginia Woltosz
/s/ DR. DAVID Z. D'ARGENIO Director and Consultant to the Company
- ------------------------------------
Dr. David Z. D'Argenio
Director
- ------------------------------------
Dr. Richard Weiss
/s/ MOMOKO A. BERAN Chief Financial Officer of the Company
- ------------------------------------
Momoko A. Beran
</TABLE>
46
<PAGE> 1
EXHIBIT 10.25
Return-Path: <snerlove@nsf gov>
Date: Wed, 01 Oct 97 13:09:00 EST
From: snerlove@nsf gov
To: [email protected]
Subject: AWARD 9710548, Woltosz, Walter S
Award Date September 29,1997
Grant No. DMI-9710548
Proposal No. DMI-9710548
Mr. Walter Woltosz
President, CEO
Simulations Plus, Inc.
40015 Sierra Highway, B- II0
Palmdale, CA 93550
Dear Mr. Woltosz:
The National Science Foundation hereby awards a grant of $300,000 to Simulation
Plus, Inc. for support of the project described in the proposal referenced
above, as modified by the revised budget and cover page dated June 5, 1997, and
the Certificate of Current Cost or Pricing Data dated September 22, 1997.
This project, under your directions is entitled:
"SBIR PHASE II: Computer Simulation of Science and Technical Laboratory
Exercises for Physically-Disabled Students."
This award is effective October 15, 1997 and expires March 31, 1999.
This grant is awarded pursuant to the authority of the National Science
Foundation Act of 1950 (42 U.S.C. 1861 et seq.) and is subject to the
following terms and conditions:
Payments made under this award will be as follows:
$75,000 Advance Payment
$75,000 Upon acceptance by NSF SBIR Program Officer of first
semiannual report
$75,000 Upon acceptance by NSF SBIR Program Officer of second
semiannual report
$75,000 Upon acceptance by NSF SBIR Program Officer of final
report
Page 1
<PAGE> 2
The attached budget indicates the amounts, by categories, on which NSF has based
its support.
The cognizant NSF program official for this grant is Sara B. (703) 306-1391 ext.
6375. The cognizant NSF grants official is Alfred W. Wilson (703) 306-1218.
Sincerely,
Herbert D. Wolff, III
Grants Officer
SUMMARY PROPOSAL BUDGET
PERSON MOS Funds granted cal acad sumr By NSF
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
A. ( 9.00) Total Senior personnel 17.30 0.00 0.00 $90,450
B. Other Personnel
1. ( 4.00) Post doctoral associates 14.50 0.00 0.00 $64,866
2. ( 0.00) Other professionals 0.00 0.00 0.00 $0
3. ( 0.00) Graduate students $0
4. ( 0.00) Secretarial-clerical $0
5. ( 0.00) Undergraduate students $0
6. ( 0.00) Other $0
Total salaries and wages (A+B) $155,316
C. Fringe benefits (if charged as direct cost) $0
Total salaries wages and fringes (A+B+C) $155,316
D. Total permanent equipment $0
E. Travel 1. Domestic $0
2. Foreign $0
F. Total participant support costs $0
G. Other direct costs
1. Materials and supplies $1,959
2. Publication costs/page charges $700
3. Consultant services $0
4. Computer (ADPE) services $0
5. Subcontracts
6. Other $26,124 $0
</TABLE>
Page 2
<PAGE> 3
<TABLE>
<S> <C> <C> <C>
Total other direct costs $28,783
H. Total direct costs (A through G) $184,099
I. Total indirect costs $97,075
J. Total direct and indirect costs (H+I) $281,174
K. Residual funds / Small business fee
1. Residual funds (if for further support of current
projects GPM 252 and 253) $0
2. Small business fee $18,826
L. Amount of this request (J) or (J - KI + K2) $300,000
M. Cost sharing
</TABLE>
Page 3
<PAGE> 1
EXHIBIT 10.26
Teijin Systems Technology LTD. Company
Distribution Agreement Confidential
THIS AGREEMENT is made this 1st day of August, 1998, between SIMULATIONS PLUS,
INC. a California corporation with principal place of business at 1220 West
Avenue J, Lancaster, CA 93534-2902, United States, hereinafter referred to as
the Company, and TEIJIN SYSTEMS TECHNOLOGY LIMITED headquartered at 2-38-16,
Hongo, Bunkyo-Ku, Tokyo I 1 3, Japan, hereinafter referred to as the
Distributor.
WITNESSETH: In consideration of the mutual covenants hereinafter contained and
for the purpose of promoting the sale within the country of Japan, hereinafter
referred to as the Territory, of GastroPlus(TM) and QMPRPlus(TM), including all
corrected or modified versions and up-versions, hereinafter referred to as the
Products, as detailed in the price list issued by the Company and attached
hereto as Appendix A, it is agreed:
1. APPOINTMENT: The Company appoints the Distributor as the exclusive
distributor for the Products within the Territory. This appointment does not
include Company's grant to the Distributor of any right to make or sell
variations or derivative works of the Products. Sole ownership of copyrights and
other intellectual and proprietary rights to the Products shall remain with the
Company. Distributor accepts the appointment, in the limited scope provided
herein, and agrees to use its best efforts to communicate the features,
benefits, pricing, and availability of the Products to potential customers in
the Distributor's usual and customary course of business.
2. EXCLUSIVE DISTRIBUTORSHIP: The Company will, during the term of this
Agreement, sell to the Distributor, and the Distributor will purchase from the
Company, the Products to be redistributed by the Distributor in the Territory.
The Distributor shall devote its best reasonable commercial efforts for the
adequate exploitation and distribution of the Products within the Territory and
shall maintain an organization sufficient therefor. It is understood that during
the term of this agreement, the Distributor is to be the sole and exclusive
distributor for the Products in the Territory and all inquiries received by the
Company for the Products from the Distributor's Territory will be promptly
referred to the Distributor.
3. TERRITORY AND COMPETING PRODUCTS: The Distributor shall not, without first
obtaining written consent of the Company, sell or distribute (1)
Page 1
<PAGE> 2
the Products outside of the Territory, nor (2) any products of other
manufacturers that may directly compete with the Products of the Company.
4. DISTRIBUTOR PRICING: The Company shall sell the Products to the Distributor
at the prices listed on the product price sheets and catalogs currently
distributed by the Company from time to time, less the trade discounts as
indicated and authorized herein.
Said trade discounts are indicated in Appendix A of this agreement. Samples will
be provided as further indicated in Appendix A of this Agreement. Any products
not included in Appendix A shall be the subject of special written quotation by
the Company, on request.
5. SPECIAL TERMS: The Distributor shall promptly advise the Company whenever
special prices, shipping promises, terms, or other conditions are required to
secure business not otherwise obtainable. In such cases, all elements relating
thereto shall be agreed to in writing by the Company and Distributor before the
final closing of the order and shall not be used to establish a precedent.
6. TAXES, DUTIES AND OTHER CHARGES: Unless otherwise authorized by the Company,
all prices to the Distributor detailed in Appendix A are exclusive of any
federal, state, municipal or other governmental taxes, duties, excise taxes or
tariffs now or hereafter imposed on the sale of the Products, but are inclusive
of any withholding taxes imposed on the prices paid to the Company by the
Distributor. Payment obligations stated in Appendix A are also exclusive of any
shipping, insurance and handling, freight forwarder or carrier agent charges
imposed on the sale of the Products.
Shipments requiring special handling may be surcharged to the Distributor for
the cost in excess of normal handling cost. Quotations and pro forma invoices
for special circumstances are available upon request from the Company.
7. PRICE CHANGES: Pricing decisions and trade discounts are made at the sole
reasonable discretion of the Company; however, the Distributor will be given
ninety (90) days advanced notice of any price or discount changes. If prior to
the receipt of notice of any price change, the Distributor shall have made
offerings based on the former price lists, then the Company will accept orders
from the Distributor in fulfillment of such tenders, provided such orders are
for immediate shipment as available and are received by the Company within 30
(thirty) days: (1) after the date of any special quotations, or (2) after the
date of any notice of a change or of any such listed prices or discounts; except
that the Company reserves the right to make special quotations binding for a
period less than 60 days, but in such event will so advise the Distributor at
the time of making said special
Page 2
<PAGE> 3
quotations.
8. WARRANTIES: The Company warrants that the Products shall substantially
conform to the Product's accompanying documentation when used in accordance with
such documentation, or documentation submitted with special written quotations
or proposals. The Company will replace Products that are, within (1) one year of
Distributor's receipt, found to contain a defect in material or workmanship.
The Distributor shall assume all responsibility with regard to the sufficiency
and suitability of said Products for actual requirements in each instance of a
sale to its customers. The Company assumes no contingent liability for failure
of the Products to meet any such Distributor guarantees or assurances, stated or
implied. All products are carefully inspected and tested during or upon
completion of manufacture, but any special tests or changes to the Products
required by the Distributor may be charged for by the Company.
9. TRAINING AND SUPPORT: During the term of the agreement, the Company will
provide to the Distributor and the Distributor's customers, training and
technical support on the application and use of the Products. Training and
technical support is limited to employees of the Distributor who are actively
engaged in the sales, training or technical support of the Products and to
employees of the Distributor's customers who have purchased the Products and are
actively involved in the use, training or technical support of the Products.
The Company will provide training and technical support, for the application and
use of the Products, to the Distributor or Distributor's customers by telephone,
e-mail, fax, or other similar means, free of charge, provided the training and
support is of a usual and customary nature. The Company will provide training
and technical support, for the application and use of the Products, to the
Distributor or-Distributor's customers by in-person meetings free of charge,
provided the training and support is of a usual and customary nature and the
in-person meeting is conducted at the Company's principal place of business in
Lancaster, California, United States. Free training and technical support
services do not include costs associated with travel and costs associated with
travel of Company employees outside a 60-mile radius of its principal place of
business in Lancaster, California, United States, unless approved by the Company
in writing. The determination of whether or not the Distributor or the
Distributor's customer training and support needs are usual and customary are at
the reasonable discretion of the Company.
10. INVOICING AND PAYMENT: The Company shall invoice the Distributor separately
on the date of shipment. The Distributor shall pay the Company for the correct
amount due in United States currency within sixty (60) days of the arrival date
of the Products.
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<PAGE> 4
11. COMPANY PROMOTIONAL EFFORTS WITHIN DISTRIBUTOR'S TERRITORY: The Company may
take such steps as it considers necessary to promote the sale of the Products in
the Territory, including the right, at its option, to send Company
representatives to spend time in the Territory in cooperation with the
Distributor and the Distributor's representatives. The Company will provide
adequate advanced notice of such actions to the Distributor.
12. COMPANY NOT LIABLE FOR LOSS: The Company shall not be responsible or liable
for any loss, damage, detention or delay caused by fire, strike, civil or
military authority, insurrection or riot, common carrier embargoes, lockout,
tempest, accidental delay in delivery of the Products by other parties, or by
any other cause that is unavoidable or beyond its reasonable control; nor in any
consequential damage.
13. DISTRIBUTOR NOT A COMPANY AGENT: The Distributor shall not act as the agent
for the Company under this Agreement, nor shall the Distributor have any right
or power hereunder to act for or to bind the Company in any respect or to pledge
its credit.
14. PATENTS, TRADEMARKS, RIGHTS: No licenses are granted or implied by this
agreement under any patents or trademarks owned or controlled by the Company or
under which the Company has any rights, except the right to distribute, sell or
use the Products furnished by the Company. No rights to reproduce, change,
modify or manufacture are granted by this Agreement.
15. DISTRIBUTOR'S USE OF COPYRIGHTS AND TRADEMARKS: The Distributor may use the
copyrights and trademarks of the Company and the Products in connection with the
advertising and promotion of the Products. GastroPlus(TM) and QMPRPlus(TM) are
trademarks of the Company. Nothing herein shall grant the Distributor or its
customers any right, title or interest in the Company's trademarks.
16. MINIMUM DISTRIBUTOR PERFORMANCE AND RENEWAL: Both parties understand that
maintaining certain minimum levels of valid order activity is of the essence to
this agreement and that these minimum standards are set forth in detail in
Appendix B of this agreement. Therefore, it is one of the conditions for renewal
of this agreement that acceptable orders for the product are tendered to the
Company in sufficient unit and aggregate sales quantity to meet the standards
set forth in Appendix B of this agreement. In respect to future agreement
renewals, minimum acceptable quantities will be agreed upon, based on sales
history and reasonable growth projections, but under no circumstance shall they
be less than 75% (seventy-five percent) of sales for the preceding one-year
term.
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<PAGE> 5
Notwithstanding the foregoing, if the Distributor fails to achieve the minimum
standards as set forth in Appendix B or as agreed upon between the parties in
future, the Company agrees that it shall, at the request of the Distributor,
negotiate for renewal of this Agreement with the Distributor in good faith;
provided, however, that the period during which the Company shall be obligated
to so negotiate with the Distributor and to refrain from granting any
distributorship for the Products in the Territory to a third party shall not
exceed ninety (90) days after the expiration of the term of this Agreement to
which the minimum standards that the Distributor fails to achieve apply.
17. CONFIDENTIALITY: Both Company and Distributor recognize the importance of
confidentiality. Accordingly, both parties agree to hold in strict confidence
and to protect with at least the same degree of care used to protect its own
proprietary information, all information disclosed by or received from the other
party and specified as proprietary and confidential by the other part
(hereinafter referred to as the Propriety Information), including, but not
limited to: strategies and plans, processes, laboratory arrangements, designs,
methods and know-how, computer software and embedded technology, software source
code, mathematical algorithms, formulas, statistical and operational methods an
techniques and data supplied by customers to enhance software performance,
marketing and sales data, marketing and business information, financial plans,
budgets and forecasts, and personnel matters, whether communicated in oral,
written, graphic, physical, or electronic form. The Proprietary Information
shall not include any information which the receiving party can show by
documentary evidence (a) was in possession prior to the disclosure thereof, (b)
was at the time of receipt or thereafter becomes, through no act or failure to
act on the part of the receiving party, part of the public domain, or (c) was
disclosed to the receiving party by others not under any obligation of
confidentiality or restricted use to the disclosing party. The receiving party
shall not, without the prior written consent of the disclosing party, disclose
any Proprietary Information to any third parties other than the receiving
party's directors, officers, employees and agents who need to know such
Proprietary Information for carrying out the purpose of this Agreement. This
Section 17 shall survive the expiration or termination of this Agreement for
five (5) years.
18. TERM AND TERMINATION: This Agreement shall be in force and effect from the
1st day of August, 1 998, until the 1st day of August, 1999. Thereafter, this
Agreement shall be automatically extended and renewed from year to year unless:
(a) either party has lawfully terminated this Agreement in accordance with the
TERMINATION paragraph of this Section 18, below, on or before the expiration of
the above initial term, or
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<PAGE> 6
any extended one (1) year period, and (b) the Distributor gives the Company
written notice of termination at least three (3) months prior to the expiration
of the above initial term or any extended one (1) year period; provided that the
Company and Distributor shall determine the minimum standards for such renewed
one (1) year period on or before the expiration of the above initial term, or
any extended one (1) year period, and provided further that such minimum
standards for the renewed one (1) year period will be agreed upon, based on
sales history and reasonable growth projections, but under no circumstance shall
they be less than 75%(seventy five percent) of sales for the preceding one (1)
year period. If the Company and the Distributor fail to agree upon the minimum
standards for such renewed one (1) year period on or before the expiration of
the above initial term, or any extended one (1) year period, this Agreement
shall be deemed to have been renewed for one year and the Company and the
Distributor will negotiate and determine the minimum standards for such renewed
one (1) year period within three (3) months after the renewal date. If the
Company and the Distributor fail to determine the minimum standards within such
three (3)-month period, then the Distributor has the right to, by giving the
Company written notice within thirty (30) days of the expiration of such three
(3) month period, exercise the option to initiate an arbitration in accordance
with Section 21 for determination of the minimum standards for the renewed one
(1) year period to cause this Agreement to be renewed as an EXCLUSIVE
distribution agreement.
TERMINATION Subject to Section 16, either party shall be entitled to earlier
terminate this Agreement by giving the other party notice of termination in
writing if the other party breaches any material provision of this Agreement and
fails to cure such breach within thirty (30) days after receipt of written
notice given by the terminating party. Termination or expiration of this
Agreement shall not relieve Distributor of its then accrued payment obligation
under this Agreement, and termination or expiration of this Agreement shall be
without prejudice to all rights and remedies of either party under this
Agreement and at law or in equity. The Company agrees that after termination or
expiration of this Agreement, it shall undertake to sell the Products and
provide necessary support services to customers and users of the Products in the
Territory at the request of such customers or users.
19. LIABILITY OF PARTIES FOR DAMAGES: Neither party shall be liable for
indirect, incidental, special, consequential or punitive damages under this
agreement.
20. TRANSFER OF DISTRIBUTOR'S RIGHTS: The rights conferred on the Distributor by
this Agreement cannot be assigned or transferred without the written consent of
the Company. The Company shall not assign, transfer
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<PAGE> 7
or otherwise dispose of in any manner the whole or any portion of this
Agreement, including, but not limited to, any rights or obligations under this
Agreement, and any and all copyrights, patents, designs, trademarks and other
intellectual property rights pertaining to the Products, without the prior
written consent of the Distributor.
21. BINDING ARBITRATION: In the event of any dispute between the parties hereto
in any way arising out of this agreement, the same shall be referred to three
arbitrators, one to be appointed by the Distributor, one to be appointed by the
Company, and a third to be mutually agreed upon by the two arbitrators so
appointed. In the case of disputes involving an aggregate sum less than $50,000,
a sole arbitrator will be appointed by the Company; said arbitrator must be
reasonably acceptable to both the Distributor and the Company.
The arbitration will be conducted under the rules of the American Arbitration
Associate (AAA) of New York (United States). The decision of a majority of the
three Arbitrators, including the apportionment of the expenses of the
arbitration, shall be final and binding upon the parties hereto. The meeting of
arbitrators shall be held in the County of Los Angeles, California, unless it
shall be mutually agreed to hold such meeting elsewhere.
22. GOVERNING LAW: This agreement shall be governed by and construed under the
laws of the State of California in the United States of America.
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be duly
executed:
"Company"
By: Walter Woltosz
Authorized Signature
Title: Chairman & CEO
Date: August 7, 1998
"Distributor"
By:
Authorized Signature
Title: President
Date: August 7, 1998
Appendix A
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<PAGE> 8
Pricing and Discount Schedule
GastroPlus US$ 15,555
QMPRPlus US$ 3,888
Gastro/QMEPR Pack US$ 17,500
2nd Purchase and Renewal 10% Discount
Multi-Year Renewal and
Multi Purchase at the same time 20% Discount
Appendix B
Order and Sales Forecast
Minimum Standard
First Year 2 Units GastroPlus
Second Year 10 Units GastroPlus
Third and subsequent years per Section 18
Page 8
<PAGE> 1
EXHIBIT 10.27
STANDARD OFFICE LEASE-NET
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
1. Basic Lease Provisions ("Basic Lease Provisions")
1.1 Parties: This Lease, dated, for reference purposes only, May 14, 1998
Is made by and between Martin Properties, Inc. (herein called "Lessor") and
Simulations Plus, Inc. Doing business under the name of Simulations Plus, Inc.
