SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No.______________)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Sec. 240.14a-11(c) or 240.14a-12
WASATCH EDUCATION SYSTEMS CORPORATION
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or
14a-6(j)(2) or Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14-a-6(i)(3).
[X] Fee computed on the table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
1) Title of each class of securities to which transaction applies:
N/A
2) Aggregate number of securities to which transaction applies:
N/A
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: 1
$1,500,000.00
4) Proposed maximum aggregate value of transaction:
$1,500,000.00
5) Total fee paid.
$300.00, calculated at 1/50 of 1% of transaction value
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
-------------------------------------------------------------
2) Form, Schedule or Registration No.:
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3) Filing Party:
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4) Date Filed:
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<PAGE>
WASATCH EDUCATION SYSTEMS CORPORATION
5250 South 300 West, Suite 101
Salt Lake City, Utah 84107
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held September 1996
TO THE SHAREHOLDERS:
Notice is hereby given that a Special Meeting of the Shareholders of
Wasatch Education Systems Corporation (the "Company") will be held at the
Company's offices located at 5250 South 300 West, Salt Lake City, Utah 84107 on
September , 1996 at 1:30 p.m., Mountain Time, for the following purposes:
1. To consider and vote upon: (a) the sale of certain of the Company's
assets to Wasatch Interactive Learning Corporation, a Utah corporation ("WILC")
formed for this transaction by Barbara Morris, President, Chief Executive
Officer and Director of the Company, Carol Hamil, Vice President of Development
of the Company, and Ralph Brown, Chief Financial Officer of the Company
(collectively, the "Management Group"), as described in that certain Acquisition
Commitment dated as of July 1, 1996 by and between the Company and WILC (the
"Acquisition Agreement"); (b) the grant of certain licenses by the Company to
WILC with respect to certain software products; and (c) the other transactions
contemplated by the terms and conditions of the Acquisition Agreement, all as
described in the accompanying Proxy Statement.
2. To transact such other business as may properly come before the meeting
or any adjournment or adjournments thereof.
In accordance with Part 13 of Section 16-10a of the Utah
Revised Business Corporation Act, a copy of which is enclosed as
Exhibit 2 to the Proxy Statement, holders of the Company's stock are
entitled to dissenter's rights with respect to such stock in connection
with the transactions contemplated by the Acquisition Agreement.
Shareholders of record at the close of business on August 1, 1996 are
entitled to notice of and to vote at the meeting.
BY ORDER OF THE BOARD OF DIRECTORS
/s/Barbara Morris
-------------------------
Barbara Morris, President
Salt Lake City, Utah
September , 1996
THE VOTE OF EACH SHAREHOLDER WILL BE IMPORTANT AT THIS MEETING. WHETHER OR NOT
YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND PROMPTLY RETURN
THE ACCOMPANYING PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE SO THAT YOUR
SHARES MAY BE REPRESENTED AT THE MEETING. SUCH ACTION WILL NOT AFFECT YOUR RIGHT
TO VOTE IN PERSON SHOULD YOU FIND IT POSSIBLE TO ATTEND THE MEETING.
<PAGE>
WASATCH EDUCATION SYSTEMS CORPORATION
5250 South 300 West
Salt Lake City, Utah 84107
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
To Be Held September 25, 1996
This Proxy Statement is furnished in connection with the solicitation
of proxies by the Board of Directors of Wasatch Education Systems Corporation, a
Utah corporation, (the "Company") to be voted at the Special Meeting of
Shareholders to be held on September , 1996 (the "Special Meeting"), and any
adjournments thereof. The Special Meeting of Shareholders will be held at the
Company's executive offices located at 5250 South 300 West, Salt Lake City, Utah
on September , 1996 at 1:30 p.m., Mountain Time.