(herein called "Lessee")
1.2 Premises: Suite Number(s) N/A, 2 floors, consisting of approximately 15,600
square feet, more or less as defined In paragraph 2 and as shown on Exhibit "A"
hereto (the "Premises").
1.3 Building: Commonly described as being located at 1220 West Avenue J
In the City of Lancaster, County of Los Angeles, State of California as more
particularly described in Exhibit_____ hereto, and as defined in paragraph 2.
1.4 Use: Professional Office/Incidental Assembly of Electronic Components
subject to paragraph 6.
1.5 Term: 3 years commencing September 1 1998("Delivery Date") and ending August
31, as defined In paragraph 3.
1.6 Base Rent: _______ See addendum per month, payable on the first day of each
month, per paragraph 4.1
1.7 Base Rent increase: On (See addendum) the monthly Base Rent payable under
paragraph 1.6 above shall be adjusted as provided in paragraph 4.3 below.
1.8 Rent Paid Upon Execution: $13,588 see addendum for $10,000
1.9 Security Deposit: $10,000 see addendum
1.10 Lessee's Share of Operating Expenses: 100% as defined in paragraph 4.2.
2. Premises, Parking and Common Areas.
2.1 Premises: The Premises herein sometimes referred to as the "Building"
identified in paragraph 1.3 of the Basic Lease Provisions. "Building" shall
include adjacent parking structures used in connection therewith. The Premises,
the Building, the Common Areas, the land upon which the same are located, along
with all other buildings and improvements thereon or thereunder, are herein
collectively referred to as the "Office Building Project" Lessor hereby leases
to Lessee and Lessee leases from Lessor for the term, at the rental, and upon
all of the conditions set forth herein, the real property referred to in the
Basic Lease Provisions, paragraph 1.2, as the "Premises": including rights to
the Common Areas as hereinafter specified.
2.2 Deleted
2.2.1 If Leessee commits, permits or allows any of the prohibited activities
described in the Lease or the rules then in effect, then Lessor shall have the
right, without notice, in addition to such other rights and remedies that it may
<PAGE> 2
have, to remove or tow away the vehicle involved and charge the cost to Lessee,
which cost shall be immediately payable upon demand by Lessor.
2.2.2 Deleted
2.3 Common Areas-Definition. The term "Common Areas" is defined as all areas and
facilities outside the Premises and within the exterior boundary line of the
Office Building Project that are provided and designated by the Lessor from time
to time for the general non-exclusive use of Lessor, Lessee and of other lessees
of the Office Building Project and their respective employees, suppliers,
shippers, customers and invitees, including but not limited to common entrances,
lobbies, corridors, stairways and stairwells, public restrooms, elevators,
escalators, parking areas to the extent not otherwise prohibited by this Lease,
loading and unloading areas, trash areas, roadways, sidewalks, walkways
parkways, ramps, driveways, landscaped areas and decorative walls.
2.4 Common Areas-Rules and Regulations. Lessee agrees to abide by and conform to
the rules and regulations attached hereto as Exhibit B with respect to the
Office Building Project and Common Areas, and to cause its employees, suppliers,
shippers, customers, and invitees to so abide and conform. Lessor or such other
person(s) as Lessor may appoint shall have the exclusive control and management
of the Common Areas and shall have the right, from time to time, to modify amend
and enforce said rules and regulations. Lessor shall not be responsible to
Lessee for the non-compliance with said rules and regulations by other lessees,
their agents, employees and invitees of the Office Building Project.
2.5 Common Areas-Changes. Lessor shall have the right, in Lessor's sole
discretion, from time to time:
(a) To make changes to the Building interior and exterior and Common Areas,
including, without limitation, changes in the location, size, shape, number, and
appearance thereof, including but not limited to the lobbies, windows,
stairways, air shafts, elevators, escalators, restrooms, driveways, entrances,
parking spaces, parking areas, loading and unloading areas, ingress, egress,
direction of traffic, decorative walls, landscaped areas and walkways; provided,
however, Lessor shall at all times provide the parking facilities required by
applicable law;
(b) To close temporarily any of the Common Areas for maintenance purposes so
long as reasonable access to the Premises remains available;
(c) Deleted
(d) To add additional buildings and improvements to the Common Areas;
(e) To use the Common Areas while engaged in making additional Improvements,
repairs or alterations to the Office Building Project, or an portion thereof;
(f) To do and perform such other acts and make such other changes in, to or with
respect to the Common Areas and Office Building Project as Lessor may, in the
exercise of sound business judgment deem to be appropriate.
3. Term
<PAGE> 3
3.1 Term. The term and Commencement Date of this Lease shall be as specified in
paragraph 1.5 of the Basic Lease Provisions.
3.2 Delay in Possession. Notwithstanding said delivery Date if for any reason
Lessor cannot deliver possession of the Premises to Lessee on said delivery date
and subject to paragraph 3.2.2, Lessor shall not be subject to any liability
therefor, nor shall such failure affect the validity of this Lease or the
obligations of Lessee hereunder or extend the term hereof; but in such case,
Lessee shall not be obligated to pay rent or perform any other obligation of
Lessee under the terms of this Lease, except as may be otherwise provided in
this Lease, until possession of the premises is tendered to Lessee, as
hereinafter defined; provided, however, that it Lessor shall not have delivered
possession of the Premises within thirty (30) days following said delivery Date,
as the same may be extended under the terms of a Work Letter executed by Lessor
and Lessee, Lessee may, at Lessee's option. by notice in writing to Lessor
within ten (10) days thereafter, cancel this Lease, in which event the parties
shall be discharged from all obligations hereunder; provided, however, that, as
to Lessee's obligations, Lessee first reimburses Lessor for all costs incurred
for Non-Standard Improvements and, as to Lessor's obligations, Lessor shall
return any money previously deposited by Lessee (less any offsets due Lessor for
Non-Standard Improvements); and provided further, that it such written notice
by Lessee is not received by Lessor within said ten (10) day period, Lessee's
right to cancel this Lease hereunder shall terminate and be of no further force
or effect.
3.2.1 Possession Tendered-Defined. Possession of the Premises shall be deemed
tendered to Lessee ("Tender of Possession") when (1) the improvements to be
provided by Lessor under this Lease are substantially completed, (2) the
Building utilities are ready for use in the Premises, (3) Lessee has reasonable
access to the Premises, and (4) ten (10) days shall have expired following
advance written notice to Lessee of the occurrence of the matters described in
(1), (2) and (3), above of this paragraph 3.2.1.
3.2.2 Delays Caused by Lessee. There shall be no abatement of rent, and the
sixty (60) day period following the Commencement Date before which Lessee's
right to cancel this Lease accrues under paragraph 3.2, shall be deemed extended
to the extent of any delays caused by acts or omissions of Lessee, its agents,
employees and contractors.
3.3 Early Possession. If Lessee occupies the Premises prior to said Commencement
Date, such occupancy shall be subject to all provisions of this Lease, such
occupancy shall not change the termination date.
3.4 Deleted
4. Rent
4.1 Base Rent. Subject to adjustment as hereinafter provided In paragraph 4.3,
and except as may be otherwise expressly provided in this Lease, Lessee shall
pay to Lessor the Base Rent for the Premises set forth in paragraph 1.6 of the
<PAGE> 4
Basic Lease Provisions, without offset or deduction. Lessee shall pay Lessor
upon execution hereof the advance Base Rent described in paragraph 1.8 of the
Basic Lease Provisions. Rent for any period during the term hereof which is for
less than one month shall be prorated based upon the actual number of days of
the calendar month involved. Rent shall be payable in lawful money of the United
States to Lessor at the address stated herein or to such other persons or at
such other places as Lessor may designate in writing.
4.2 Operating Expenses. Lessee shall pay to Lessor during the term hereof, In
addition to the Base Rent, Lessee's Share, as hereinafter defined, of all
Operating Expenses, as hereinafter defined, during each calendar year of the
term of this Lease, in accordance with the following provisions:
(a) "Lessee's Share" is defined, for purposes of this Lease, as the percentage
set forth In paragraph 1.10 of the Basic Lease Provisions, which percentage has
been determined by dividing the approximate square footage of the Premises by
the total approximate square footage of the rentable space contained in the
Office Building Project. It is understood and agreed that the square footage
figures set forth in the Basic Lease Provisions are approximations which Lessor
and Lessee agree are reasonable and shall not be subject to revision except in
connection with an actual change in the size of the Premises or a change in the
space available for lease in the Office Building Project.
(b) "Operating Expenses" is defined, for purposes of this Lease, to include all
costs, if any, incurred by Lessor in the exercise of its reasonable discretion.
for:
(I) The operation, repair, maintenance, and replacement, in neat, clean,
safe, good order and condition, of the Office Building Project, including but
not limited to, the following:
(aa) The Common Areas, Including their surfaces, coverings, decorative items,
and including parking areas, loading and unloading areas, trash areas, roadways,
sidewalks, walkways, stairways, parkways, driveways, landscaped areas,
striping,bumpers, irrigation systems, Common area lighting facilities, building
exteriors, fences and gates;
(bb) All heating, air conditioning, plumbing, electrical systems, life safety
equipment, telecommunication and other equipment used in common by, or for the
benefit of Lessee including elevators and escalators, tenant directories, fire
detection systems including sprinkler system maintenance and repair.
(ii) Trash disposal, janitorial and security services;
(iii) Any other service to be provided by Lessor that is elsewhere in this Lease
stated to be an "Operating Expense";
(iv) The cost of the premiums for the liability and property insurance policies
to be maintained by Lessor under paragraph 8 hereof;
(v) The amount of the real property taxes to be paid by Lessor under paragraph
10.1 hereof;
(vi) The cost of water, sewer, gas, electricity, and other publicly mandated
services to the Office Building Project;
<PAGE> 5
(vii) Labor, salaries and applicable fringe benefits and costs, materials,
supplies and tools used in maintaining and/or cleaning the Office Building
Project and accounting and a management fee attributable to the operation of the
office Building Project; no management fee shall be charged on taxes and
insurance.
(viii) Replacing and/or adding improvements mandated by any governmental agency
and any repairs or removals necessitated thereby amortized over its useful life
according to Federal income tax regulations or guidelines for depreciation
thereof (including interest on the unamortized balance as is then reasonable in
the judgment of Lessor's accountants);
(ix) Replacements of equipment or improvements that have a useful life for
depreciation purposes according to Federal income tax guidelines of five (5)
years or less, as amortized over such life.
(c) Operating Expenses shall not include the costs of replacements of equipment
or improvements that have a useful life for Federal Income tax purposes in
excess of five (5) years unless it is of the type described in paragraph
4.2(b)(viii), in which case their cost shall be included as above provided.
(d) Operating Expenses shall not Include any expenses paid by any lessee
directly to third parties, or as to which Lessor is otherwise reimbursed by any
third party, other tenant, or by insurance proceeds.
(e) Lessee's Share of Operating Expenses shall be payable by Lessee within ten
(10) days after a reasonably detailed statement of actual expenses is presented
to Lessee by Lessor At Lessor's option, however, an amount may be estimated by
Lessor from time to time of Lessee's Share of annual Operating Expenses and the
same shall be payable monthly or quarterly, as Lessor shall designate, during
each calendar year of the Lease term, on the same day as the Base Rent is due
hereunder. In the event that Lessee pays Lessor's estimate of Lessee's Share of
Operating Expenses as aforesaid, Lessor shall deliver to Lessee within sixty
(60) days after the expiration of each calendar year a reasonably detailed
statement showing Lessee's Share of the actual Operating Expenses incurred
during the preceding year. It Lessee's payments under this paragraph 4.2(e)
during said preceding calendar year exceed Lessee's Share as indicated Qn said
statement, Lessee shall be entitled to credit the amount of such overpayment
against Lessee's Share of Operating Expenses next falling due or refund of
overpayment at Lessee's option. If Lessee's payments under this paragraph during
said preceding calendar year were less than Lessee's Share as indicated on said
statement, Lessee shall pay to Lessor the amount of the deficiency within ten
(10) days after delivery by Lessor to Lessee of said statement. or refund of
overpayment at Lessee's option
4.3 Rent Increase. "See Addendum"
5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof the
security deposit set forth in paragraph 1.9 of the Basic Lease Provisions as
security for Lessee's faithful performance of Lessee's obligations hereunder If
Lessee fails to pay rent or other charges due hereunder, or otherwise defaults
with respect to any provision of this Lease, Lessor may use, apply or retain all
or any portion of said deposit for the payment of any rent or other charge in
default for the payment of any other sum to which Lessor may become obligated by
reason of Lessee's default, or to compensate Lessor
<PAGE> 6
for any loss or damage which Lessor may suffer thereby It Lessor so uses or
applies all or any portion of said deposit, Lessee shall within ten (10) days
after written demand therefor deposit cash with Lessor in an amount sufficient
to restore said deposit to the full amount then required of Lessee. Lessor shall
not be required to keep said security deposit separate from its general
accounts. If Lessee performs all of Lessee's obligations hereunder, said
deposit, or so much thereof as has not heretofore b een applied by Lessor, shall
be returned, without payment of interest or other increment for its use, to
Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's
interest hereunder) at the expiration of the term hereof, and no more than ten
(10) days after Lessee has vacated the Premises. No trust relationship is
created herein between Lessor and Lessee with respect to said Security Deposit.
6. Use.
6.1 Use. The Premises shall be used and occupied only for the purpose set forth
in paragraph l.4 of the Basic Lease Provisions or any other use which is
reasonably comparable to that use and for no other purpose.
6.2 Compliance with Law.
(a) Lessor warrants to Lessee that the Premises, in the state existing on the
date that the Lease term commences, but without regard to alterations or
improvements made by Lessee or the use for which Lessee will occupy the
Premises, does not violate any covenants or restrictions of record, or any
applicable building code, regulation or ordinance in effect an such Lease term
Commencement Date. In the event it is determined that this warranty has been
violated, then it shall be the obligation of the Lessor, after written notice
from Lessee, to promptly, at Lessor's sole cost and expense, rectify any such
violation.
(b) Except as provided In paragraph 6.2(a) Lessee shall, at Lessee's expense,
promptly comply with all applicable statutes, ordinances, rules, regulations,
orders, covenants and restrictions of record, and requirements of any fire
insurance underwriters or rating bureaus, now in effect or which may hereafter
come into effect, whether or not they reflect a change in policy from that now
existing, during the term or any part of the term hereof, relating in any manner
to the Premises and the occupation and use by Lessee of the Premises. Lessee
shall conduct its business in a lawful manner and shall not use or permit the
use of the Premises or the Common Areas in any manner that will tend to create
waste or a nuisance or shall tend to disturb other occupants of the Office
Building Project.
6.3 Condition of Premises.
(a) Lessor shall deliver the Premises to Lessee in a clean condition on the
Lease Delivery Date (unless Lessee is already in possession) and Lessor warrants
to Lessee that the plumbing, lighting, air conditioning, and heating system in
the Premises shall be in good operating condition. In the event that it is
determined that this warranty has been violated, then it shall be the obligation
of Lessor, after receipt of written notice from Lessee setting forth with
<PAGE> 7
specificity the nature of the violation, to promptly, at Lessor's sole cost,
rectify such violation.
(b) Except as otherwise provided in this Lease, Lessee hereby accepts the
Premises and the Office Building Project in their condition existing as of the
Lease Commencement Date or the date that Lessee takes possession of the
Premises, whichever is earlier, subject to all applicable zoning, municipal,
county and state laws, ordinances and regulations governing and regulating the
use of the Premises, and any easements, covenants or restrictions of record, and
accepts this Lease subject thereto and to all matters disclosed thereby and by
any exhibits attached hereto. Lessee acknowledges that it has satisfied itself
by its own independent investigation that the Premises are suitable for its
intended use, and that neither Lessor nor Lessor's agent or agents has made any
representation or warranty as to the present or future suitability of the
Premises, Common Areas, or Office Building Project for the conduct of Lessee's
business.
7. Maintenance, Repairs, Alterations and Common Area Services.
7.1 Lessor's Obligations. Lessor shall keep the Office Building Project,
including the Premises interior and exterior walls, roof, and common areas, and
the equipment whether used exclusively for the Premises or in common with other
premises, in good condition and repair; provided, however, Lessor shall not be
obligated to paint, repair or replace wall coverings, or to repair or replace
any improvements that are not ordinarily a part of the Building or are above
then Building standards. Except as provided in paragraph 9.5, there shall be no
abatement of rent or liability of Lessee on account of any injury or
interference with Lessee's business with respect to any improvements,
alterations or repairs made by Lessor to the Office Building Project or any part
thereof.
7.2 Lessee's Obligations.
(a) Notwithstanding Lessor's obligation to keep the Premises in good condition
and repair, Lessee shall be responsible for payment of the cost thereof to
Lessor as additional rent for that portion of the cost of any maintenance and
repair of the Premises, or any equipment (wherever located) that serves only
Lessee or the Premises, to the extent such cost is attributable to causes beyond
normal wear and tear. Lessee shall be responsible for the cost of painting,
repairing or replacing wall coverings, and to repair or replace any Premises
improvements that are not ordinarily a part of the Building or that are above
then Building standards. Lessor may, at its option, upon reasonable notice,
elect to have Lessee perform any particular such maintenance or repairs the cost
of which is otherwise Lessee's responsibility hereunder.
(b) On the last day of the term hereof, or on any sooner termination, Lessee
shall surrender the Premises to Lessor in the same condition as received,
ordinary wear and tear excepted, clean and free of debris. Any damage or
deterioration of the Premises shall not be deemed ordinary wear and tear if the
same could have been prevented by good maintenance practices by Lessee. Lessee
shall repair any damage to the Premises occasioned by the installation or
removal of Lessee's trade fixtures, alterations, furnishings and equipment.
Except as otherwise stated in this Lease, Lessee shall leave the air lines,
power panels, electrical distribution systems, lighting fixtures, air
<PAGE> 8
conditioning, window coverings, wall coverings, carpets, wall panelling,
ceilings and plumbing on the Premises and in good operating condition.
7.3 Alterations and Additions.
(a) Lessee shall not, without Lessor's prior written consent make any
alterations, improvements, additions, Utility Installations or repairs in, on or
about the Premises, or the Office Building Project. As used in this paragraph
7.3 the term "Utility Installation" shall mean carpeting, window and wall
coverings, power panels, electrical distribution systems, lighting fixtures, air
conditioning, plumbing, and telephone and telecommunication wiring and
equipment. At the expiration of the term, Lessor may require the removal of any
or all of said alterations, improvements, additions or Utility Installations,
and the restoration of the Premises and the Office Building Project to their
prior condition, at Lessee's expense. Should Lessor permit Lessee to make its
own alterations, improvements, additions or Utility Installations, Lessee shall
use only such contractor as has been expressly approved by Lessor, and Lessor
may require Lessee to provide Lessor, at Lessee's sole cost and expense, a lien
and completion bond in an amount equal to one and one-half times the estimated
cost of such improvements, to insure Lessor against any liability for mechanic's
and materialmen's liens and to insure completion of the work. Should Lessee make
any alterations, improvements, additions or Utility Installations without the
prior approval of Lessor, or use a contractor not expressly approved by Lessor,
Lessor may, at any time during the term of this Lease, require that Lessee
remove any part or all of the same.
(b) Any alterations, improvements, additions or Utility Installations in or
about the Premises or the Office Building Project that Lessee shall desire to
make shall be presented to Lessor in written form, with proposed detailed plans.
If Lessor shall give its consent to Lessee's making such alteration,
improvement, addition or Utility Installation, the consent shall be deemed
conditioned upon Lessee acquiring a permit to do so from the applicable
governmental agencies, furnishing a copy thereof to Lessor prior to the
commencement of the work, and compliance by Lessee with all conditions of said
permit in a prompt and expeditious manner.
(c) Lessee shall pay, when due, all claims for labor or materials furnished or
alleged to have been furnished to or for Lessee at or for use in the Premises,
which claims are or may be secured by any mechanic's or materialmen's lien
against the Premises, the Building or the Office Building Project, or any
interest therein.
(d) Lessee shall give Lessor not less than ten (10) days' notice prior to the
commencement of any work in the Premises by Lessee, and Lessor shall have the
right to post notices of non-responsibility in or on the Premises or the
Building as provided by law. If Lessee shall, in good faith, contest the
validity of any such lien, claim or demand, then Lessee shall, at its sole
expense defend itself and Lessor against the same and shall pay and satisfy any
such adverse judgment that may be rendered thereon be fore the enforcement
thereof against the Lessor or the Premises, the Building or the, Office Building
Project, upon the condition that if Lessor shall require, Lessee shall furnish
to Lessor a surety bond satisfactory to Lessor in an amount equal to such
contested lien claim or demand indemnifying Lessor against liability for the
same and holding the Premises, the Building and the Office Building Project free
from the effect of such lien or claim. In addition, Lessor may require Lessee
<PAGE> 9
to pay Lessor's reasonable attorneys fees and costs in participating in such
action if Lessor shall decide it is to Lessor's best interest so to do.
(e) All alterations, improvements, additions and Utility Installations (whether
or not such Utility Installations constitute trade fixtures of Lessee), which
may be made to the Premises by Lessee, including but not limited to, floor
coverings, panellings, doors, drapes, built-ins, moldings, sound attenuation,
and lighting and telephone or communication conduit, wiring and outlets, shall
be made and done in a good and workmanlike manner and of good and sufficient
quality and materials and shall be the property of Lessor and remain upon and
be surrendered with the Premises at the expiration of the Lease term. unless
Lessor requires their removal pursuant to paragraph 7.3(a). Provided Lessee is
not in default, notwithstanding the provisions of this paragraph 7.3(e),
Lessee's personal. property and equipment, other than that which is affixed to
the Premises so that it cannot be removed without material damage to the
Premises or the Building, and other than Utility Installations, shall remain the
property of Lessee and may be removed by Lessee subject to the provisions of
paragraph 7.2.
(f) Lessee shall provide Lessor with as-built plans and specifications for any
alterations, improvements, additions or Utility Installations.
7.4 Utility Additions. Lessor reserves the right to Install new or additional
utility facilities throughout the Office Building Project for the benefit of
Lessor or Lessee, or any other lessee of the Office Building Project, including,
but not by way of limitation, such utilities as plumbing, electrical systems,
security systems, communication systems. and fire protection and detection
systems, so long as such installations do not unreasonably interfere with
Lessee's use of the Premises.
8. Insurance; Indemnity.
8.1 Liability Insurance-Lessee. Lessee shall, at Lessee's expense, obtain and
keep in force during the term of this Lease a policy of Comprehensive General
Liability insurance utilizing an Insurance Services Office standard form with
Broad Form General Liability Endorsement (GLO404), or equivalent, in an amount
of not less than $1,000,000 per occurrence of bodily injury and property damage
combined or in a greater amount a reasonably determined by Lessor and shall
insure Lessee with Lessor as an additional insured against liability arising
out of the use, occupancy or maintenance of the Premises. Compliance with the
above requirement shall not, however, limit the liability of Lessee hereunder.
8.2 Liability Insurance-Lessor. Lessor shall obtain and keep in force during the
term of this Lease a policy of Combined Single Limit Bodily Injury and Broad
Form Property Damage Insurance, plus coverage against such other risks Lessor
deems advisable from time to time, insuring Lessor, but not Lessee, against
liability arising out of the ownership, use, occupancy or maintenance of the
Office Building Project in an amount not less than $5,000,000.00 per occurrence.
<PAGE> 10
8.3 Property insurance-Lessee. Lessee shall, at Lessee's expense, obtain and
keep in force during the term of this Lease for the benefit of Lessee,
replacement cost fire and extended coverage insurance, with vandalism and
malicious mischief, sprinkler leakage and earthquake sprinkler leakage
endorsements, in an amount sufficient to cover not less than 100% of the full
replacement cost, as the same may exist from time to time, of all of Lessee's
personal property, fixtures, equipment and tenant improvements .
8.4 Property Insurance-Lessor. Lessor shall obtain and keep in force during the
term of this Lease a policy or policies of insurance covering loss or damage to
the Office Building Project improvements, but not Lessee's personal property,
fixtures, equipment or tenant improvements, in the amount of the full
replacement cost thereof, as the same may exist from time to time, utilizing
Insurance Services Office standard form, or equivalent, providing protection
against all perils included within the classification of fire, extended
coverage, vandalism, malicious mischief, plate glass, and such other perils as
Lessor deems advisable or may be required by a lender having a lien on the
Office Building Project. In addition, Lessor shall obtain and keep in force,
during the term of this Lease, a policy of rental value insurance covering a
period of one year, with loss payable to Lessor, which insurance shall also
cover all Operating Expenses for said period. Lessee will not be named in any
such policies carried by Lessor and shall have no right to any proceeds
therefrom. The policies required by these paragraphs 8.2 and 8.4 shall contain
such deductibles as Lessor or the aforesaid lender may determine. In the event
that the Premises shall suffer an insured loss as defined in paragraph 9.1(f)
hereof, the deductible amounts under the applicable insurance policies shall be
deemed an Operating Expense. Lessee shall not do or permit to be done anything
which shall invalidate the insurance policies carried by Lessor. Lessee shall
pay the entirety of any increase in the property insurance premium for the
Building over what it was Immediately prior to the commencement of the term of
this Lease if the increase is specified by Lessor's insurance carrier as being
caused by the nature of Lessee's occupancy or any act or omission of Lessee.
8.5 Insurance Policies. Lessee shall deliver to Lessor copies of liability
insurance policies required under paragraph 8.1 or certificates evidencing the
existence and amounts of such Insurance within seven (7) days after the
Commencement Date of this Lease. No such policy shall be cancellable or subject
to reduction of coverage or other modification except after thirty (30) days
prior written notice to Lessor. Lessee shall, at least thirty (30) days prior to
the expiration of such policies, furnish Lessor with renewals thereof.
8.6 Waiver of Subrogation. Lessee and Lessor each hereby release and relieve the
other and waive their entire right of recovery against the other, for direct or
consequential loss or damage arising out of or incident to the perils covered by
property insurance carried by such party, whether due to the negligence of
Lessor or Lessee or their agents, employees, contractors and/or invitees. If
necessary all property insurance policies required under this Lease shall be
endorsed to so provide.
8.7 Indemnity. Lessee shall indemnity and hold harmless Lessor and its agents,
Lessor's master or ground lessor partners and lenders, from and against any and
all claims for damage to the person or property of anyone or any entity arising
from Lessee's use of the Office Building Project, or from the conduct of
<PAGE> 11
Lessee's business or from any activity, work or things done, permitted or
suffered by Lessee in or about the Premises or else-where and shall further
indemnify and hold harmless Lessor from and against any and all claims, costs
and expenses arising from any breach or default in the performance of any
obligation on Lessee's part to be performed under the terms of this Lease, or
arising from any act or omission of Lessee, or any of Lessee's agents,
contractors, employees or invitees and from and against all costs, attorney's
fees, expenses and liabilities incurred by Lessor as the result of any such use,
conduct, activity, work, things done, permitted or suffered, breach, default or
negligence, and in dealing reasonably therewith, including but not limited to
the defense or pursuit of any claim or any action or proceeding involved
therein; and in case any action or proceeding be brought against Lessor by
reason of any such matter. Lessee upon notice from Lessor shall defend the same
at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor
shall cooperate with Lessee in such defense. Lessor need not have first paid any
such claim in order to be so indemnified. Lessee, as a material part of the
consideration to Lessor, hereby assumes all risk of damage to property of Lessee
or injury to persons, in, upon or about the Office Building Project arising from
any cause and Lessee hereby waives all claims in respect thereof against Lessor.
8.8 Exemption of Lessor from Liability. Lessee hereby agrees that Lessor shall
not be liable for injury to Lessee's business or any loss of income therefrom or
for loss of or damage to the goods, wares, merchandise or other property of
Lessee, Lessee's employees, invitees, customers, in or about the Premises or the
Office Building Project, nor shall Lessor be liable for injury to the person of
Lessee, Lessee's employees, agents or contractors, whether such damage or injury
is caused by or results from theft, fire, steam, electricity, gas, water or
rain, or from the breakage, leakage, obstruction or other defects of pipes,
sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures,
whether said damage or injury results from conditions arising upon the Premises
or upon other portions of the Office Building Project, or from other sources or
places, or from new construction or the repair, alteration or improvement of any
part of the Office Building Project, or of the equipment, fixtures or
appurtenances applicable thereto, and regardless of whether the cause of such
damage or injury or the means of repairing the same is inaccessible, Lessor
shall not be liable for any damages arising from any act or neglect of any other
lessee, occupant or user of the Office Building Project, nor from the failure of
Lessor to enforce the provisions of any other lease of any other lessee of the
Office Building Project.
8.9 No Representation of Adequate Coverage. Lessor makes no representation that
the limits or forms of coverage of insurance specified in this paragraph 8 are
adequate to cover Lessee's property or obligations under this Lease.
9. Damage or Destruction.
9.1 Definitions.
(a) "Premises Damage" shall mean if the Premises are damaged or destroyed to any
extent.
(b) "Premises Building Partial Damage" shall mean if the Building of which the
Premises are a part is damaged or destroyed to the extent that the cost to
<PAGE> 12
repair is less than fifty percent (50%) of the then Replacement Cost of the
Building.
(c) "Premises Building Total Destruction" shall mean if the Building of which
the Premises are a part is damaged or destroyed to the extent that the cost to
repair is fifty percent (50%) or more of the then Replacement Cost of the
Building.
(d) "Office Building Project Buildings" shall mean all of the buildings on the
Office Building Project site.
(e) "Office Building Project Buildings Total Destruction" shall mean it the
Office Building Project Buildings are damaged or destroyed to the extent that
the cost of repair is fifty percent (50%) or more of the then Replacement Cost
of the Office Building Project Buildings.
(f) "Insured Loss" shall mean damage or destruction which was caused by an event
required to be covered by the insurance described in paragraph 8. The fact that
an Insured Loss has a deductible amount shall not make the loss an uninsured
loss.
(g) "Replacement Cost" shall mean the amount of money necessary to be spent in
order to repair or rebuild the damaged area to the condition that existed
immediately prior to the damage occurring, excluding all improvements made by
lessees, other than those installed by Lessor at Lessee's expense.
9.2 Premises Damage; Premises Building Partial Damage.
(a) Insured Loss: Subject to the provisions of paragraphs 9.4 and 9.5, if at any
time during the term of this Lease there is damage which is an Insured Loss and
which falls into the classification of either Premises Damage or Premises
Building Partial Damage, then Lessor shall, as soon as reasonably possible and
to the extent the required materials and labor are readily available through
usual commercial channels, at Lessor's expense, repair such damage (but not
Lessee's fixtures, equipment or tenant improvements originally paid for by
Lessee) to its condition existing at the time of the damage, and this Lease
shall continue in full force and effect.
(b) Uninsured Loss: Subject to the provisions of paragraphs 9.4 and 9.5, if at
any time during the term of this Lease there is damage which is not an Insured
Loss and which falls within the classification of Premises Damage or Premises
Building Partial Damage, unless caused by a negligent or willful act of Lessee
(in which event Lessee shall make the repairs at Lessee's expense), which damage
prevents Lessee from making any substantial use of the Premises, Lessor may at
Lessor's option either (i) repair such damage as soon as reasonably possible at
Lessor's expense, in which event this Lease shall continue in full force and
effect, or (ii) give written notice to Lessee within thirty (30) days after the
date of the occurrence of such damage of Lessor's intention to cancel and
terminate this Lease as of the date of the occurrence of such damage, in which
event this Lease shall terminate as of the date of the occurrence of such
damage.
9.3 Premises Building Total Destruction; Office Building Project Total
Destruction. Subject to the provisions of paragraphs 9.4 and 9.5, it at any
<PAGE> 13
time during the term of this Lease there is damage, whether or not it is an
Insured Loss, which falls into the classifications of either (i) Premises.
Building Total Destruction, or (ii) Office Building Project Total Destruction,
then Lessor may at Lessor's option either (i) repair such damage or destruction
as soon as reasonably possible at Lessor's expense (to the extent the required
materials are readily available through usual commercial channels) to its
condition existing at the time of the damage, but not Lessee's fixtures.
equipment or tenant improvements, and this Lease shall continue in full force
and effect, or (ii) give written notice to Lessee within thirty (30) days after
the date of occurrence of such damage of Lessor's intention to cancel and
terminate this Lease, in which case this Lease shall terminate as of the date of
the occurrence of such damage.
9.4 Damage Near End of Term.
(a) Subject to paragraph 9.4(b), if at any time during the last twelve (12)
months of the term of this Lease there is substantial damage to the Premises,
Lessor may at Lessor's option cancel and terminate this Lease as of the date of
occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within 30 days after the date of occurrence of such damage.
(b) Notwithstanding paragraph 9.4(a), in the event that Lessee has an option to
extend or renew this Lease, and the time within which said option may be
exercised has not yet expired, Lessee shall exercise such option, if it is to be
exercised at all, no later than twenty (20) days after the occurrence of an
Insured Loss falling within the classification of Premises Damage during the
last twelve (12) months of the term of this Lease. If Lessee duly exercises
such option during said twenty (20) day period, Lessor shall, at Lessor's
expense, repair such damage, but not Lessee's fixtures, equipment or tenant
improvements, as soon as reasonably possible and this Lease shall continue in
full force and effect. If Lessee fails to exercise such option during said
twenty (20) day period, then Lessor may at Lessor's option terminate and cancel
this Lease as of the expiration of said twenty (20) day period by giving written
notice to Lessee of Lessor's election to do so within ten (10) days after the
expiration of said twenty (20) day period, notwithstanding any term or
provision In the grant of option to the contrary.
9.5 Abatement of Rent; Lessee's Remedies.
(a) In the event Lessor repairs or restores the Building or Premises pursuant to
the provisions of this paragraph 9, and any part of the Premises are not usable
(including loss of use due to loss of access or essential services), the rent
payable hereunder (including Lessee's Share of Operating Expenses) for the
period during which such damage, repair or restoration continues shall be
abated, provided (1) the damage was not the result of the negligence of Lessee,
and (2) such abatement shall only be to the extent the operation and
profitability of Lessee's business as operated from the Premises is adversely
affected. Except for said abatement of rent, if any, Lessee shall have no claim
against Lessor for any damage suffered by reason of any such damage,
destruction, repair or restoration.
<PAGE> 14
(b) If Lessor shall be obligated to repair or restore the Premises or the
Building under the provisions of this Paragraph 9 and shall not commence such
repair or restoration within ninety (90) days after such occurrence, or if
Lessor shall not complete the restoration and repair within six (6) months after
such occurrence, Lessee may at Lessee's option cancel and terminate this Lease
by giving Lessor written notice of Lessee's election to do so at any time prior
to the commencement or completion, respectively, of such repair or
restoration. In such event this Lease shall terminate as of the date of such
notice.
(c) Lessee agrees to cooperate with Lessor In connection with any such
restoration and repair, Including but not limited to the approval and/or
execution of plans and specifications required.
9.6 Termination-Advance Payments. Upon termination of this Lease pursuant to
this paragraph 9, an equitable adjustment shall be made concerning advance rent
and any advance payments made by Lessee to Lessor. Lessor shall, within ten (10)
days in addition, return to Lessee so much of Lessee's security deposit as has
not theretofore been applied by Lessor.
9.7 Waiver. Lessor and Lessee waive the provisions of any statute which relate
to termination of leases when leased property Is destroyed and agree that such
event shall be governed by the terms of this Lease.
10. Real Property Taxes.
10.1 Payment of Taxes. Lessor shall pay the real property tax, as defined In
paragraph 10.3, applicable to the Office Building Project subject to
reimbursement by Lessee of Lessee's Share of such taxes in accordance with the
provisions of paragraph 4.2, except as otherwise provided In paragraph 10.2.
10.2 Additional Improvements. Lessee shall not be responsible for paying any
increase in real property tax specified in the tax assessor's records and work
sheets as being caused by additional improvements placed upon the Office
Building Project by other lessees or by Lessor for the exclusive enjoyment of
any other lessee. Lessee shall, however, pay to Lessor at the time that
Operating Expenses are payable under paragraph 4.2(c) the entirety of any
increase in real property tax if assessed solely by reason of additional
improvements placed upon the Premises by Lessee or at Lessee's request.
10.3 Definition of "Real Property Tax". As used herein, the term "real property
tax" shall include any form of real estate tax or assessment, general, special,
ordinary or extraordinary, and any license fee, commercial rental tax,
improvement bond or bonds, levy or tax (other than inheritance, personal income
or estate taxes) imposed on the Office Building Project or any portion thereof
by any authority having the direct or indirect power to tax, including any city,
county, state or federal government, or any school. agricultural, sanitary,
fire, street, drainage or other improvement district thereof, as against any
legal or equitable interest of Lessor in the Office Building Project or in any
portion thereof, as against Lessor's right to rent or other income therefrom,
and as against Lessor's business of leasing the Office Building Project. The
term "real property tax" shall also include any tax, fee, levy, assessment or
charge (i) in substitution of, partially or totally, any tax, fee, levy,
<PAGE> 15
assessment or charge hereinabove included within the definition of "real
property tax:' or (ii) the nature of which was hereinbefore included within the
definition of "real property tax:' or (iii) which is imposed for a service or
right not charged prior to June 1, 1978, or, if previously charged, has been
increased since June 1, 1978, or (iv) which is imposed as a result of a change
in ownership, as defined by applicable local statutes for property tax purposes,
of the Office Building Project or which is added to a tax or charge hereinbefore
included within the definition of real property tax by reason of such change of
ownership, or (v) which is imposed by reason of this transaction, any
modifications or changes hereto, or any transfers hereof.
10.4 Joint Assessment. If the improvements or property, the taxes for which are
to be paid separately by Lessee under paragraph 10.2 or 10.5 are not separately
assessed, Lessee's portion of that tax shall be equitably determined by Lessor
from the respective valuations assigned in the assessor's work sheets or such
other information (which may include the cost of construction) as may be
reasonably available. Lessor's reasonable determination thereof, in good faith,
shall be conclusive.
10.5 Personal Property Taxes.
(a) Lessee shall pay prior to delinquency all taxes assessed against and levied
upon trade fixtures, furnishings, equipment and all other personal property of
Lessee contained In the Premises or elsewhere.
(b) If any of Lessee's said personal property shall be assessed with Lessor's
real property, Lessee shall pay to Lessor the taxes attributable to Lessee
within ten (10) days after receipt of a written statement setting forth the
taxes applicable to Lessee's property.