THE PROXY
A form of proxy is enclosed for use at the Special Meeting. Unless
contrary instructions are indicated on the proxy, all shares represented by
valid proxies received pursuant to this solicitation (and not revoked before
they are voted), will be voted for the approval of (a) the sale of certain of
the Company's assets to Wasatch Interactive Learning Corporation, a Utah
corporation formed by Barbara Morris, President, Chief Executive Officer and
Director of the Company, Carol Hamil, Vice President of Development of the
Company and Ralph Brown, Chief Financial Officer of the Company ("WILC"), as
described in that certain Acquisition Commitment dated as of July 1, 1996 by and
between the Company and WILC (the "Acquisition Agreement"); (b) the grant of
Licenses by the Company to WILC with respect to certain software products; and
(c) the other transactions contemplated by the terms and conditions of the
Acquisition Agreement, all as described in this Proxy Statement (the
"Acquisition").. As to any other business which may properly come before the
meeting and be submitted to a vote of shareholders, proxies received by the
Board of Directors will be voted in accordance with the best judgment of the
holders thereof.
The Company will bear the cost of solicitation of proxies. In addition
to the use of mails, proxies may be solicited by personal interview, telephone
or telegraph, by officers, directors and other employees of the Company. The
Company will also request persons, firms and corporations holding shares in the
names of their nominees, which are beneficially owned by others, to send or
cause to be sent proxy material to, and obtain proxies from, such beneficial
owners (and will reimburse such holders for their reasonable expenses in so
doing).
The approximate date when this Proxy Statement and form of proxy are
being first sent to shareholders is September 5, 1996.
A Proxy may be revoked at any time before it is exercised, by written
notice mailed or delivered to the Company's transfer agent, American Stock
Transfer & Trust Company, 40 Wall Street, New York, New York 10005, by
substitution of a new proxy bearing a later date, by a request of return of the
Proxy at the Special Meeting or by voting in person at the Special Meeting.
<PAGE>
VOTING SECURITIES AND VOTE REQUIRED
The close of business on August 1, 1996 has been fixed by the Board of
Directors as the record date (the "Record Date") for the determination of
shareholders entitled to notice of and to vote at the Special Meeting or any
adjournments thereof. The Company has two classes of capital stock. As of the
Record Date, 3,579,229 shares of no par value common stock ("Common Stock") were
issued and outstanding and 9,821,021 shares of no par value Preferred Stock were
issued and outstanding, of which 4,429,870 shares designated Series "A"
Preferred Stock were issued and outstanding, 91,151 shares designated Series "B"
Preferred Stock were issued and outstanding and 5,300,000 shares designated
Series "C" Preferred Stock were issued and outstanding. The number of
outstanding shares of Common Stock reflects the one for six reverse stock split
of the Company's stock which was approved by the Company's shareholders on
February 28, 1992. Each holder of record of Common Stock at the close of
business on the Record Date is entitled to one vote for each share of Common
Stock held on each matter to come before the Special Meeting. Holders of
Preferred Stock are not entitled to vote at the Special Meeting. The presence at
the Special Meeting, in person or by Proxy, of a majority of shares entitled to
vote will constitute a quorum for the transaction of business. The vote required
for Proposal 1 is the affirmative vote of a majority of the shares of Common
Stock present, in person or by proxy, at the Special Meeting.
Votes cast by proxy or in person at the Special Meeting will be counted by
the persons appointed by the Company to act as election inspectors for the
meeting. The election inspectors will treat shares represented by proxies that
reflect abstentions as shares that are present and entitled to vote for purposes
of determining the presence of a quorum. If a broker or nominee has indicated on
a proxy that it does not have discretionary authority to vote certain shares
(i.e., "broker non-votes" ), those shares will be treated as not present and not
entitled to vote with respect to that matter (even though those shares may be
entitled to vote on other matters). Action may be taken on a matter only if a
quorum, which is equal to a majority of the votes entitled to be cast on the
matter, exists with respect to that matter.
Any unmarked proxies, including those submitted by brokers or nominees,
will be voted in favor of the proposals as indicated in the accompanying proxy
card.