11. Utilities.
11.1 Deleted
11.2 Services Exclusive to Lessee. Lessee shall pay for all water, gas, heat,
light, power, telephone and other utilities and services specially exclusively
supplied and/or metered exclusively to the Premises or to Lessee, together with
any taxes thereon. If any such services are not separately metered to the
Premises, Lessee shall pay at Lessor's option, either Lessee's Share or a
reasonable proportion to be determined by Lessor of all charges jointly metered
with other premises in the Building.
11.3 Deleted
11.4 Excess Usage by Losses. Lessee shall not make connection to the utilities
except by or through existing outlets and shall not install or use machinery or
equipment in or about the Premises that uses excess water, lighting or power, or
suffer or permit any act that causes extra burden upon the utilities or
services, including but not limited to security services, over standard office
usage for the Office Building Project. Lessor shall require Lessee to reimburse
Lessor for any excess expenses or costs that may arise out of a breach of this
subparagraph by Lessee. Lessor may, in its sole discretion, install at Lessee's
<PAGE> 16
expense supplemental equipment and/or separate metering applicable to Lessee's
excess usage or loading.
11.5 Interruptions. There shall be no abatement of rent and Lessor shall not be
liable in any respect whatsoever for the inadequacy, stoppage, interruption or
discontinuance of any utility or service due to riot, strike, labor dispute,
breakdown, accident, repair or other cause beyond Lessor's reasonable control or
in cooperation with governmental request or directions.
12. Assignment and Subletting.
12.1 Lessor's Consent Required. Lessee shall not voluntarily or by operation of
law assign, transfer, mortgage, sublet, or otherwise transfer or encumber all or
any part of Lessee's interest in the Lease or in the Premises, without Lessor's
prior written consent, which Lessor shall not unreasonably withhold. Lessor
shall respond to Lessee's request for consent hereunder in a timely manner and
any attempted assignment, transfer, mortgage, encumbrance or subletting without
such consent shall be void, and shall constitute a material default and breach
of this Lease without the need for notice to Lessee under paragraph 13.1.
"Transfer" within the meaning of this paragraph 12 shall include the transfer or
transfers aggregating: (a) if Lessee, is a corporation, more than twenty-five
percent (25%) of the voting stock of such corporation, or (b) If Lessee 13 a
partnership, more then twenty-five percent (25%) of the profit and loss
participation In such partnership.
12.2 Losses Affiliate. Notwithstanding the provisions of paragraph 12.1 hereof,
Lessee may assign or sublet the Premises, or any portion thereof, without
Lessor's consent, to any corporation which controls, is controlled by or is
under common control with Lessee, or to any corporation resulting from the
merger or consolidation with Lessee, or to any person or entity which acquires
all the assets of Lessee as a going concern of the business that is being
conducted on the Premises, all of which are referred to as "Lessee Affiliate";
provided that before such assignment shall be effective, (a) said assignee shall
assume, in full, the obligations of Lessee under this Lease and (b) Lessor shall
be given written notice of such assignment and assumption. Any such assignment
shall not, in any way, affect or limit the liability of Lessee under the terms
of this Lease even if after such assignment or subletting the terms of this
Lease are materially changed or altered without the consent of Lessee, the
consent of whom shall not be necessary.
12.3 Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of Lessor's consent, no assignment or subletting shall release
Lessee of Lessee's obligations hereunder or alter the primary liability of
Lessee to pay the rent and other sums due Lessor hereunder Including Lessee's
Share of Operating Expenses, and to perform all other obligations to be
performed by Lessee hereunder.
<PAGE> 17
(b) Lessor may accept rent from any person other than Lessee pending approval or
disapproval of such assignment.
(c) Neither a delay in the approval or disapproval of such assignment or
subletting, nor the acceptance of rent, shall constitute a waiver or estoppel of
Lessor's right to exercise its remedies for the breach of any of the terms or
conditions of this paragraph 12 or this Lease.
(d) If Lessee's obligations under this Lease have been guaranteed by third
parties, then an assignment or sublease, and Lessor's consent thereto, shall not
be effective unless said guarantors give their written consent to such sublease
and the terms thereof.
(e) The consent by Lessor to any assignment or subletting shall not constitute a
consent to any subsequent assignment or subletting by Lessee or to any
subsequent or successive assignment or subletting by the sublessee. However,
Lessor may consent to subsequent sublettings and assignments of the sublease or
any amendments or modifications thereto without notifying Lessee or anyone else
liable on the Lease or sublease and without obtaining their consent and such
action shall not relieve such persons from liability under this Lease or said
sublease; provided, however, such persons shall not be responsible to the extent
any such amendment or modification enlarges or increases the obligations of the
Lessee or subleases under this Lease or such sublease.
(f) In the event of any default under this Lease, Lessor may proceed directly
against Lessee, any guarantors or any one else responsible for the performance
of this Lease, including the subleases, without first exhausting Lessor's
remedies against any other person or entity responsible therefor to Lessor, or
any security held by Lessor or Lessee.
(g) Lessor's written consent to any assignment or subletting of the Premises by
Lessee shall not constitute an acknowledgement that no default then exists under
this Lease of the obligations to be performed by Lessee nor shall such consent
be deemed a waiver of any then existing default, except as may be otherwise
stated by Lessor at the time.
(h) The discovery of the fact that any financial statement relied upon by Lessor
in giving Its consent to an assignment or subletting was materially false shall,
at Lessor's election, render Lessor's said consent null and void.
12.4 Additional Terms and Conditions Applicable to Subletting. Regardless of
Lessor's consent, the following terms and conditions shall apply to any
subletting by Lessee of all or any part of the Premises and shall be deemed
included in all subleases under this Lease whether or not expressly Incorporated
therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in
all rentals and Income arising from any sublease heretofore or hereafter made by
Lessee, and Lessor may collect such rent and income and apply same toward
Lessee's obligations under this Lease; provided, however, that until a default
shall occur in the performance of Lessee's obligations under this Lease, Lessee
may receive, collect and enjoy the rents accruing under such sublease. Lessor
shall not, by reason of this or any other assignment of such sublease to Lessor
nor by reason of the collection of the rents from a subleases, be deemed liable
to the subleases for any failure of Lessee to perform and comply with any of
Lessee's obligations to such subleases under such sublease. Lessee hereby
<PAGE> 18
irrevocably authorizes and directs any such subleases, upon receipt of a written
notice from Lessor stating that a default exists in the performance of Lessee's
obligations under this Lease, to pay to Lessor the rents due and to become due
under the sublease. Lessee agrees that such subleases shall have the right to
rely upon any such statement and request from Lessor, and that such subleases
shall pay such rents to Lessor without any obligation or right to inquire as to
whether such default exists and notwithstanding any notice from or claim from
Lessee to the contrary. Lessee shall have no right or claim against said
subleases or Lessor for any such rents so paid by said subleases to Lessor.
(b) No sublease entered Into by Lessee shall be effective unless and until it
has been approved in writing by Lessor. In entering into any sublease, Lessee
shall use only such form of sublease as is satisfactory to Lessor, and once
approved by Lessor, such sublease shall not be changed or modified without
Lessor's prior written consent. Any subleases shall, by reason of entering into
a sublease under this Lease, be deemed, for the benefit of Lessor, to have
assumed and agreed to conform and comply with each and every obligation herein
to be performed by Lessee other than such obligations as are contrary to or
inconsistent with provisions contained in a sublease to which Lessor has
expressly consented in writing.
(c) In the event Lessee shall default in the performance of its obligations
under this Lease, Lessor, at Its option and without any obligation to do so, may
require any subleases to attorn to Lessor, in which event Lessor shall undertake
the obligations of Lessee under such sublease from the time of the exercise of
said option to the termination of such sublease; provided, however, Lessor shall
not be liable for any prepaid rents or security deposit paid by such subleases
to Lessee or for any other prior defaults of Lessee under such sublease.
(d) No subleases shall further assign or sublet all or any part of the Premises
without Lessor's prior written consent.
(e) With respect to any subletting to which Lessor has consented, Lessor agrees
to deliver a copy of any notice of default by Lessee to the subleases. Such
subleases shall have the right to cure a default of Lessee within three (3) days
after service of said notice of default upon such subleases, and the subleases
shall have a right of reimbursement and offset from and against Lessee for any
such defaults cured by the subleases.
12.5 Lessor's Expenses. In the event Lessee shall assign or sublet the Premises
or request the consent of Lessor to any assignment or subletting or If Lessee
shall request the consent of Lessor for any act Lessee proposes to do then
Lessee shall pay Lessor's reasonable costs and expenses incurred in connection
therewith, including attorneys: architects: engineers' or other consultants'
fees.
12.6 Conditions to Consent. Lessor reserves the right to condition any approval
to assign or sublet upon Lessor's determination that (a) the proposed assignee
or subleases shall conduct a business on the Premises of a quality substantially
equal to that of Lessee and consistent with the general character of the other
occupants of the Office Building Project and not in violation of any exclusives
or rights then held by other tenants, and (b) the proposed assignee or subleases
be at least as financially responsible as Lessee was expected to be at the time
of the execution of this Lease or of such assignment or subletting, whichever is
greater.
<PAGE> 19
13. Default; Remedies.
13.1 Default. The occurrence of any one or more of the following events shall
constitute a material default of this Lease by Lessee:
(a) The vacation or abandonment of the Premises by Lessee. Vacation of the
Premises shall include the failure to occupy the Premises for a continuous
period of sixty (60) days or more, whether or not the rent is paid.
(b) The breach by Lessee of any of the covenants, conditions or provisions of
paragraphs 7.3(a), (b) or (d) (alterations), 12.1 (assignment or subletting),
13.1(a) (vacation or abandonment), 13.1(e) (insolvency), 13.1(f) (false
statement), 16(a) (estoppel certificate), 30(b) (subordination), 13.3
(auctions), or 41.1 (easements), all of which are hereby deemed to be material,
non-curable defaults without the necessity of any notice by Lessor to Lessee
thereof.
(c) The failure by Lessee to make any payment of rent or any other payment
required to be made by Lessee hereunder, as and when due, where such failure
shall continue for a period of three (3) days after written notice thereof from
Lessor to Lessee. In the event that Lessor serves Lessee with a Notice to Pay
Rent or Quit pursuant to applicable Unlawful Detainer statutes such Notice to
Pay Rent or Quit shall also constitute the notice required b this subparagraph.
(d) The failure by Lessee to observe or perform any of the covenants, conditions
or provisions of this Lease to be observed or performed by Lessee other than
those referenced in subparagraphs (b) and (c), above, where such failure shall
continue for a period of thirty (30) days after written notice thereof from
Lessor to Lessee; provided, however, that it the nature of Lessee's
noncompliance is such that more than thirty (30) days are reasonably required
for its cure, then Lessee shall not be deemed to be in default it Lessee
commenced such cure within said thirty (30) day period and thereafter diligently
pursues such cure to completion. To the extent permitted by law, such thirty
(30) day notice shall constitute the sole and exclusive notice required to be
given to Lessee under applicable Unlawful Detainer statutes.
(e) (i) The making by Lessee of any general arrangement or general assignment
for the benefit of creditors; (ii) Lessee becoming a "debtor" as defined in 11
U.S.C. Section 101 or any successor statute thereto (unless, in the case of a
petition filed against Lessee, the same is dismissed within sixty (60) days;
(iii) the appointment of a trustee or receiver to take possession of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where possession is not restored restored Lessee within
thirty (30) days; or (iv) the attachment, execution or other judicial seizure of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where such seizure is not discharged within thirty (30)
days. In the event that any provision of this paragraph 13.1(e) is contrary to
any applicable law, such provision shall be of no force or effect.
<PAGE> 20
(f) The discovery by Lessor that any financial statement given to Lessor by
Lessee, or its successor in interest or by any quarantor of Lessee's obligation
hereunder, was materially false.
13.2 Remedies. In the event of any material default or breach of this Lease by
Lessee, Lessor may at any time thereafter, with or without notice or demand and
without limiting Lessor in the exercise of any right or remedy which Lessor may
have by reason of such default:
(a) Terminate Lessee's right to possession of the Premises by any lawful means,
in which case this Lease and the term hereof shall terminate and Lessee shall
immediately surrender possession of the Premises to Lessor. In such event Lessor
shall be entitled to recover from Lessee all damages incurred by Lessor by
reason of Lessee's default including, but not limited to, the cost of recovering
possession of the Premises; expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and any
real estate commission actually paid; the worth at the time of award by the
court having jurisdiction thereof of the amount by which the unpaid rent for the
balance of the term after the time of such award exceeds the amount of such
rental loss for the same period that Lessee proves could be reasonably avoided;
that portion of the leasing commission paid by Lessor pursuant to paragraph 15
applicable to the unexpired term of this Lease.
(b) Maintain Lessee's right to possession in which case this Lease shall
continue in effect whether or not Lessee shall have vacated or abandoned the
Premises. In such event Lessor shall be entitled to enforce all of Lessor's
rights and remedies under this Lease, including the right to recover the rent as
it becomes due hereunder.
(c) Pursue any other remedy now or hereafter available to Lessor under the laws
or judicial decisions of the state wherein the Premises are located. Unpaid
installments of rent and other unpaid monetary obligations of Lessee under the
terms of this Lease shall bear Interest from the date due at the maximum rate
then allowable by law.
13.3 Default by Lessor. Lessor shall not be in default unless Lessor fails to
perform obligations required of Lessor within a reasonable time, but in no event
later than thirty (30) days after written notice by Lessee to Lessor specifying
wherein Lessor has failed to perform such obligation; provided, however, that if
the nature of Lessor's obligation is such that more than thirty (30) days are
required for performance then Lessor shall not be in default if Lessor commences
performance within such 30-day period and thereafter diligently pursues the
same to completion.
13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee to
Lessor of Base Rent, Lessee's Share of Operating Expenses or other sums due
hereunder will cause Lessor to incur costs not contemplated by this Lease. the
exact amount of which will be extremely difficult to ascertain, Such costs
include, but are not limited to, processing and accounting charges, and late
charges which may be imposed on Lessor by the terms of any mortgage or trust
deed covering the Office Building Project. Accordingly, if any installment of
Base Rent, Operating Expenses, or any other sum due from Lessee shall not be
received by Lessor or Lessor's designee within ten (10) days after such amount
<PAGE> 21
shall be due, then, without any requirement for notice to Lessee, Lessee shall
pay to Lessor a late charge equal to 5% of such overdue amount. The parties
hereby agree that such late charge represents a fair and reasonable estimate of
the costs Lessor will incur by reason of late payment by Lessee. Acceptance of
such late charge by Lessor shall in no event constitute a waiver of Lessee's
default with respect to such overdue amount, nor prevent Lessor from exercising
any of the other rights and remedies granted hereunder.
14. Condemnation. If the Premises or any portion thereof or the Office Building
Project are taken under the power of eminent domain, or sold under the threat of
the exercise of said power (all of which are herein called "condemnation"), this
Lease shall terminate as to the part so taken as of the date the condemning
authority takes title or possession, whichever first occurs; provided that if so
much of the Premises or the Office Building Project are taken by such
condemnation as would substantially and a diversely affect the operation and
profitability of Lessee's business conducted from the Premises, Lessee shall
have the option, to be exercised only in writing within thirty (30) days after
Lessor shall have given Lessee written notice of such taking (or in the absence
of such notice, within thirty (30) days after the condemning authority shall
have taken possession), to terminate this Lease as of the date the condemning
authority takes such possession. Lessee does not terminate this Lease in
accordance with the foregoing, this Lease shall remain in full force and effect
as to the portion of the Premises remaining, except that the rent and Lessee's
Share of Operating Expenses shall be reduced in the proportion that the floor
area of the Premises taken bears to the total floor area of the Premises. Common
Areas taken shall be excluded from the Common Areas usable by Lessee and no
reduction of rent shall occur with respect thereto or by reason thereof. Lessor
shall have the option in its sole discretion to terminate this Lease as of the
taking of possession by the condemning authority, by giving written notice to
Lessee of such election within thirty (30) days after receipt of notice of a
taking by condemnation of any part of the Premises or the Office Building
Project. Any award for the taking of all or any part of the Premises or the
Office Building Project under the power of eminent domain or any payment made
under threat of the exercise of such power shall be the property of Lessor,
whether such award shall be made as compensation for diminution in value of the
leasehold or for the taking of the fee, or as severance damages; provided,
however, that Lessee shall be entitled to any separate award for loss of or
damage to Lessee's trade fixtures, removable personal property and unamortized
tenant improvements that have been paid for by Lessee. For that purpose the cost
of such improvements shall be amortized over the original term of this Lease
excluding any options. In the event that this Lease is not terminated by reason
of such condemnation, Lessor shall to the extent of severance damages received
by Lessor in connection with such condemnation, repair any damage to the
Premises caused by such condemnation except to the extent that Lessee has been
reimbursed therefor by the condemning authority. Lessee shall pay any amount in
excess of such severance damages required to complete such repair.
15. Brokers Fee.
(a) The brokers involved in this transaction are Martin Properties, Inc. as
"listing broker" and Century 21 "cooperating broker," licensed real estate
broker(s). A "cooperating broker" is defined as any broker other than the
listing broker entitled to a share of any commission arising under this Lease.
<PAGE> 22
Upon execution of this Lease by both parties, Lessor shall pay to said brokers
jointly. or In such separate shares as they may mutually designate in writing, a
fee as set forth in a separate agreement between Lessor and said broker(s), or
in the event there Is no separate agreement between Lessor and said broker(s),
the sum of $ per separate agreement for brokerage services rendered by said
brokers to Lessor in this transaction.
(b) Lessor further agrees that (i) if Lessee exercises any Option, as defined in
paragraph 39.1 of this Lease, which Is granted to Lessee under this Lease, or
any subsequently granted option which is substantially similar to an Option
granted to Lessee under this Lease, or (ii) If Lessee acquires any rights to the
Premises or other premises described in this Lease which are substantially
similar to what Lessee would have acquired had an Option herein granted to
Lessee been exercised, or (iii) if Lessee remains in possession of the Premises
after the expiration of the term of this Lease after having failed to exercise
an Option, or (iv) if said broker(s) are the procuring cause of any other lease
or sale entered into between the parties pertaining to the Premises and/or any
adjacent property in which Lessor has an interest, or (v) if the Base Rent is
increased, whether by agreement or operation of an escalation clause contained
herein, then as to any of said transactions or rent increases, Lessor shall pay
said broker(s) a fee in accordance with the schedule of said broker(s) in
effect at the time of execution of this Lease. Said fee shall be paid at the
time such increased rental is determined.
(c) Lessor agrees to pay said fee not only on behalf of Lessor but also on
behalf of any person, corporation, association. or other entity having an
ownership interest in said real property or any part thereof, when such fee is
due hereunder. Any transferee of Lessor's Interest In this Lease, whether such
transfer Is by agreement or by operation of law, shall be deemed to have assumed
Lessor's obligation under this paragraph 15. Each listing and cooperating broker
shall be a third party beneficiary of the provisions of this paragraph 15 to the
extent of their interest in any commission arising under this Lease and may
enforce that right directly against Lessor; provided, however, that all brokers
having a right to any part of such total commission shall be a necessary party
to any suit with respect thereto.