Dissenters' Rights
The transactions contemplated by the Acquisition Agreement may be construed
to be a sale, lease, exchange or other disposition of all or substantially all
of the property of the Company for which a shareholder vote is required. Under
Part 13 of the Utah Revised Business Corporation Act, the Company's shareholders
are or may be entitled to dissent from the proposed Acquisition, and obtain
payment of the fair value of their shares in the event the Acquisition is
approved. Fair value of the shares means the value of the shares immediately
before the effective date of the Acquisition transaction, excluding any
appreciation or depreciation in anticipation of the Acquisition. Notice of
dissenters' rights is being submitted to shareholders with this Notice of
Special Shareholders' Meeting and Proxy Statement. A shareholder who wishes to
assert dissenters' rights must deliver to the Company written notice of the
shareholder's intent to demand payment for the shareholder's shares if the
proposed Acquisition is effected and not vote for the Acquisition. Within ten
(10) days after the effective date of Acquisition approval by shareholders,
notice will be sent to dissenting shareholders stating when and where written
demand for payment must be sent and when certificates for shares must be
deposited by the shareholder to effectuate the purchase of shares from the
dissenting shareholder. The rights of the dissenter to demand payment are lost
if the dissenter fails to give written notice of intent to demand payment, or
fails to timely make written demand for payment after receiving the Company's
notice. A DISSENTERS' RIGHTS AND COPY OF PART 13 OF THE UTAH REVISED BUSINESS
CORPORATION ACT IS ATTACHED HERETO AS EXHIBIT C.
<PAGE>
PROPOSAL ONE
APPROVAL OF AGREEMENT
The Board of Directors of the Company seeks shareholder approval of (a) the
sale of certain of the Company's assets to WILC, as described in the Acquisition
Agreement; (b) the grant of certain Licenses by the Company to WILC with respect
to certain software products; and (c) the other transactions contemplated by and
terms and conditions of the Acquisition Agreement, all as described in this
Proxy Statement.
The principal terms of the Acquisition Agreement are as follows. This
description is qualified in its entirety by reference to the Acquisition
Agreement, attached as Exhibit A to this Proxy Statement.
Exclusive Negotiation. Until the first to occur of the following (the
"Expiration Date"): (a) three (3) months from the date hereof; or (b) notice
from WILC to Seller that WILC is unable to complete the purchase transaction
contemplated by this Commitment, Seller will deal exclusively with WILC with
regard to a disposition of the Education Market Assets. Seller will fully
cooperate with WILC and make reasonable efforts to support WILC's efforts to
secure necessary debt or equity financing. However, Seller does not represent or
warrant, and will not be responsible for, WILC's success in raising the desired
financing. If WILC has made reasonable progress towards consummation of this
Commitment prior to the Expiration Date, but is unable to close prior to the
Expiration Date, WILC may extend the Expiration Date in one (1) month
increments, subject to The Company's consent which will not be unreasonably
withheld.
Sale of Education Market Assets. The Company agrees to sell to WILC, and
WILC agrees to purchase the Education Market Assets (as defined below) of the
Company relating to or arising out of the Company's business (the "Business") of
developing, marketing and licensing proprietary and third party educational
software and related products and services in the Education Market (as defined
below). The "Education Market Assets" include the following:
(a) All cash, bank deposits, and cash equivalents relating to the
Education Market as of the Closing Date (as defined below);
(b) All accounts receivable and other entitlements to payment under
all contracts, licenses, and other arrangements relating to the
Education Market;
(c) All distributor agreements, customer contracts, renewals, and
installed base of licensees of the Company's products relating to
the Education Market, including but not limited to the Product
Distribution Agreements with TRO;
(d) All inventory and raw materials, including CD-ROM's, printed
instructional and training materials, brochures, and marketing
materials relating to the Education Market;
(e) All tangible property, including all office equipment, computers
and related equipment, audio-visual equipment, desks, chairs,
leasehold improvements, library and reference materials, trade
show equipment and displays, file cabinets, and other supplies
and personal property relating to the Education Market;
(f) All insurance policies on persons, property, and risks relating
to the Education Market;
(g) All outstanding bids, proposals, and purchase orders of the
Company relating to the Education Market;
(i) All files and records of The Company in hard copy or magnetic
format relating to the Education Market, including customer and
vendor lists and files, advertising materials and signs,
correspondence, and equipment warranty information and
maintenance records;
<PAGE>
(j) All contracts and agreements with employees, independent
marketing representatives, dealers, and sales agents of the
Company relating to the Education Market;
(k) All leasehold interests in property and leased equipment relating
to the Education Market; and
(l) All third party software licenses (excluding the software
licensed by the Company from third parties to sell into the
Education market, "Third Party Software" ), programs, development
tools, and utilities used in the Business for the Education
Market, including without limitation all word processing,
spreadsheet, database, graphics and desktop publishing, project
management, product testing and authoring programs.