(d) Lessee and Lessor each represent and warrant to the other that neither has
had any dealings with any person, firm, broker or finder (other than the
person(s), If any, whose names are set forth In paragraph 15(a), above) in
connection with the negotiation of this Lease and/or the consummation of the
transaction contemplated hereby. and no other broker or other person, firm or
entity Is entitled to any commission or finder's fee In connection with said
transaction and Lessee and Lessor do each hereby indemnify and hold the other
harmless from and against any costs, expenses, attorneys' fees or liability for
compensation or charges which may be claimed by any such unnamed broker, finder
or other similar party by reason of any dealings or actions of the indemnifying
party.
16. Estoppel Certificate.
(a) Each party (as "responding party") shall at any time upon not less than ten
(10) days' prior written notice from the other party ("requesting party")
execute, acknowledge and deliver to the requesting party a statement in writing
(i) certifying that this Lease is unmodified and In full force and effect (or,
<PAGE> 23
if modified, stating the nature of such modification and certifying that this
Lease, as so modified, is in full force and effect) and the date to which the
rent and other charges are paid in advance , if any, and (II) acknowledging that
there are not, to the responding party's knowledge, any uncured defaults on the
part of the requesting party, or specifying such defaults if any are claimed.
Any such statement may be conclusively relied upon by any prospective purchaser
or encumbrancer of the Office Building Project or of the business of Lessee.
(b) At the requesting party's option, the failure to deliver such statement
within such time shall be a material default of this Lease by the party who is
to respond, without any further notice to such party, or it shall be conclusive
upon such party that (i) this Lease is in full force and effect, without
modification except as may be represented by the requesting party, (ii) there
are no uncured defaults in the requesting party's performance, and (iii) if
Lessor is the requesting party, not more than one month's rent has been paid in
advance.
(c) If Lessor desires to finance, refinance, or sell the Office Building
Project, or any part thereof, Lessee hereby agrees to deliver to any lender or
purchaser designated by Lessor such financial statements of Lessee as may be
reasonably required by such lender or purchaser. Such statements shall include
the past three (3) years' financial statements of Lessee. All such financial
statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes he rein set forth.
17. Lessor's Liability. The term "Lessor" as used herein shall mean only the
owner or owners, at the time in question, of the fee title or a lessee's
interest in a ground lease of the Office Building Project, and except as
expressly provided in paragraph 15, in the event of any transfer of such title
or interest, Lessor herein named (and in case of any subsequent transfers then
the grantor) shall be relieved from and after the dale of such transfer of all
liability as respects Lessor's obligations thereafter to be performed, provided
that any funds in the hands of Lessor or the then grantor at the time of such
transfer, in which Lessee has an interest, shall be delivered to the grantee.
The obligations contained in this Lease to be performed by Lessor shall, subject
as aforesaid, be binding on Lessor's successors and assigns, only during their
respective periods of ownership.
18. Severabiity. The invalidity of any provision of this Lease as determined by
a court of competent jurisdiction shall in no way affect the validity of any
other provision hereof.
19. Interest on Post-due Obligations. Except as expressly herein provided, any
amount due to Lessor not paid when due shall bear Interest at the maximum rate
then allowable by law or judgments from the date due. Payment of such interest
shall not excuse or cure any default by Lessee under this Lease; provided,
however, that Interest shall not be payable on late charges incurred by Lessee
nor on any amounts upon which late charges are paid by Lessee.
<PAGE> 24
20. Time of Essence. Time 13 of the essence with respect to the obligations to
be performed under this Lease.
21. Additional Rent. All monetary obligations of Lessee to Lessor under the
terms of this Lease, including but not limited to Lessee's Share of Operating
Expense and any other expenses payable by Lessee hereunder shall be deemed to be
rent.
22. Incorporation of Prior Agreements; Amendments. This Lease contains all
agreements of the parties with respect to any matter mentioned herein, No prior
or contemporaneous agreement or understanding pertaining to any such matter
shall be effective. This Lease may be modified in writing only, signed by the
parties in interest at the time of the modification. Except as otherwise stated
in this Lease, Lessee hereby acknowledges that neither the real estate broker
listed in paragraph 15 hereof nor any cooperating broker on this transaction
nor the Lessor or any employee or agents of any of said persons has made any
oral or written warranties or representations to Lessee relative to the
condition or use by Lessee of the Premises or the Office Building Project and
Lessee acknowledges that Lessee assumes all responsibility regarding the
Occupational Safety Health Act, the legal use and adaptability of the Premises
and the compliance thereof with all applicable laws and regulations in effect
during the term of this Lease.
23. Notices. Any notice required or permitted to be given hereunder shall be in
writing and may be given by personal delivery or by certified or registered
mail, and shall be deemed sufficiently given if delivered or addressed to Lessee
or to Lessor at the address noted below or adjacent to the signature of the
respective parties, as the case may be. Mailed notices shall be deemed given
upon actual receipt at the address required, or forty-eight hours following
deposit in the mail, postage prepaid, whichever first occurs. Either party may
by notice to the other specify a different address for notice purposes except
that upon Lessee's taking possession of the Premises, the Premises shall
constitute Lessee's address for notice purposes. A copy of all notices required
or permitted to be given to Lessor hereunder shall be concurrently transmitted
to such party or parties at such addresses as Lessor may from time to time
hereafter designate by notice to Lessee.
24. Waivers. No waiver by Lessor of any provision hereof shall be deemed a
waiver of any other provision hereof or of any subsequent breach by Lessee of
the same or any other provision. Lessor's consent to, or approval of, any act
shall not be deemed to render unnecessary the obtaining of Lessor's consent to
or approval of any subsequent act by Lessee. The acceptance of rent hereunder by
Lessor shall not be a waiver of any preceding breach by Lessee of any provision
hereof, other than the failure of Lessee to pay the particular rent so accepted,
regardless of Lessor's knowledge of such preceding breach at the time of
acceptance of such rent.
25. Recording. Either Lessor or Lessee shall, upon request of the other.
execute, acknowledge and deliver to the other a "short form" memorandum of this
Lease for recording purposes.
<PAGE> 25
26. Holding Over. If Lessee, with Lessor's consent, remains in possession of the
Premises or any part thereof after the expiration of the term hereof, such
occupancy shall be a tenancy from month to month upon all the provisions of this
Lease pertaining to the obligations of Lessee, except that the rent payable
shall be one hundred ten percent (110%)of the rent payable immediately preceding
the termination date of this Lease, and all Options, If any, granted under the
terms of this Lease shall be deemed terminated and be of no further effect
during said month to month tenancy.
27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. Covenants and Conditions. Each provision of this Lease performable by either
party shall be deemed both a covenant and a condition.
29. Binding Effect; Choice of Law. Subject to any provisions hereof restricting
assignment or subletting by Lessee and subject to the provisions of paragraph
17, this Lease shall bind the parties, their personal representatives,
successors and assigns. This Lease shall be governed by the laws of the States
where the Office Building Project is located and any litigation concerning this
Lease between the parties hereto shall be initiated In the county in which the
Office Building Project is located.
30. Subordination.
(a) This Lease, and any Option or right of first refusal granted hereby, at
Lessor's option, shall be subordinate to any ground lease, mortgage, deed of
trust, or any other hypothecation or security now or hereafter placed upon the
Building and to any and all advances made on the security thereof and to all
renewals, modifications, consolidations, replacements and extensions thereof.
Notwithstanding such subordination, Lessee's right to quiet possession of the
Premises shall not be disturbed it Lessee is not in default and so long as
Lessee shall pay the rent and observe and perform all of the provisions of this
Lease, unless this Lease is otherwise terminated pursuant to its terms. If any
mortgagee, trustee or ground lessor shall elect to have this Lease and any
Options granted hereby prior to the lien of its mortgage, deed of trust or
ground lease, and shall give written notice thereof to Lessee, this Lease and
such Options shall be deemed prior to such mortgage, deed of trust or ground
lease, whether this Lease or such Options are dated prior or subsequent to the
date of said mortgage, deed of trust or ground lease or the date of recording
thereof.
(b) Lessee agrees to execute any documents required to effectuate an attornment,
a subordination, or to make this Lease or any Option granted herein prior to the
lien of any mortgage, deed of trust or ground lease, as the case may be.
Lessee's failure to execute such documents within ten (10) days after written
demand shall constitute a material default by Lessee hereunder without further
notice to Lessee or, at Lessor's option, Lessor shall execute such documents on
behalf of Lessee as Lessee's attorney-in-fact. Lessee does hereby make,
constitute and irrevocably appoint Lessor as Lessee's attorney-in-fact and in
<PAGE> 26
Lessee's name, place and stead, to execute such documents in accordance with
this paragraph 30(b).
31. Attorneys' Fees.
31.1 If either party or the broker(s) named herein bring an action to enforce
the terms hereof or declare rights hereunder, the prevailing party in any such
action, trial or appeal thereon, shall be entitled to his reasonable attorneys'
fees to be paid by the losing party as fixed by the court In the same or a
separate suit, and whether or not such action is pursued to decision or
judgment. The provisions of this paragraph shall inure to the benefit of the
broker named herein who seeks to enforce a right hereunder
31.2 The attorneys' fee award shall not be computed in accordance with any court
fee schedule, but shall be such as to fully reimburse all attorneys' fees
reasonably incurred in good faith.
31.3 Lessor shall be entitled to reasonable attorneys' fees and all other costs
and expenses incurred in the preparation and service of notices of default and
consultations in connection therewith, whether or not a legal action is
subsequently commenced in connection with such default.
32. Lessor's Access.
32.1 Lessor and Lessor's agents shall have the right to enter the Premises at
reasonable times for the purpose of Inspecting the same, performing any services
required of Lessor, showing the same to prospective purchasers, lenders, or
lessees, taking such safety measures, erecting such scaffolding or other
necessary structures, making such alterations, repairs, improvements or
additions to the Premises or to the Office Building Project as Lessor may
reasonably deem necessary or desirable and the erecting, using and maintaining
of utilities, services, pipes and conduits through the Premises and/or other
premises as long as there is no material adverse effect to Lessee's use of the
Premises. Lessor may at any time place on or about the Premises or the Building
any ordinary "For Sale" signs and Lessor may at any time during the last 120
days of the term hereof place on or about the Premises an ordinary "For Lease"
signs.
32.2 All activities of Lessor pursuant to this paragraph shall be without
abatement of rent, nor shall Lessor have any liability to Lessee for the same.
32.3 Lessor shall have the right to retain keys to the Premises and to unlock
all doors in or upon the Premises other than to files, vaults and safes, and in
<PAGE> 27
the case of emergency to enter the Premises by any reasonably appropriate means,
and any such entry shall not be deemed a forceable or unlawful entry or detainer
of the Premises or an eviction. Lessee waives any charges for damages or
injuries or interference with Lessee's property or business in connection
therewith.
33. Auctions. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises or the Common Areas
without first having obtained Lessor's prior written consent. Notwithstanding
anything to the contrary in this Lease, Lessor shall not be obligated to
exercise any standard of reasonableness in determining whether to grant such
consent. The holding of any auction on the Premises or Common Areas in violation
of this paragraph shall constitute a material default of this Lease.
34. Signs. Lessee shall not place any sign upon the Premises or the Office
Building Project without Lessor's prior written consent. Under no circum-
stances shall Lessee place a sign on any roof of the Office Building Project.
35. Merger. The voluntary or other surrender of this Lease by Lessee, or a
mutual cancellation thereof, or a termination by Lessor, shall not work a
merger, and shall, at the option of Lessor, terminate all or any existing
subtenancies or may, at the option of Lessor, operate as an assignment to Lessor
of any or all of such subtenancies.
36. Consents. Except for paragraphs 33 (auctions) and 34 (signs) hereof,
wherever in this Lease the consent of one party is required to an act of the
other party such consent shall not be unreasonably withheld or delayed.
37. Guarantor. In the event that there is a guarantor of this Lease, said
guarantor shall have the same obligations as Lessee under this Lease.
38. Quiet Possession. Upon Lessee paying the rent for the Premises and observing
and performing all of the covenants, conditions and provisions on Lessee's part
to be observed and performed hereunder, Lessee shall have quiet possession of
the Premises for the entire term hereof subject to all of the provisions of this
Lease. The individuals executing this Lease on behalf of Lessor represent and
warrant to Lessee that they are fully authorized and legally capable of
executing this Lease on behalf of Lessor and that such execution is binding upon
all parties holding an ownership interest in the Office Building Project.
39. Options.
<PAGE> 28
39.1 Definition. As used in this paragraph the word "Option" has the following
meaning: (1) the right or option to extend the term of this Lease or to renew
this Lease or to extend or renew any lease that Lessee has on other property of
Lessor; (2) the option or right of first refusal to lease the Premises or the
right of first offer to lease the Premises or the right of first refusal to
lease other space within the Office Building Project or other property of Lessor
or the right of first offer to lease other space within the Office Building
Project or other property of Lessor; (3) the right or option to purchase the
Premises or the Office Building Project, or the right of first refusal to
purchase the Premises or the Office Building Project or the right of first offer
to purchase the Premises or the Office Building Project, or the right or option
to purchase other property of Lessor, or the right of first refusal to purchase
other property of Lessor or the right of first offer to purchase other property
of Lessor.
39.2 Options Personal. Each Option granted to Lessee In this Lease is personal
to the original Lessee and may be exercised only by the original Lessee while
occupying the Premises who does so without the intent of thereafter assigning
this Lease or subletting the Premises or any portion thereof, and may not be
exercised or be assigned, voluntarily or involuntarily, by or to any person or
entity other than Lessee; provided, however, that an Option may be exercised by
or assigned to any Lessee Affiliate as defined in paragraph 12.2 of this Lease.
The Options, if any, herein granted to Lessee are not assignable separate and
apart from this Lease, nor may any Option be separated from this Lease in any
manner, either by reservation or otherwise.
39.3 Multiple Options. In the event that Losses has any multiple options to
extend or renew this Lease a later option cannot be exercised unless the prior
option to extend or renew this Lease has been so exercised.
39.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option, notwithstanding any
provision In the grant of Option to the contrary, (i) during the time commencing
from the date Lessor gives to Lessee a notice of default pursuant to paragraph
13.1 (c) or 13.1 (d) and continuing until the noncompliance alleged in said
notice of default is cured. Or (ii) during the period of time commencing on the
day after a monetary obligation to Lessor is due from Lessee and unpaid (without
any necessity for notice thereof to Lessee) and continuing until the obligation
is paid, or (iii) in the event that Lessor has given to Lessee three or more
notices of default under paragraph 13.1(c), or paragraph 13.1(d), whether or not
the defaults are cured, during the 12 month period of time immediately prior to
the time that Lessee attempts to exercise the subject Option, (iv) if Lessee has
committed any non-curable breach, including without limitation those described
in paragraph 13.1(b), or is otherwise in default of any of the terms, covenants
or conditions of this Lease.
(b) The period of time within which an Option may be exercised shall not be
extended or enlarged by reason of Lessee's Inability to exercise an Option
because of the provisions of paragraph 39.4(a).
<PAGE> 29
(c) All rights of Lessee under the provisions of an Option shall terminate and
be of no further force or effect, notwithstanding Lessee's due and timely
exercise of the Option, if, after such exercise and during the term of this
Lease, (i) Lessee falls to pay to Lessor a monetary obligation of Lessee for a
period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessee fails to
commence to cure a default specified in paragraph 13.1 (d) within thirty (30)
days after the date that Lessor gives notice to Lessee of such default and/or
Lessee fails thereafter to diligently prosecute said cure to completion, (iii)
Lessor gives to Lessee three or more notices of default under paragraph 13.1(c).
or paragraph 13.1(d), whether or not the defaults are cured, or (iv) if Lessee
has committed any non-curable breach, including without limitation those
described in paragraph 13.1(b), or is otherwise in default of any of the terms,
covenants and conditions of this Lease.
40. Security Measures-Lessor's Reservations.
40.1 Lessee hereby acknowledges that Lessor shall have no obligation whatsoever
to provide guard service or other security measures for the benefit of the
Premises or the Office Building Project. Lessee assumes all responsibility for
the protection of Lessee, its agents, and Invitees and the property of Lessee
and of Lessee's agents and invitees from acts of third parties. Nothing herein
contained shall prevent Lessor, at Lessor's Sole option, from providing security
protection for the Office Building Project or any part thereof, in which event
the cost thereof shall be included within the definition of Operating Expenses,
as set forth in paragraph 4.2(b).
40.2 Lessor shall have the following rights:
(a) To change the name, address or title of the Office Building Project or
building In which the Premises are located upon not less than 90 days prior
written notice;
(b) To, at Lessee's expense, provide and Install Building standard graphics on
the door of the Premises and such portions of the Common Areas as Lessor shall
reasonably deem appropriate;
(c) To permit any lessee the exclusive right to conduct any business as long as
such exclusive does not conflict with any rights expressly given herein;
(d) To place such signs, notices or displays as Lessor reasonably deems
necessary or advisable upon the root, exterior of the buildings or the Office
Building Project or on Dole signs In the Common Areas:
40.3 Losses shall not:
(a) Deleted
<PAGE> 30
(b) Suffer or permit anyone, except In emergency, to go upon the roof of the
Building.
41. Easements.
41.1 Lessor reserves to itself the right, from time to time, to grant such
easements, rights and dedications that Lessor deems necessary or desirable, and
to cause the recordation of Parcel Maps and restrictions, so long as such
easements, rights, dedications, Maps and restrictions do not unreasonably
Interfere with the use of the Premises by Lessee. Lessee shall sign any of the
aforementioned documents upon request of Lessor and failure to do so shall
constitute a material default of this Lease by Lessee without the need for
further notice to Lessee.
41.2 The obstruction of Lessee's view, air, or light by any structure erected in
the vicinity of the Building, whether by Lessor or third parties, shall in no
way affect this Lease or impose any liability upon Lessor.
42. Performance Under Protest. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one party to the other under the provisions
hereof, the party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment, and there shall survive the right on the part
of said party to institute suit for recovery of such sum. If it shall be
adjudged that there was no legal obligation on the part of said party to pay
such sum or any part thereof, said party shall be entitled to recover such sum
or so much thereof as it was not legally required to pay under the provisions of
this Lease.
43. Authority. If Lessee is a corporation, trust, or general or limited
partnership, Lessee, and each individual executing this Lease on behalf of such
entity, represent and warrant that such individual is duly authorized to execute
and deliver this Lease on behalf of said entity If Lessee is a corporation,
trust or partnership, Lessee shall, within thirty (30) days after execution of
this Lease, deliver to Lessor evidence of such authority satisfactory to Lessor.
44. Conflict. Any conflict between the printed provisions, Exhibits or Addenda
of this Lease and the typewritten or handwritten provisions, It any, shall be
controlled by the typewritten or handwritten provisions.
45. No Offer. Preparation of this Lease by Lessor or Lessor's agent and
submission of same to Lessee shall not be deemed an offer to Lessee to lease.
This Lease shall become binding upon Lessor and Lessee only when fully executed
by both parties.
46. Lender Modification. Lessee agrees to make such reasonable modifications to
this Lease as may be reasonably required by an institutional lender in
<PAGE> 31
connection with the obtaining of normal financing or refinancing of the Office
Building Project.
47. Multiple Parties. It more than one person or entity is named as either
Lessor or Lessee herein, accept as otherwise expressly provided herein, the
obligations of the Lessor or Lessee herein shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee,
respectively.
48. Deleted
49. Attachments. Attached hereto are the following documents which constitute a
part of this Lease.
See Addendum
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED
AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS
LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND
EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR
ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER OR ITS
AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX
CONSEQUENCES OF THIS LEASE OR THE TRANSACTION RELATING THERETO: THE PARTIES
SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN LEGAL COUNSEL AS TO THE LEGAL AND
TAX CONSEQUENCES OF THIS LEASE.
LESSOR
Martin Properties, Inc.
By: (Signature of Rob Martin, President of Martin Properties)
LESSEE
Simulations Plus, Inc.
By: (Signature of Walter S. Woltosz, President & CEO of Simulations Plus, Inc.)
C 1984 American industrial Real Estate Association FULL SERVICE-NET
<PAGE> 32
NOTE: These forms are often modified to meet changing requirements of law and
needs of the industry. Always write or call to make sure you are utilizing the
Most Current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 345 So. Figueroa
St., M-1, Los Angeles, CA 90071. (213) 687-8777.
<PAGE> 33
Addendum to Standard Office Lease - Net
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
In conjunction with the Standard Office Lease - Net dated May 14, 1998 by and
between MARTIN PROPERTIES, INC., as the Lessor and, SIMULATIONS PLUS. INC., as
the Lessee, the following terms and conditions are hereby incorporated and made
part of said lease:
50. POSSESSION: The premises shall be delivered to the Lessee on or before July
1, 1998. Lessee and Lessor shall execute an amendment to this lease establishing
the date of Tender of Possession or the actual taking of possession by Lessee.
Tenant shall have two months of free rent regardless of the possession date. The
lease shall be for thirty-six (36) months from the rental commencement date.
51. RENT PAYMENTS & NOTIFICATIONS: Accordance with paragraph 1.6, commencing on
September 1st, 1998 and on the 1st day of each subsequent month without demand
from Lessor, Lessee agrees to mail or deliver the rent payments to the following
address:
MARTIN PROPERTIES, INC.
5655 Lindero Canyon Road, Suite 603
Westlake Village, CA 91362
52. BASE RENT AND INCREASES: Monthly Base Rent for the Lease Term will be as
follows:
Year 1 $10,000 per month $.64 S.F. NNN
Year 2 $10,920 per month $.70 S.F. NNN
Year 3 $11,700 per month $.75 S.F. NNN
Lessee shall be responsible for all utilities and services that are separately
metered to their space and shall pay their pro-rata share of the common area
maintenance expenses, real estate taxes and insurance.
53. OPTION TO RENEW: Provided that Lessee Is not then in default of any of the
terms, covenants or conditions of the Lease, Lessee shall be provided two (2)
two (2) year Options to Renew term by providing Lessor with not less than three
(3) months prior written notice of its intention to exercise these options. All
other terms shall remain the same. The base Rent shall increase four (4) per
cent per annum.
<PAGE> 34
54. TENANT IMPROVEMENTS: Lessee is solely responsible for any and all costs for
tenant improvement work required (if any) for its occupancy in the premises,
following those guidelines set forth in paragraph 7. Lessee shall have the right
to construct at Lessee's sole cost and expense any additional Tenant
Improvements in the premises with Lessor's prior consent, said consent not to be
unreasonable withheld or delayed. Lessee warrants to Lessor that any such Tenant
Improvements initially or subsequently constructed in the premises will conform
to the applicable building and safety codes of the City of Lancaster. Lessee
shall apply and obtain a building permit for said Tenant Improvements if one is
required.
55. CONDITION OF THE PREMISES AND REPAIRS: Lessor shall deliver HVAC system,
plumbing and electrical in working order and shall warrant these systems for a
period of 90 days from the delivery date. Lessor shall repair defective and
missing floor tiles and roof shall be free of leaks and warrant same for the
term of the lease in accordance with paragraph 6.3, Lessee is aware and has read
those provisions contained in paragraphs 7 and 9, and understands Lessor's
obligations for repair and maintenance extend to the structural portions of the
premises only. Lessee is responsible for any and all repairs required within the
interior of the leased premises during its occupancy in the Premises, other than
structural elements contained therein. Lessor to repair and paint holes in walls
where sinks/cabinets were removed prior to Lessee's occupancy of the building.
56. SIGNAGE: Notwithstanding paragraph 34, page 8 of the lease, Lessee, at
Lessee's sole cost may install a sign on the leased premises which follows those
guidelines set forth by the City of Lancaster's Code and the standards for
Centerpoint Business Park.
57. ADA: Please be advised that an owner or Lessee of real property may be
subject to the Americans With Disabilities Act (the ADA), a Federal law codified
at 42 USC Section 12101 et. seq. Requirements of the ADA that could apply to
your property include Title III. Title III requires owners and tenants of
"public accommodations" to remove barriers to access by disabled persons and to
provide auxiliary aids and services for vision or speech impaired persons by
January 26, 1992. The regulations under Title III of the ADA are codified at 28
CFR Part 36. We recommend that you and your attorney review the ADA and the
regulations, and, if appropriate, your proposed lease or purchase agreement, to
determine if this law would apply to you, and the nature of the requirements.
These are legal issues. You are responsible for conducting your own independent
investigation of these issues, and Lessor and Brokers shall be held harmless and
indemnified from the impacts on Lessee's business and use within the Premises.
<PAGE> 35
58. COMPLIANCE WITH ENVIRONMENTAL LAW: Lessee hereby represents, warrants,
covenants and agrees with Lessor, as follows:
Lessee agrees that it will not intentionally permit the use, generation,
manufacture, disposal or storage of any toxic and/or "Hazardous Materials" in,
on and/or around the Leased premises now or at any future time. For the purposes
of this Lease, "Hazardous Materials" shall include, but shall not be limited to,
any substances, material or waste which is or becomes regulated by any state or
local governmental or quasi-governmental authority, or by the United States
government, or any agency thereof, including but not limited to the United
States Environmental Protection Agency (collectively referred to herein as the
"Governmental Authorities"). Notwithstanding the representations set forth in
subparagraph above, Lessor, and Lessee acknowledge and agree that should Lessee
use, store or maintain materials in the ordinary course of Lessee's business
operations, which constitute Hazardous Materials, Lessee will:
Obtain all required licenses, permits and other necessary agreements
with respect to the permitted Materials from all applicable Governmental
Authorities before using, storing or maintaining such materials in or about the
Leased Premises, and;
Lessee shall comply with all laws, statutes, ordinances, regulations,
rules, court or administrative orders or decrees, licenses or permits, ("The
Applicable Laws") of all applicable Governmental Authorities with respect to the
Permitted Materials; and;
Lessee shall maintain detailed and accurate books and records of receipt
and disposal of the Permitted Material on the Leased Premises in accordance with
the general standards of the industry in which Lessee operates, and such books
and records shall account for and shall reveal no discrepancies between the
receipt and disposal of such Permitted Materials; and
Lessee shall immediately notify Lessor of any notice from any
Governmental Authority received by lessee, or if Lessor should have reason to
believe, that the Permitted Materials are being used, or stored in violation of
Applicable Laws, or that there are hazardous materials other than the Permitted
materials affecting any all or any portion of the Leased Premises. Lessee shall
thereafter immediately commence, at its sole expense, all remedial action
necessary to eradicate the violations and to bring the Leased Premises in full
compliance with all Applicable Laws, and shall diligently pursue to completion
such necessary actions. In order to verify Lessee's compliance with this
section, Lessor, at any time after receipt of notice of a violation of any
Applicable Laws, may contract for the services of persons to perform
environmental site assessments on the Leased Premises at Lessor's expense, to be
performed at any time or times upon reasonable notice, and under reasonable
conditions. Lessor shall have the option to require specific performance of
Lessee's obligations hereunder. Lessee hereby indemnities and holds Lessor and
lessor's
<PAGE> 36
Lender harmless from and against any loss, liability, cost expense, penalty,
litigation, demand, defense, action, proceeding or disbursement (including
reasonable attorneys' fees) which may be imposed upon Lessor in connection with
the use or storage of the Permitted Materials, or which may result in connection
with Materials other than the Permitted Materials, as they relate to the leased
Premises or any surrounding areas.
It is expressly agreed and understood that upon Lessee's vacation of the Leased
Premises, Lessee, at Lessee's expense, shall leave the leased Premises
"environmentally clean", as when delivered to Lessee.
59. SUBJECT TO LESSOR ACQUIRING TITLE: Lessee is aware that Lessor is currently
in escrow to purchase the subject property and this lease is subject to Lessor
acquiring title to the subject property. Should Lessor not obtain title to the
subject property by July 30, 1998 than this lease shall be null and void and
both parties shall mutually release each party from any obligation or claim.
60. RENT PAID UPON EXECUTION AND SECURITY DEPOSIT: Shall be paid to Century 21
and shall be deposited into their trust account, and shall be paid to Lessor
upon close of escrow. Should escrow fail to close by July 30, 1998 then deposits
shall be returned to Lessee.
61. Lessee hereby accepts the premises, subject to all applicable zoning,
municipal, county and state laws, ordinances and regulations governing and
regulating the use of the premises. Lessor and Lessee acknowledge that they have
reviewed the Covenants, Conditions, and Restrictions of Centerpoint Business
Park, and believe the Lessee's intended use of the premises does not conflict
with said Covenants, Conditions and Restrictions. However, should legal actions
be brought against Lessee by any of the owners or occupants of Centerpoint
Business Park, which legal action results in a final judgement that interferes
with Lessee's uses and occupancy of the premises, then Lessee shall be relieved
of any further obligation to Lessor under the said Lease Agreement, and the
Lease shall be of no further force and effect. Under such circumstances, Lessor
shall pay to Lessee an amount equal to Lessee's cost expended in leasehold
improvements (but not trade fixtures) with respect to the premises multiplied by
a fraction, the numerator of which is the number of months which Lessee has
occupied the premises, and the denominator of which is the total number of
months of the Lease term. Lessee shall provide to Lessor a detailed list of the
proposed leasehold improvements within ten (10) days from the execution of the
Lease. Lessor shall have three business days to approve said improvements. Upon
completion of the leasehold improvements, Lessee shall provide Lessor with a
detailed schedule of all the costs supported by invoices therefor.
Attachments:
<PAGE> 37
Exhibit 'A' Site Plan
Exhibit 'B' Floor Plan
Exhibit 'C' Rules and Regulations
Exhibit 'D' Sign Criteria
"LESSEE"
SIMULATIONS PLUS, INC.
By:
Walter S. Woltosz
Its President and CEO
"LESSOR"
MARTIN PROPERTIES, INC.
By:
Rob Martin
Its President.
<PAGE> 38
9. Landlord will have the right to approve where and how telephone wires are to
be Introduced. No boring or cutting for wires or any kind will be allowed
without the consent or Landlord. The location of telephone, call boxes and other
equipment affixed to the Premises shall be subject to the approval of Landlord.
10. No Tenant shall lay linoleum, tile, carpet or other similar Floor covering
so that the same shall be affixed to the floor of the Premises in any manner
except as approved by the Landlord. The expenses of repairing any damage
resulting from any violation of this rule shall be borne by the Tenant by whom,
or by whose contractors, employees or invitees, the damage shall have been
caused.
11. Deleted
12. No Tenant shall make, or permit to be made any unseemly or disturbing noises
or disturb or Interfere with occupants of neighboring buildings or Premises or
those having business within them whether by the use of musical instruments,
radio, phonograph, unusual noise, or in any other way. No Tenant shall throw
anything out of doors, windows or skylight or down the passage ways.
13. No Tenant nor any Tenant's servants, employees agents, visitors or
licensees, shall at any time bring or keep upon the Premises any inflammable,
combustible or, explosive fluid, chemical or substance, except for ordinary
office supplies and small quantities of cleaning fluids and glues used in light
electronic assembly.
14. Landlord reserves the right to exclude or expel from the Building any person
who, in the judgment of Landlord is intoxicated or under the influence of liquor
or drugs, or who shall in any manner do any act in violation of any of the rules
and regulations of the Building.
15. The requirements Of Tenant will be attended to only upon application at the
office of the Landlord. Employees of Landlord shall not perform any work or do
anything outside of their regular duties unless under special instructions from
the Landlord and no employee shall admit any person (Tenant or other wise) to
any office without specific instructions from the Landlord.
16. Landlord shall have the right, exercisable without notice and without
liability to Tenant, to change the name and the street address of the Building
of which the Premises are a part.
17. The word "Building" as used herein means the building of which the Premises
are a part.
<PAGE> 39
18. Landlord reserves the right to make such other and further rules and
regulations as in its judgement may be for the safety, care and cleanliness of
the Premises and for the preservation of good order therein. Tenant agrees to
abide by all such additional rules and regulations which are adopted.
19. No air conditioning unit or similar apparatus shall be installed or used by
Tenant without the written consent of Landlord.
20. No vending machines shall be installed, maintained or operated on the
Premises without the written consent of the Landlord.
21. Deleted
22. Canvassing, soliciting and peddling in the building are prohibited and each
Tenant shall cooperate to prevent the same.
23. Deleted
24. Deleted
<PAGE> 40
SIGN CRITERIA
FOR
OFFICE/SHOP BUILDING TENANTS/OWNERS
LOCATED IN
CENTERPOINT BUSINESS PARK
LANCASTER, CALIFORNIA
LHA JOB NO. 8643
NOVEMBER 20, 1990
DEVELOPER
MOORE DEVELOPMENT CORPORATION
1575 SPINNAKER DRIVE, SUITE 204
VENTURA, CALIFORNIA 93008
(805) 650-8910
ARCHITECT
LEIDENPROST/HOROWITZ, AIA & ASSOCIATES
1833 S. VICTORY BOULEVARD
GLENDALE, CALIFORNIA 91505
(818) 246-6050
Subject to City of Lancaster's Approval
<PAGE> 41
SIGN CRITERIA
These criteria have been established for the purpose of assuring an outstanding
business park, and for the mutual benefit of all tenants. Conformance will be
strictly enforced and any installed non-conforming or unapproved signs must be
brought into conformance at the expense of the tenant.
A. GENERAL REQUIREMENTS
1. Each tenant shall submit or cause to be submitted to the Landlord/Developer
for approval before fabrication at least four copies of detailed drawings
indicating the location, size, layout, design and color of the proposed signs,
including all lettering and/or graphics. The tenant shall submit or cause to be
submitted to the City of Lancaster, Department of Community Development, three
(3) copies of the Landlord approved and signed drawings for review and approval
before fabrication and installation.
2. All permits for signs and their installation shall be obtained by the tenant
or tenant's representative prior to installation.
3. Tenant shall be responsible for the fulfillment of all requirements and
specifications.
4. All signs shall be constructed and installed at tenant's expense.
5. All signs shall be reviewed by the Landlord/Developer and his designed
Project Architect for conformance with this criteria and overall design quality.
With this Approval or disapproval of sign submittals based on aesthetics of
design shall remain the sole right of the Landlord/Developer.
6. Tenant's sign contractor to be responsible for obtaining all required City
Approvals.
7. All signs shall be installed no later than 30 days following the date tenant
opens for business.
8. Tenant shall repair all damage made by installation and/or removal of all
signs.
9. Tenant shall keep all signs in good repair and all electrified signs fully
illuminated (as to operating condition) and in good working order and shall
promptly repair or replace any broken or damaged sign surfaces, enclosures, and
electrical parts.
<PAGE> 42
SIGN CRITERIA
Page 2 of 4
B. GENERAL SPECIFICATIONS
1. Tenant signs will be as shown on the attached detail sheet drawings.
2. No audible, flashing, animated, or Neon type (except for "open" window sign)
signs will be permitted.
3. No projections above or below the sign panel will be permitted. Sign must be
within dimensional limits as indicated on the attached drawings.
4. All wall signs shall be internally illuminated and the source of illumination
shall not be visible.
5. Style of letter other than that detailed may be permitted after written
approval by Landlord/Developer and governing agency.
6. Under-canopy signs: None.
7. Tenant shall be responsible for the installation and maintenance of all
signs.
8. Wording of signs shall not include the product sold except as part of the
tenant's trade name or insignia unless approved by Landlord/Developer and
governing agency.
9. Where applicable, width of tenant's fascia sign shall not exceed 70% of width
of the office of storefront except where office or storefront is 16 feed or
less. In such case 75% maximum is allowable on buildings with sign type E, the
sign shall not exceed 10 feet in length. Building L and H shall be permitted no
more than four fascia signs per building. All other buildings will be permitted
no more than two fascia signs per building.
10. Letters on building "G", "E", "A", "L" (north face), shall be a maximum of
24 inches in height. All other buildings shall be allowed a maximum letter
height of 18 inches.
11. All tenant signs on building G, E, A, L (north face) shall be of a color
chosen by tenant and approved by Landlord/Developer and governing agency. All
other building fascia signs shall be constructed in accordance with sign type
"C" in the color of blue chosen by Landlord/Developer.
<PAGE> 43
SIGN CRITERIA
Page 3 of 4
12. Electrical service to all, signs where necessary will be connected to
tenant's meter.
13. All lettering on monument signs shall be black block letters.
14. With the exception of building "L", no one tenant shall be allowed two
different sign types.
C. CONSTRUCTION REQUIREMENTS
1. Letter fastening and clips are to be concealed with stucco and be of
galvanized, stainless steel aluminum, brass or bronze metals. Letters may be
attached with approved adhesives.
2. No labels will be permitted on the exposed surface of signs, except those
required by local ordinance which shall be placed in an inconspicuous location.
3. Where applicable, tenants shall have identification signs designed in a
manner compatible with and complimentary to adjacent and facing office or
storefronts and the overall design concept of the park.
4. Design, layout and materials for tenants' signs shall conform in all respects
with the sign design drawings included with this criteria. The maximum height
for letters in the body of the sign shall be as indicated in these documents.
5. All monument signs to be finished with stucco, and have non-illuminated block
letters in accordance with "Sign B".
6. All penetrations of the building structure required for sign installation
shall be sealed in a water-tight condition and shall be patched to match
adjacent finish.
D. MISCELLANEOUS REQUIREMENTS
1. Each tenant shall be permitted to place upon each entrance of its demised
premises not more than 144 square inches of gold leaf or decal application
lettering not to exceed two inches in height, indicating hours of business,
emergency telephone numbers, etc.
<PAGE> 44
SIGN CRITERIA
Page 4 of 4
2. Except as provided herein, no advertising placards, banners, pennants, names,
insignia, trademarks, or other descriptive material shall be affixed or
maintained upon the glass panes and supports of the show windows and doors, or
upon the exterior walls of buildings without the written previous approval of
the Landlord and the City of Lancaster.
3. Each tenant who has a non-customer door for receiving merchandise may have
uniformly applied on said door the tenant's name and address, in three (3) inch
high block letters, as directed by the Landlord/Developer. Where more than one
tenant uses the same door, each name and address shall be applied. Colors of
letters shall match Ameritone Black. No other rear entry signs shall be
permitted.
4. Contractors installing signs are to be State registered contractors and are
to have a current City business license.
E. INDIVIDUAL TENANT IDENTIFICATION WINDOW SIGNS
1. Location: On the right of left side of main entrance to tenant's space, no
higher than eye level.