For purposes of the Acquisition Agreement, "Education Market" means the
following markets for standalone products (program resides and runs on one
workstation only) and networked products (program runs on more than one
workstation concurrently, with multiple workstations connected to a common
server): (i) preschool education institutions, facilities, and programs, both
public and private; (ii) K-12 education institutions, facilities, and programs,
both public and private; (iii) juvenile and adult basic education institutions,
facilities, and programs, both public and private, including correctional
facilities and corporate sites; (iv) post-secondary educational institutions,
facilities, and programs, including vocational schools and community colleges;
(v) individuals (or parents of minor students) who are enrolled in the foregoing
educational institutions, facilities, or programs, provided the sales are made
through such institutions, facilities, or programs (as opposed to retail sales);
and (vi) organizations directly affiliated with the above educational
institutions, such as PTAs.
The Education Market Assets will specifically exclude ownership rights in
The Company's intellectual property, products, and related copyrights,
capitalized development costs, tax net operating losses, and other tax benefits
which will remain with the Company.
Grant of Licenses; Exclusivity Period. The Company grants to WILC the
following licenses and distribution rights with respect to all software products
including textual materials currently marketed by the Company (the "Licensed
Programs"):
(a) A non-exclusive, perpetual, fully paid-up, worldwide right and
license to use, copy or otherwise reproduce, modify, correct
defects or deficiencies in, and to prepare derivative works based
on, all or any portion of the Licensed Programs (specifically
including any and all lesson content);
(b) A perpetual, worldwide right and license to market, distribute,
and sublicense the Licensed Programs and derivative works of the
Licensed Programs in the Education Market, directly or through
sub-distributors, dealers, Independent Marketing Representatives
("IMRs") or other third parties, subject to the royalty
obligations described below. The foregoing license will be
exclusive during the Exclusivity Period (as defined below);
(c) Commencing upon expiration of the Exclusivity Period, a
non-exclusive, perpetual, worldwide right and license to market,
distribute, and sublicense the Licensed Programs and derivative
works of the Licensed Programs in the Home Market (as defined
below), subject to the royalty obligations described below;
<PAGE>
(d) A non-exclusive perpetual, worldwide right and sublicense to use,
copy or otherwise reproduce, modify, correct defects or
deficiencies in, and to prepare derivative works based on, all or
any portion of the Third Party Software, subject to the
provisions and royalties, if any, due to the original licensors
of the Third Party Software;
(e) A perpetual, worldwide right and sublicense to market,
distribute, and sublicense the Third Party Software and
derivative works of the Third Party Software in the Education
Market, directly or through sub-distributors, dealers, IMRs, or
other third parties, subject to the provisions and royalties, if
any, due to the original licensors of the Third Party Software.
The foregoing license will be exclusive during the Exclusivity
Period;
(f) Commencing upon expiration of the Exclusivity Period, a
non-exclusive, perpetual, worldwide right and sublicense to
market, distribute and sublicense the Third Party Software and
derivative works of the Third Party Software in the Home Market,
directly or through sub-distributors, dealers, IMRs, or other
third parties, subject to the provisions and royalties, if any,
due to the original licensors of the Third Party Software; and
(g) A non-exclusive, perpetual, worldwide right and sublicense to
market, distribute and sublicense the Licensed Programs, the
Third Party Software, and derivative works of the Licensed
Programs or Third Party Software, in the Internet Market,
directly or through sub-distributors, dealers, IMRs, or other
third parties, subject to the provisions and royalties, if any,
due to the original licensors of the Third Party Software and to
the Company.
All licenses of Licensed Programs from the Company to WILC include source
code and object code, but all sublicenses from WILC will be object code only.