2. Hand painted white Helveticia letters with a six inch maximum letter height.
3. Submit to Landlord/Developer for approval.
4. Not to exceed four feet in length.
<PAGE> 1
EXHIBIT 10.28
SOFTWARE OEM AGREEMENT FOR ASSISTIVE MARKET DEVELOPER
BETWEEN
DIGITAL EQUIPMENT CORPORATION
and
WORDS +, INC.
for
DECtalk Access32 Software
Windows 95/NT
AGREEMENT # QR-CLAM2-61
EFFECTIVE DATE 10/15/97
TABLE OF CONTENTS
PREAMBLE
ARTICLE 1: DEFINITIONS
ARTICLE 2: TITLE AND LICENSE GRANTS
ARTICLE 3: COMPENSATION
ARTICLE 4: RECORDS AND ROYALTY PAYMENTS
Page 1
<PAGE> 2
ARTICLE 5: DISCLAIMER OF WARRANTIES
ARTICLE 6: INTELLECTUAL PROPERTY INDEMNIFICATION
ARTICLE 7: LIMITATION OF LIABILITY
ARTICLE 8: TERM AND TERMINATION
ARTICLE 9: PUBLICITY
ARTICLE 10: QUALITY CONTROL
ARTICLE 11: GENERAL
APPENDIX A: DISTRIBUTION SOFTWARE/LICENSE FEES
APPENDIX B: DISTRIBUTION DOCUMENTATION
APPENDIX C: END USER AGREEMENT
APPENDIX D: LEGAL REQUIREMENTS FOR RESELLER AGREEMENT
APPENDIX E: GUIDELINES FOR USING DECtalk TRADEMARK
APPENDIX F: QUARTERLY ACTIVITY/FEE REPORT
Software OEM Agreement for Assistive Market Developer
between
DIGITAL EQUIPMENT CORPORATION
and
WORDS +, INC.
This Software OEM Agreement, 10/15/1997, (the "Effective Date") is entered into
by and between Digital Equipment Corporation, a Massachusetts corporation with
principal offices at 111 Powdermill Road, Maynard, Massachusetts, 01754
("DIGITAL") and
Words +, Inc.
40015 Sierra Highway
Building B-145
Palmdale, CA. 93550 ("SOFTWARE OEM")
WHEREAS, DIGITAL has developed a proprietary speech synthesis technology and
related software, known as DECtalk Access32;
WHEREAS, SOFTWARE OEM has acquired the standard DECtalk Access32 software
developers kit from DIGITAL which includes a separate license agreement with
DIGITAL ("END USER SOFTWARE LICENSE AGREEMENT"), which permits evaluation of
DIGITAL'S DECtalk Access32 software for, potential use in conjunction with
SOFTWARE OEM's internally developed assistive
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applications for visually or vocally impaired individuals;
WHEREAS, such END USER SOFTWARE LICENSE AGREEMENT does not permit SOFTWARE OEM
to distribute DECtalk Access32 software with such assistive applications; and
WHEREAS, SOFTWARE OEM desires to obtain a non-exclusive right to distribute
DECtalk Access32 software only for use as a component of SOFTWARE OEM's
assistive applications,
NOW THEREFORE, in consideration of the mutual promises and covenants contained
herein, DIGITAL and SOFTWARE OEM agree as follows:
ARTICLE I - DEFINITIONS
As used in this Software OEM Agreement, the following terms shall have the
meanings set forth below:
1.01 DIGITAL'S INTELLECTUAL PROPERTY RIGHTS shall mean DIGITAL's rights in its
text to speech synthesis technology and DECtalk Access32 Version 2.0 software,
and future versions of DECtalk Access32 software, if and when they are made
commercially available by DIGITAL, including:
1.01.01 All rights, title and interests in all Letters Patent, including any
re-issue, division, continuation or continuation-in-part applications throughout
the world now or hereafter filed;
1.01.02 All rights, title and interests in all DECtalk trademarks, and trademark
rights arising under common law, state law, federal law and laws of foreign
countries;
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1.01.03 All rights, title and interests in all copyrights and all other literary
property and author rights, whether or not copyrightable, throughout the world.
1.02 DISTRIBUTION SOFTWARE shall mean DIGITAL'S DECtalk Access32 Version 2.0
software for the Windows NT/95 operating system files identified in Appendix A.
1, including any future versions of such DECtalk Access32 software, if and when
they become commercially, available by DIGITAL, and any part or any derivatives
of such operating system and future versions thereof.
1.03 DISTRIBUTION DOCUMENTATION shall mean the documents identified in Appendix
B, or any part thereof, or any derivatives thereof
1.04 ASSISTIVE APPLICATION shall mean (1) a screen access system employing a
mechanical, electronic or voice input mechanism and integrated speech output
mechanism specially designed for use by a visually or reading impaired
individual to allow eyes-free audio output of text-based and written
information; or (2) a voice output communication aid device that provides a data
entry input mechanism and an integrated speech output mechanism specially
designed to allow vocally impaired individuals a means to orally communicate
with other individuals.
1.05 COPY PROTECTION METHOD shall mean a method whereby SOFTWARE OEM prohibits
the unauthorized copying of DISTRIBUTION SOFTWARE.
1.06 SHARED MEMORY INITIALIZATION TECHNIQUE (SMIT) shall mean a SOFTWARE OEM
created routine incorporated into its ASSISTIVE APPLICATION which shall create
and initialize a shared-memory section for DECtalk Access32 software that shall
include a unique encrypted identifier, provided by DIGITAL, and which functions
to unlock DECtalk Access32 and allow it to be used by the END USER.
1.07 END USER shall mean a third party authorized by SOFTWARE OEM to use
DISTRIBUTION SOFTWARE and DISTRIBUTION DOCUMENTATION solely as a component of
SOFTWARE OEM's ASSISTIVE APPLICATION and only for the END USER's own internal
operation with no right to distribute to others.
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1.08 RESELLER shall mean a party authorized by SOFTWARE OEM to transfer SOFTWARE
OEM'S ASSISTIVE APPLICATION, including DISTRIBUTION SOFTWARE or DISTRIBUTION
DOCUMENTATION as a component thereof, directly or indirectly to an END USER
without adding value to or changing DISTRIBUTION SOFTWARE in any way.
1.09 END USER AGREEMENT shall mean the agreement between SOFTWARE OEM and an END
USER or between RESELLER and an END USER, a copy of which is provided in
Appendix C.
1.10 RESELLER AGREEMENT shall mean an agreement between SOFTWARE OEM and a
RESELLER, which incorporates all of the requirements listed in Appendix D.
1.11 TRADE shall mean DIGITAL's "DECtalk" trademark.
ARTICLE 2 - TITLE AND LICENSE GRANTS
2.01 Subject to the limited non-exclusive rights granted to SOFTWARE OEM as
expressly set forth in this Article 2, DIGITAL owns and shall retain all rights,
title and interests in DIGITAL's INTELLECTUAL PROPERTY RIGHTS, DECtalk Access32
software, DISTRIBUTION SOFTWARE, and DISTRIBUTION DOCUMENTATION.
2.02 Subject to the payment of the royalties set forth in Article 4, DIGITAL
grants to SOFTWARE OEM a non-exclusive, non-transferable, revocable license
under DIGITAL's INTELLECTUAL PROPERTY RIGHTS, to:
2.02.01 copy DISTRIBUTION SOFTWARE in object form only within SOFTWARE OEM's own
facilities, provided that the SHARED MEMORY INITIALIZATION TECHNIQUE is
implemented within SOFTWARE OEM's ASSISTIVE APPLICATIONS and an approved COPY
PROTECTION METHOD is operative;
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2.02.02 have copied DISTRIBUTION SOFTWARE in object form only and only by an
authorized agent of SOFTWARE OEM, provided that the SHARED MEMORY INITIALIZATION
TECHNIQUE is implemented within SOFTWARE OEM's ASSISTIVE APPLICATIONS and an
approved COPY PROTECTION METHOD is operative;
2.02.03 copy DISTRIBUTION DOCUMENTATION in full or in part as required to meet
END USER requirements;
2.02.04 distribute DISTRIBUTION SOFTWARE and DISTRIBUTION DOCUMENTATION
worldwide directly to END USERs only as a component of SOFTWARE OEM's ASSISTIVE
APPLICATION, provided each of such END USERS enters into an END USER AGREEMENT;
2.02.05 distribute DISTRIBUTION SOFTWARE and DISTRIBUTION DOCUMENTATION
worldwide directly to RESELLERs only as a component of SOFTWARE OEM's ASSISTIVE
APPLICATION and indirectly to END USERs, provided that the SOFTWARE OEM has
entered into a RESELLER AGREEMENT with the RESELLER and the END USER enters into
an END USER AGREEMENT;
2.02.06 use the TRADEMARK in the marketing and distribution of DISTRIBUTION
SOFTWARE and DISTRIBUTION DOCUMENTATION but only in accordance with Appendix E
and Article 9.
2.03 The license grant in Article 2.02 is not effective until: (1) SOFTWARE
OEM's COPY PROTECTION METHOD, and any subsequent changes thereto, are evaluated
by DIGITAL and SOFTWARE OEM receives written approval to use COPY PROTECTION
METHOD from DIGITAL; (2) SOFTWARE OEM has incorporated COPY PROTECTION METHOD
into its ASSISTIVE APPLICATION; and (3) SOFTWARE OEM has incorporated the SHARED
MEMORY INITIALIZATION TECHNIQUE into its ASSISTIVE APPLICATION.
ARTICLE 3 - COMPENSATION
3.01 In consideration of the rights granted to SOFTWARE OEM by DIGITAL
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under this Software OEM Agreement SOFTWARE OEM shall pay DIGITAL the License
Fees specified in Appendix A.2.
3.02 All payments due hereunder shall be made in United States dollars and
without deduction for taxes, assessments, or other charges of any kind
attributable to either party which may be imposed on either party by any
government in any country in which SOFTWARE OEM is distributing DISTRIBUTION
SOFTWARE or DISTRIBUTION DOCUMENTATION.
ARTICLE 4 - RECORDS AND ROYALTY PAYMENTS
4.01 SOFTWARE OEM shall make and retain true and accurate records, files, and
books of account containing all data required for full computation and
verification of the amounts to be paid under this Software OEM Agreement for a
period of at least five years after creation of each record. SOFTWARE OEM shall
permit the audit of the records, files, and books of accounts once during any
calendar year during normal business hours by an auditor mutually agreed upon
between SOFTWARE OEM and DIGITAL, upon thirty (30) days written notice. Such
auditor shall not disclose to DIGITAL any information other than that relating
solely to the correctness of, or that is necessary for, the report and payments
to be made to DIGITAL pursuant to this Software OEM Agreement. Any such audit
shall be done at DIGITAL's expense, unless the results of such audit establishes
that inaccuracies in SOFTWARE OEM's quarterly reports have resulted in
underpayments of fees for any year by more than five percent (5%) of the amount
actually due, in which case SOFTWARE OEM shall bear the expense of the audit and
additional fees owed.
4.02 Within thirty (30) days following the end of each calendar quarter,
SOFTWARE OEM shall pay DIGITAL the License Fees as specified in Appendix A.2.
SOFTWARE OEM shall submit a quarterly report in the format shown in Appendix F,
along with the payment due, if any, attached.
4.03 All fees and reports shall be mailed by SOFTWARE OEM to:
U.S. Cash Applications
Digital Equipment Corporation
100 Nagog Park
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Acton, MA. 01720
ATTN.: A/R Accounting Manager
with copies of reports and checks sent to DIGITAL's contact persons at the
addresses identified in Article 10.04.
4.04 SOFTWARE OEM shall pay interest to DIGITAL from the payment due date to the
actual date of payment upon any and all amounts of royalty that are overdue, at
the rate of three percentage points over the prime interest rate of CitiBank of
New York published in the Wall Street Journal on the payment due date.
ARTICLE 5 - DISCLAIMER OF WARRANTIES
5.01 The DISTRIBUTION SOFTWARE as provided by DIGITAL shall perform
substantially as described in the "DECtalk for the Windows NT Operating System:
Programmer's Guide and warranted as described under the separate license
agreement ("END USER SOFTWARE LICENSE AGREEMENT"), however DIGITAL makes no
other representation as to the quality, characteristics or functionality of the
DISTRIBUTION DOCUMENTATION and DISTRIBUTION SOFTWARE including but not limited
to whether it is error-free or will operate in accordance with the performance
requirements of SOFTWARE OEM or any of its RESELLER's or END USERS. DIGITAL
HEREBY DISCLAIMS ALL EXPRESS AND IMPLIED WARRANTIES, INCLUDING ANY WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
5.02 After the warranty period described under the separate license agreement
("END USER SOFTWARE LICENSE AGREEMENT), and upon SOFTWARE OEM's written request
to DIGITAL for maintenance support, DIGITAL may at its sole discretion provide
such support to SOFTWARE OEM at DIGITAL's commercial rates then in effect and
under a separate agreement. Under no circumstances, however, will DIGITAL be
responsible for or provide maintenance support directly to RESELLERs or END
USERS.
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5.04 DIGITAL shall have no liability whatsoever to SOFTWARE OEM, RESELLERS, END
USERS or any other person for or on account of any lost data, lost profits,
injury, loss, of damage, of any kind or nature, sustained by, or any damage
assessed or asserted against, or any other liability incurred by or imposed upon
SOFTWARE OEM or any other person, including incidental, consequential, special
or indirect damages, arising out of or in connection with or resulting from (a)
the use of any DISTRIBUTION SOFTWARE or DISTRIBUTION DOCUMENTATION, or (b) any
advertising or other promotional activities with respect to any of the
foregoing, and SOFTWARE OEM shall hold DIGITAL, and its officers, agents, or
employees, harmless in the event DIGITAL, its officers, agents, or employees, is
held liable.
ARTICLE 6 - INTELLECTUAL PROPERTY INDEMNIFICATION
6.01 Notwithstanding Article 5, should the DISTRIBUTION SOFTWARE become the
subject of a claim of infringement of a third party's proprietary right DIGITAL
will, at its expense and at SOFTWARE OEM's request defend any claim brought
against SOFTWARE OEM, to the extent it is based on a claim that the DISTRIBUTION
SOFTWARE infringes or violates any patent or copyright, and DIGITAL will pay all
costs and damages finally awarded; provided that SOFTWARE OEM gives DIGITAL (a)
prompt written notice of such claim, and (b) information, reasonable assistance
and sole authority to defend or settle such claim. In defense or settlement of
such claim DIGITAL may: (a) procure for SOFTWARE OEM the right to continue to
make, use and distribute the DISTRIBUTION SOFTWARE: or (b) replace or modify the
DISTRIBUTION SOFTWARE to make such DISTRIBUTION SOFTWARE non-infringing; or (c)
if neither (a) or (b) is reasonably feasible, to terminate this Software OEM
Agreement with no future royalty obligations from the LICENSEE.
ARTICLE 7 - LIMITATION OF LIABILITY
7.01 DIGITAL's total cumulative liability under this Software OEM Agreement
arising out of the licensing or infringement of the DISTRIBUTION SOFTWARE or
DISTRIBUTION DOCUMENTATION, to incur direct damages, out of pocket costs in the
defense of any suit, to pay damages awarded or settlement amounts in any suit or
suits, for breach of this Software OEM Agreement or for any other claim by
SOFTWARE OEM shall not exceed in total the amount of license fees paid by
SOFTWARE OEM under this Software OEM Agreement. This limitation of liability
shall apply regardless of the form of action, whether in contract or tort. Any
action against DIGITAL must be brought within 2 years after such cause of action
arises.
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ARTICLE 8 - TERM AND TERMINATION
8.01 The term of this Software OEM Agreement shall commence on the Effective
Date and continues thereafter for a period of three (3) years unless sooner
terminated in accordance with this Article.
8.02 This Software OEM Agreement may be terminated by the non-defaulting party
only upon the other party's default and by sending a Notice of Termination in
accordance with the notice provisions of Article 11. The following constitutes a
default: a party defaults in the performance or observation of any material
provision or material condition on its part to be performed or observed, or
fails to make any payment due hereunder, and if such defaulting party fails to
cure the default within thirty (30) days after receipt of written notice of the
default from the other party.
8.03 Upon expiration or termination of this Software OEM Agreement by DIGITAL,
SOFTWARE OEM shall immediately cease to license or otherwise dispose of
DISTRIBUTION SOFTWARE and DISTRIBUTION DOCUMENTATION, and shall at DIGITAL's
option, (a) either return to DIGITAL within sixty (60) days of termination all
documents, software, updates and improvements provided hereunder and all
complete and partial copies thereof, in its possession, or (b) certify the
destruction of all of such materials.
8.04 Upon termination, SOFTWARE OEM. SOFTWARE OEM shall immediately cease to
license or otherwise dispose Of DISTRIBUTION SOFTWARE and DISTRIBUTION
DOCUMENTATION but may retain the documents and software required SOFTWARE OEM to
maintain DISTRIBUTION SOFTWARE that have been distributed to END USERs prior to
termination and for no other purpose. SOFTWARE OEM shall at DIGITAL's option
return to DIGITAL all other documents and software not so required within sixty
(60) days after such expiration or termination or certify the destruction of
such material.
8.05 Termination or expiration of this Software OEM Agreement shall not affect
licenses to use DISTRIBUTION SOFTWARE and DISTRIBUTION DOCUMENTATION granted by
SOFTWARE OEM under this Software OEM Agreement prior to termination and for
which fees have been paid to DIGITAL prior to receiving or giving Notice of
Termination.
8.06 The termination rights provided herein shall be in addition to and not in
substitution for any right to damages or injunctive relief that may be available
to or exercisable by the party terminating or having the right to terminate this
Software OEM Agreement, nor shall such
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termination rights relieve either party from liability or damage to the other
party for breach of this Software OEM Agreement.
ARTICLE 9 - PUBLICITY
9.01 The existence of this Software OEM Agreement is not considered to be
confidential. However the terms of this Software OEM Agreement are considered to
be the confidential information of the parties. Except as expressly provided in
this Software OEM Agreement, a party shall not disclose the terms of this
Software OEM Agreement (including its Appendices), or any provision of or rights
granted under this Software OEM Agreement in any publicity, advertising, or
promotional activity, without the written approval of the other party, except as
may be required by law.
ARTICLE 10 - QUALITY CONTROL
10.01 SOFTWARE OEM agrees that it shall make no modifications to DISTRIBUTION
SOFTWARE and shall in no way degrade the quality of speech produced by
DISTRIBUTION SOFTWARE. SOFTWARE OEM shall not permit its RESELLERS or END USERS
to modify of degrade DISTRIBUTION SOFTWARE. However, in the event that DIGITAL
has reason to believe that the quality of speech produced by DISTRIBUTION
SOFTWARE, when used in conjunction with any of the SOFTWARE OEM's ASSISTIVE
APPLICATIONS, is significantly less than that produced by DIGITAL's DECtalk
products using the same version of DIGITAL's DECtalk Access32 software as is
licensed under this Software OEM Agreement, DIGITAL shall have the right to
evaluate such use of DISTRIBUTION SOFTWARE and make recommendations for
modifications of the use of DISTRIBUTION SOFTWARE to improve the quality of the
speech. Within 30 days of receipt of DIGITAL's written recommendations for
modification of the use of the DISTRIBUTION SOFTWARE by SOFTWARE OEM, SOFTWARE
OEM shall notify, DIGITAL as to whether it will incorporate such recommended
modifications, into the ASSISTIVE APPLICATION. If SOFTWARE OEM does not notify
DIGITAL within the 30 day period that it will incorporate the recommended
modifications, or having notified DIGITAL within the 30 days period that it will
incorporate the recommended modifications, fails to incorporate the
modifications recommended by DIGITAL within 90 days from thereafter, the license
granted herein shall terminate 90 days from the receipt of DIGITAL's
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written modification recommendation.