The Company reserves the perpetual, worldwide right to use, copy or
otherwise reproduce, modify, correct defects or deficiencies in, prepare and
distribute derivative works and market, distribute, and sublicense the Licensed
Programs, Third Party Software, and derivative works of the Licensed Programs or
Third Party Software, in the Home Market and Internet Market (as defined below),
directly or through sub-distributors, dealers, IMRs or other third parties,
subject to the provisions and royalties, if any, due to the original licensors
of the Third Party Software. During the Exclusivity Period WILC will not market,
distribute, or sublicense through retail channels to the Home Market the
Licensed Programs, Third Party Software, or WILC derivative works of the
Licensed Programs, and the Company shall not market, distribute, or sublicense
to the Education Market the Licensed Programs, Third Party Software or Seller's
derivative works of the Licensed Programs.
For purposes of the Acquisition Agreement , "Home Market" means the
following markets: (i) retail or off-the-shelf sales to individual end-users;
and (ii) direct channel sales, including mail order, directed to individual
end-users. The Company will develop new product names for the Home Market so
that products offered by The Company in the Home Market are distinguishable from
products offered by WILC in the Education Market. The Company will in all events
have the right, where accurate and appropriate, to refer to Wasatch Education
Systems as the development origin of products it offers in the Home Market. In
the event The Company introduces a "networked" product for the Home Market
during the Exclusivity Period, the Company will (i) provide Buyer at least 3
months' prior written notice of the anticipated release date; and (ii) label the
"networked" product as follows: "Not Intended for School Use".
<PAGE>
For purposes of the Acquisition Agreement , "Internet Market" means
distribution or delivery of the Licensed Programs, Third Party Software, or
Derivative Works to end users over a wide area network using electronic data
communications technology as presently implemented in the Internet or as
hereafter designed for use in conjunction with telephone, cable, wireless, or
other types of data transmission systems.
The "Exclusivity Period" is a period of one (1) year from the Closing Date;
provided, however, that the Exclusivity Period may be extended upon payment of
certain Minimum Royalties by WILC to the Company as follows:
Minimum Royalty Due Date New Exclusivity Period
- --------------- ----------------------- ----------------------
$500,000 End of 1st License Year Two (2) License Years
$500,000 End of 2nd License Year Three (3) License Years
$500,000 End of 3rd License Year Four (4) License Years
$500,000 End of 4th License Year Five (5) License Years
Minimum Royalties paid will be credited against royalties due for net
revenues, and royalties for Net Revenues will be applied to satisfy the Minimum
Royalty obligations. In the event the royalties for any License Year are less
than the Minimum Royalty paid for that License Year, an amount equal to the
Minimum Royalty paid for that License Year minus the actual royalties payable
for that License Year will be credited against royalties for net revenues in
subsequent License Years. In the event royalties paid as for net revenues in any
License Year exceed the Minimum Royalty due for that License Year, an amount
equal to the royalties as actually paid minus the Minimum Royalty will be
credited against Minimum Royalties next falling due for subsequent License
Years.
Assumption of Liabilities. On the Closing Date, WILC will assume (and
indemnify the Company against) the following liabilities and obligations
(collectively the "Assumed Liabilities"):
(a) Liabilities of the Company relating to its business in the
Education Market or to the Acquisition which are shown on the
most recent balance sheet of the Company and/or are otherwise
known to the Management Group, excepting the following which The
Company will retain: (i) indebtedness and obligations evidenced
by certain debentures having a face principal amount of $1.2
million; and (ii) any and all obligations and commitments of the
Company to its shareholders or directors who are not the
Company's employees;
(b) Obligations to the existing installed base of Education Market
customers for software support and maintenance arising before and
after the Closing Date;
(c) Royalties owed to third party licensors on account of (i) The
Company's sublicensing of Third Party Software to its customers
before the Closing Date; and (ii) WILC's sublicensing of Third
Party Software to its customers from and after the Closing Date,
but specifically excluding the Company's sublicensing of Third
Party Software to its customers after the Closing Date.
Cash Purchase Price. In addition to the assumption of the Assumed
Liabilities, WILC will pay to the Company cash consideration ("Cash
Consideration") in the amount of One Million Five Hundred Thousand Dollars
($1,500,000), payable at the Closing. At its option, WILC may discharge the
royalty obligations described below and the Minimum Royalty payments as
described above by paying to the Company, on the Closing Date or within one (1)
year after the Closing Date, an additional Cash Consideration of Three Million
Five Hundred Thousand Dollars ($3,500,000) for a total Cash Consideration of
Five Million Dollars ($5,000,000), in which event WILC's licenses in the
Education Market will be perpetually exclusive and the Exclusivity Period will
be deemed to be five (5) years for all other purposes.
<PAGE>
Royalty Payments to the Company. In addition to assuming the Assumed
Liabilities and paying the Cash Consideration, WILC will pay to the Company
royalties of 2.5% to 10% of net revenues collected by WILC from the distribution
and licensing of the Licensed Programs and certain derivative works during the
five (5) year period commencing on the Closing Date (each of the five (5) years
during this period is sometimes referred to as a "License Year.")
Adjustment to Cash Consideration. In arriving at the Cash Consideration set
forth above and the royalty payments described above (collectively, the
"Purchase Price"), the parties have attempted to make a reasonable and good
faith allocation of value between the assets and business being sold or
transferred to WILC under this Agreement (the "Sold Business") and the assets
and business being retained by the Company (the "Retained Business"). However,
neither party is entirely comfortable that the Purchase Price properly reflects
the appropriate allocation of value between the Sold Business and the Retained
Business. Therefore, the Purchase Price will be adjusted as set forth below in
the event there is an acquisition, merger, or sale of all or substantially all
of the assets (the "Acquisition") of the Sold Business or Retained Business:
(a) In the event of an Acquisition of the Sold Business, WILC or its
successor will have the option of discharging the royalty
obligations described above by paying to the Company an amount
equal to $3,500,000, which royalty discharge amount will be paid
within thirty (30) days after the closing of the Acquisition. In
the event WILC or its successor does not exercise the foregoing
option, the royalty obligations described above will be expressly
assumed by the successor company in the Acquisition and continue
in full force and effect against said successor.
(b) In the event of an Acquisition of the Sold Business within two
(2) years after the Closing Date, then, in addition to the
payment of any royalty or royalty buyout described in paragraph
(a) above, the Purchase Price will be increased by an amount
calculated as follows (the "Increased Amount") based upon the
"Net Sold Business Acquisition Proceeds":
Portion of Net Sold Business
Month of Sold Business Acquisition Acquisition Proceeds
---------------------------------- --------------------
1-12 months after Closing Date 10.00%
13-16 months after Closing Date 7.50%
17-20 months after Closing Date 5.00%
21-24 months after Closing Date 2.50%
25 or more months after Closing Date 0.00%
For purposes of the Acquisition Agreement, "Net Sold Business
Acquisition Proceeds" will mean (a) the total cash consideration, plus
the fair market value of property or stock, received by WILC or its
Shareholders as payment in the Sold Business Acquisition, less all
commissions and out-of-pocket expenses of the Sold Business
Acquisition, minus (b) the sum of (i) the Cash Consideration paid to
date, (ii) the aggregate royalties paid to date , and (iii) in the
case of an asset sale, the debts and obligations owed to creditors of
WILC immediately prior to the Sold Business Acquisition. The Increase
Amount of the Purchase Price will be paid by WILC to the Company
within thirty (30) days after the closing of the Net Sold Business
Acquisition.
(c) In the event of an Acquisition of the Retained Business within
two (2) years after the Closing Date, then notwithstanding the
payment of any royalty or royalty buyout described in paragraph
(a) above, the Purchase Price will be decreased by an amount
calculated as follows (the "Decreased Amount") based upon the
"Net Retained Business Acquisition Proceeds":
<PAGE>
Portion of Net Retained Business
Month of Retained Business Acquisition Acquisition Proceeds
-------------------------------------- --------------------
1-12 months after Closing Date 10.00%
13-16 months after Closing Date 7.50%
17-20 months after Closing Date 5.00%
21-24 months after Closing Date 2.50%
25 or more months after Closing Date 0.00%
For purposes of the Acquisition Agreement, "Net Retained Business
Acquisition Proceeds" means (a) the total cash consideration, plus the fair
market value of property or stock, received by the Company or its
Shareholders as payment in the Retained Business Acquisition, less all
commissions and out-of-pocket expenses of the Retained Business
Acquisition, minus (b) the sum of (i) the Company's shareholder
indebtedness and Preferred Stock liquidation preferences as of the Closing
Date, and (ii) in the case of an asset sale, the debts and obligations owed
to creditors of the Company immediately prior to the Retained Business
Acquisition.