ARTICLE 11 - GENERAL
11.01 This Software OEM Agreement shall not be assigned or transferred by
SOFTWARE OEM except upon notice to DIGITAL and with the written consent of
DIGITAL and any attempted assignment or transfer without such notice and consent
shall be voidable by DIGITAL.
11.02 Nothing in this Software OEM Agreement shall be construed as making either
party the agent of the other.
11.03 The failure of either party to give notice to the other party of the
breach or non-fulfillment of any term, clause, provision or condition of this
Software OEM Agreement shall not constitute a waiver thereof, nor shall the
waiver of any breach or non-fulfillment of any term, clause, provision of
condition of this Software OEM Agreement constitute a waiver of any other breach
or non-fulfillment of that or any other term, clause, provision or condition of
this Software OEM Agreement.
11.04 Any notice under this Software OEM Agreement shall be in writing and
deemed to have been sufficiently given when, if given to DIGITAL. is addressed
to:
Director
Corporate Licensing Office
Digital Equipment Corporation
111 Powdermill Road, MS02-3/C11
Maynard, MA 01754
USA
With duplicates to:
Manager
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Assistive Technology Group
Digital Equipment Corporation
334 South Street, SHR3-1/X4
Shrewsbury, MA 01545
USA
and when. if given to SOFTWARE OEM, it is addressed to:
Words +, Inc.
40015 Sierra Highway, Bldg. B-145
Palmdale, CA 93550
and sent by registered or certified mail, return receipt requested postage
prepaid. The date of execution of the return receipt or five (5) days after the
date of mailing, whichever comes first, shall be deemed to be the date on which
such notice has been given. Each party shall give prompt written notice to the
other party of any change in its address or corporate name, and after notice of
such change has been given, any notice by the other party to it shall be
addressed in accordance with that change.
11.05 If any provision of this Software OEM Agreement is held invalid by any
law. rule, order, or by the final determination of any State or Federal court.
it shall not affect any other provisions of this Software OEM Agreement which
can be given effect without such invalid provision and to this extent the
parties agree that the provisions of this Software OEM Agreement are and shall
be severable.
11.06 SOFTWARE OEM recognizes that the transfer of the DISTRIBUTION SOFTWARE and
DISTRIBUTION DOCUMENTATION from one country to another may be subject to the
approval of the government of the United States of America and/or other
countries that the SOFTWARE OEM might operate in, or various agencies thereof,
and international control organizations in which such governments participate.
SOFTWARE OEM shall obtain all such approvals as are required by such governments
or bodies before any such transfer of the DISTRIBUTION SOFTWARE and DISTRIBUTION
DOCUMENTATION is effected.
11.07 SOFTWARE OEM shall only distribute DISTRIBUTION SOFTWARE as a component of
its ASSISTIVE APPLICATION which includes an approved and operative COPY
PROTECTION METHOD and an
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operative SHARED MEMORY INITIALIZATION TECHNIQUE. SOFTWARE OEM shall only
distribute DISTRIBUTION SOFTWARE and DISTRIBUTION DOCUMENTATION and related
materials with proper inclusion of any copyright and proprietary notices,
legends, and markings as provided by DIGITAL. Related materials and applicable
initialization and configuration screens of the software components of SOFTWARE
OEM applications shall also include such notices, legends and markings. With
respect to any document or software containing a copyright notice and/or a
confidential, proprietary, restricted or similar legend, provided by one party
to the other under this Software OEM Agreement, the SOFTWARE OEM shall agree to
include the copyright notice and/or such legend on all authorized reproductions
it makes of such document or software in the same manner and location that such
notice and/or legend appears in the document or software provided.
11.08 This Software OEM Agreement is governed by the laws of the Commonwealth of
Massachusetts.
11.09 This Software OEM Agreement and the END USER SOFTWARE LICENSE AGREEMENT
sets forth the entire agreement and understanding between the parties as to the
subject matter hereof and merges all prior discussions and agreements between
them and neither of the parties shall be bound by any conditions, definitions,
warranties, understandings or representations with respect to such subject
matter other than as expressly provided herein. This Software OEM Agreement may
not be modified, amended, or supplemented except by a document executed by a
proper and duly authorized officer or representative of the party to be bound
thereby.
IN WITNESS WHEREOF, the parties hereto have as of the Effective Date first
written above caused this Software OEM Agreement, which includes Appendices A,
B, C, D, E and F to be signed in duplicate by their duly authorized
representatives.
DIGITAL EQUIPMENT CORPORATION
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Signed by William Armitage Vice President on October 30, 1997
WORDS +, IN
Signed by Philip R. Lawrence, Vice President, Operations on October 30, 1997
APPENDIX A
A. 1 DISTRIBUTION SOFTWARE
A. 1.1 DISTRIBUTION SOFTWARE shall include the following files:
A C-language file, SMIT***.C, which contains a SOFTWARE OEM specific encrypted
identifier for use with the SOFTWARE OEM created SHARED MEMORY INITIALIZATION
TECHNIQUE software. This encrypted identifier must be held in confidence by
SOFTWARE OEM;
SMIT enabled DECtalk Dynamic Linked Library (.DLL) for commercially available
DECtalk Access32 software languages;
SMIT enabled Microsoft Speech Application Programmers Interface (SAPI) Dynamic
Linked Library (.DLL) for commercially available DECtalk Access32 software
languages'.
DECtalk Main Dictionary for commercially available DECtalk Access32 software
languages;
DECtalk User Dictionary Generator Program;
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DECtalk Help File; and
DECtalk Access32 Multilanguage Management Software for the DIGITAL Application
Programmers Interface (DAPI).
A. 1.2 SOFTWARE OEM is authorized to copy from the DECtalk Access32 V2.0
software developers kit, or subsequent versions as they become commercially
available, the above identified files for purposes of creating DISTRIBUTION
SOFTWARE:
A.2 LICENSE FEES:
SOFTWARE OEM shall pay to DIGITAL a license fee for each copy of DISTRIBUTION
SOFTWARE distributed to an END USER or RESELLER as follows:
Copies of DISTRIBUTION DECtalk License Fee Payable to DIGITAL
SOFTWARE Distributed
Quantity 1 end user copy US$100 for each individual language (for example,
U.S. English) used on each desktop US$200 for
each multilanguage kit used on each desktop
APPENDIX B - DISTRIBUTION DOCUMENTATION
(1) DECtalk (tm) Software for the Windows NT/95 (tm) Operating System: Getting
Started Guide.
(2) DECtalk (tm) Software for the Windows NT/95 (tm) Operating System: Release
Notes.
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APPENDIX C - END USER AGREEMENT
A copy of the attached DIGITAL END USER AGREEMENT shall be included by SOFTWARE
OEM with each copy of DISTRIBUTION SOFTWARE. An electronic file (license.doc)
will be provided to SOFTWARE OEM for its use in creating copies of the DIGITAL
END USER AGREEMENT for inclusion with DISTRIBUTION SOFTWARE. SOFTWARE OEM shall
be allowed to make format changes to this file to meet unique packaging
requirements; however, the text content or the logo image included in this file
may not be changed.
TM
END USER AGREEMENT
IMPORTANT - CAREFULLY READ THE DIGITAL LICENSE AGREEMENT BEFORE PROCEEDING. IF
YOU DO NOT AGREE TO ITS TERMS, PLEASE RETURN THE LICENSE AGREEMENT AND ALL
ACCOMPANYING MATERIALS WITHOUT FURTHER OPENING OR USING THEM. RETURN THEM TO THE
SUPPLIER FROM WHICH YOU OBTAINED THEM FOR A FULL REFUND. FURTHER OPENING OR USE
OF THE MATERIALS INDICATES YOUR ACCEPTANCE OF THE TERMS OF THE LICENSE
AGREEMENT.
DIGITAL LICENSE AGREEMENT
SOFTWARE PROGRAM: DECtalk Access32 software runtime kit
This document Is your Proof of License and the legal agreement governing your
use of the Software. Please store It In a safe place.
LICENSE TERMS
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1. GRANT
Digital Equipment Corporation ("DIGITAL") grants you the right to use the
Software Program Version (the "Software") specified above on any single
computer. You may only use the Software as a component of the Words +, Inc.
application accompanying it.
You may copy the Software into the local memory or stores device of such
computer. You may make archival or back-up copies of the Software.
You may permanently transfer your rights to use the Software, the Software
itself including any updates to the specified version of the Software, and the
accompanying documentation including this License Agreement, providing you
retain no copies of the Software, updates, documentation, or License Agreement,
and the recipient agrees to the terms of this License Agreement.
2. COPYRIGHT
The Software is owned by DIGITAL and Its suppliers and Is protected by copyright
laws and International treaties. Your use of the Software and associated
documentation is subject to the applicable copyright laws and the express rights
and restrictions of this License Agreement.
3. RESTRICTIONS
You may not rent, lease, or otherwise transfer the Software except as expressly
authorized in this License Agreement.
You may not remove any copyright, trademark or other proprietary notices from
the Software or the media.
You may not reverse engineer, decompile, or disassemble the Software, except to
extend DIGITAL cannot prohibit such acts by law.
LIMITED WARRANTY
DIGITAL warrants that the Software will perform substantially as described
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in the documentation accompanying the Software for a period of ninety (90) days
from delivery. ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE ARE LIMITED TO NINETY (90) DAYS.
EXCLUSIVE REMEDY. DIGITAL's and its suppliers' entire liability and your
exclusive remedy for Software which does not conform to DIGITAL's Limited
Warranty shall be, at DIGITAL's option, either (1) repair or replacement of the
nonconforming Software, or (2) refund of your license price. This warranty and
remedy are subject to your returning the non-conforming Software during the
warranty period to the DIGITAL reseller of the Software from which it was
purchased in the country in which you obtained the Software.
DISCLAIMER OF WARRANTIES. THE ABOVE WARRANTIES ARE YOUR EXCLUSIVE WARRANTIES AND
NO OTHER WARRANTY, EXPRESS OR IMPLIED, WILL APPLY. DIGITAL does not warrant that
the operation of the Software will be uninterrupted or error free.
This warranty gives you specific legal rights, and you may also have other
rights which vary from state to state. Some states do not allow limitations on
how long an implied warranty lasts, so the above limitation may not apply to
you.
ALLOCATION OF LIABILITY
DIGITAL'S AND ITS SUPPLIERS' TOTAL LIABILITY TO YOU FOR ANY CAUSE WHATSOEVER
SHALL BE LIMITED TO THE LICENSE PRICE YOU PAID FOR THE PRODUCT. THIS LIMITATION
WILL APPLY REGARDLESS OF THE FORM OF ACTION, WHETHER IN CONTRACT OR TORT,
INCLUDING WITHOUT LIMITATION NEGLIGENCE. THE FOREGOING LIMITATION DOES NOT APPLY
TO DAMAGES RESULTING FROM PERSONAL INJURY CAUSED BY DIGITAL'S NEGLIGENCE.
IN NO EVENT WILL DIGITAL OR ITS SUPPLIERS BE LIABLE FOR ANY DAMAGES RESULTING
FROM LOSS OF DATA OR USE, LOST PROFITS, OR ANY INCIDENTAL OR CONSEQUENTIAL
DAMAGES.
Some jurisdictions do not allow the exclusion or limitation of incidental or
consequential damages, so the above limitation or exclusion may
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not apply to you.
U.S. GOVERNMENT RESTRICTED RIGHTS
The Software and documentation are provided with "RESTRICTED RIGHTS". Use,
duplication, or disclosure by the U.S. Government is subject to restrictions as
set forth in subparagraph (c)(1)(ii) of DFARS 252.227-7013, or FAR 52.227-19, or
in FAR 52.227-14 Aft. III, as applicable. Contractor/manufacturer is Digital
Equipment Corporation.
GENERAL
You are responsible for compliance with all applicable export or re-export
control laws and regulations if you export the Software.
This Agreement is governed by and is to be construed under the laws of the
Commonwealth of Massachusetts. The 1980 United Nations Convention on Contracts
for the International Sale of Goods will not apply.
If you have any questions concerning this Agreement, please contact the DIGITAL
reseller from which you obtained the Software or write to: DIGITAL EQUIPMENT
CORPORATION, 111 Powdermill Road, Maynard, MA. 01754-1418.
All registered and unregistered trademarks are the sole property of their
owners, and are specifically listed in the Software Product Description or user
documentation for this Software Program.
Copyright Digital Equipment Corporation, 1995. All rights reserved. -September,
1997-
APPENDIX D - LEGAL REQUIREMENTS FOR RESELLER AGREEMENT
1. Prohibit use of the DISTRIBUTION SOFTWARE and DISTRIBUTION DOCUMENTATION for
any purpose other than solely as a component of SOFTWARE OEM's ASSISTIVE
APPLICATION.
Page 20
<PAGE> 21
2. Prohibit the RESELLER from copying the DISTRIBUTION SOFTWARE and DISTRIBUTION
DOCUMENTATION.
3. Prohibit the reverse engineering, reverse compilation, disassembly or
decomposition of the DISTRIBUTION SOFTWARE.
4. Specify that title of the DISTRIBUTION SOFTWARE which is a component of
SOFTWARE OEM's ASSISTIVE APPLICATION does not pass to the RESELLER.
5. Disclaim DIGITAL's liability, as a supplier to SOFTWARE OEM, for any damages,
whether direct, indirect, incidental or consequential arising from the use of
the DISTRIBUTION SOFTWARE.
6. Require the RESELLER, at the termination or expiration of the RESELLER
AGREEMENT, to discontinue use and destroy or return to SOFTWARE OEM all SOFTWARE
OEM ASSISTIVE APPLICATIONs which contain DISTRIBUTION SOFTWARE and DISTRIBUTION
DOCUMENTATION as a component thereof.
APPENDIX E - GUIDELINES FOR USING DECtalk TRADEMARK
E.1 SOFTWARE OEM agrees not to use, attempt to register, sell, or otherwise
dispose of any products bearing any mark identical to or confusingly similar to
the TRADEMARK, except as permitted by the rights granted under this SOFTWARE OEM
Agreement.
E.2 The DIGITAL DECtalk trademark should always appear exactly as follows:
DECtalk Examples of proper and improper displays of the mark include:
Right Wrong
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<PAGE> 22
DECtalk technology DECTALK technology
DECtalk Access32 software DECTALK ACCESS32 software
E.3 When using the DECtalk trademark in a one or two page publication, inset an
asterisk after it and identify DIGITAL as the owner of the trademark in a
footnote at the bottom of the text. This should be done the first time the
trademark is used and in headlines. The footnote should say either "DECtalk is a
trademark of Digital Equipment Corporation", or "DECtalk is a trademark for
human voice synthesis products sold by Digital Equipment Corporation". In a very
long publication, a note on the title page instead of asterisks and footnotes
can be used. If it is clear from the copy that DIGITAL is owner of the
trademark. a "TM" may be used in place of the asterisk and footnote. The word
"Trademark" (in a country-appropriate language) in small type just below the
trademark could also be used.
E.4 The trademark should be used as an adjective and not a noun. A noun should
always follow the DECtalk trademark. The first time the DECtalk trademark is
used in headlines and at least once on each page of the copy, use the trademark
with the specific noun that identifies the product (e.g., human voice synthesis
products).
Examples of proper and improper uses of the mark include:
Right Wrong
The DECtalk Access32 software will... DECtalk will...
E.5 The DECtalk trademark should not be modified. In particular, plural or
possession forms should not be created.
APPENDIX F
QUARTERLY ACTIVITY/FEE REPORT
SOFTWARE OEM NAME QUARTER ENDING
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<PAGE> 23
SOFTWARE OEM ADDRESS SOFTWARE OEM AGREEMENT NUMBER
License Fee(s) for past quarter
individual end user copies @ $100 multilanguage end user copies @ $200
Total Amount due for the past quarter upon which License Fees are due
Check Number and Date
Name of the Bank
Signature
(Authorized Representative
of the SOFTWARE OEM)
Name
Title
Date
Page 23
<PAGE> 1
EXHIBIT 10.29
EPSON AMERICA, INC.
March 26, 1998
Mr. Phil Lawrence
Vice President, Operations
Words+, Inc.
40015 Sierra Highway
Building B-145
Palmdale, CA 93550
EPSON
20770 Madrona Avenue
PO. Box 2842
Torrance, California 90509-2842
Phone: 310.782.0770
FAX: 310.782.5220
RE: Understandings Concerning Discontinuation of EHT 400 and 410 Series
Dear Mr. Lawrence:
As our Dan McGuire advised you earlier this month, Epson has been forced to
discontinue its EHT-400 and EHT-410 series hand-held terminals. A formal notice
of discontinuation is enclosed.
The purpose of this letter agreement is to memorialize the understandings
between Epson and Words+ in connection with the product discontinuance. If you
agree with this letter, please countersign below and send us a fully-executed
copy. This letter agreement will represent the complete understanding between
Epson and Words+ on these matters, and will supersede any prior understandings.
Any modification to this letter agreement must be in writing and signed by both
parties.
1. Epson will fill the current booked orders of Words+. These are:
PO Number Model Number Ouantity Price Delivery Date
Al 16042 EHT-410CF 32 $2240.00 04/18/98
EHT41OHDD 340MB HDD 40 $470.00 04/18/98
2. Epson will accept a last order, from Words+ for 50 EHT-410 terminals, with
360MB hard disk drives, on these terms:
a) PO to be received by March 31, 1998.
b) PO must request shipment of all units by September 30, 1998.
c) Payment must be net 30 from invoice date.
d) PO may not be rescheduled or cancelled.
3. We understand that, for your own purposes, you are making modifications to
the earphone jack and parallel port for the EHTs received. Also, for FCC
approval purposes, we have authorized you to add a choke coil and filter
capacitor to the DC input circuitry. Epson will have no responsibility for
product performance, product liability or other issues that arise from the
<PAGE> 2
modifications to the ear phone jack or parallel port. In addition, Epson will
have no responsibility for any such issues arising from the failure of Words+ to
correctly perform the modifications to the DC input circuitry.
4. Similarly, Epson will have no responsibility for product performance, product
liability or other issues that arise from use of the Epson products with
hardware or software (including hard disk drive cards) not supplied by Epson.
EPSON AMERICA
Signed by: Mike Helm
Title: Group Manager
Date: March 26, 1998
WORDS+, INCORPORATED
Signed by: Philip Lawrence
Title: V.P. of Operations
Date: March 31, 1998
<PAGE> 3
Notice of Product Discontinuance
March 18, 1998
Effective immediately, Epson America has discontinued sale of its EHT-400 and
410 series hand-held terminals.
This action is made necessary for a number of reasons, but primarily because
Epson's sole supplier for the terminal's hard disk drive card -- Integral
Peripherals, Inc., of Boulder, Colorado -- has recently announced closure of its
manufacturing plant and cessation of all sales and support for the cards.
Epson anticipates being able to fill currently-booked orders. The product
warranty will continue to be honored.
Please contact your Epson sales representative if you have any questions about
this announcement.
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