For a period of six (6) months after the Closing Date, WILC will provide to
the Company technical assistance on a "best efforts, as available" basis to
support the Company's use of the Licensed Programs and development of the
Company Derivative Works of the Licensed Programs.
WILC will also provide to the Company accounting assistance on a "best
efforts, as available" basis to support the Company's ownership and use of the
capitalized development, net operating losses, and other tax benefits which
remain with the Company.
Conditions to Closing. WILC's obligations under the Acquisition Agreement
are contingent upon satisfaction of the following conditions:
(a) Approval of the Acquisition Agreement by the Board of Directors
of the Company on or before July 1, 1996 which approval has been
obtained;
(b) WILC's obtaining the necessary cash or other financing to pay the
Cash Consideration;
(c) WILC's obtaining the required consents, if any, of third parties
to an outright assignment or transfer of Education Market Assets;
and
(d) WILC's obtaining the required consents, if any, of third parties
to a license of the Licensed Programs and sublicense of Third
Party Software, on terms acceptable to WILC.
(e) The Company's obtaining the approval or forbearance, if required,
of its shareholders and debenture holders prior to consummation
of the Acquisition; provided that: (i) the Company shall use its
best efforts to obtain prior to July 31, 1996, any approval or
forbearance of debenture holders required for the consummation of
this Acquisition which approval has been obtained; (ii) the
Company's Board of Directors will prior to July 15, 1996,
determine whether shareholder approval is required for the
Acquisition, and, if required, use its best efforts to obtain
prior to July 31, 1996, the shareholder commitment to approve the
consummation of this Acquisition from those shareholders, or the
shareholder's parent, subsidiary or related entity, in which one
of the disinterested directors of the Company is an officer,
director, corporate agent, or general partner; and (iii) the
Company's Board of Directors will recommend the approval of this
Acquisition to all other shareholders in connection with the
notice of shareholders' meeting.
<PAGE>
Technology Funding, Inc., which through affiliated entities owns 67.1% of
the Company's voting stock as of August 1, 1996, has indicated its intent to
approve the transactions contemplated by the Acquisition Agreement. The Company
therefore believes that the approval of this Proposal is assured, and that the
transactions contemplated by this Proposal are likely to occur, subject to WILC
obtaining the required funding and consents to assign or transfer the Education
Market Assets and to license the Licensed programs and sublicense the Third
Party Software. However, there can be no assurance that such funding or consents
will be obtained or that such transactions will in fact be consumated.
Finders Fees. The Company and WILC each warrant to the other that it has
incurred no obligation to pay any finders fees or commissions in connection with
WILC's acquisition of the Education Market Assets.
Transferred Employees. WILC will offer all employees of the Company
employment with WILC at the same title, salary, and responsibility, and WILC
will assume all liabilities of the Company with respect to such transferred
employees, including but not limited to accrued wages, accrued vacation, sick
leave, employee reimbursements, and severance, if any; and WILC will defend,
indemnify, and hold the Company harmless from and against any claims or
liability for such employee obligations.
Expenses. Each of the parties hereto will pay its own expenses in
connection with the Acquisition Agreement and the transactions contemplated
hereby, including, without limitation, any legal and accounting fees, whether or
not the transactions contemplated hereby are consummated.
Closing Date. For purposes of the Acquisition Agreement, the "Closing Date"
will be the sooner of: (a) the Expiration Date; or (b) ten (10) days after the
date on which WILC advises the Company that WILC is ready, willing, and able to
consummate the purchase of the Education Market Assets and assumption of the
Assumed Liabilities on the terms and provisions set forth in the Acquisition
Agreement. On the Closing Date, all Education Market Assets will be transferred
to WILC and WILC will assume all Assumed Liabilities and responsibilities
relating to the Licensed Programs and Third Party Software as set forth in the
Acquisition Agreement.
REASONS FOR THE TRANSACTIONS
The Company needed significant new capital to provide the funds necessary
to exploit the home and retail markets. The Company believes that the retail
distribution channel offers the greatest opportunity to build value with its
Windows and DOS based educational software. This agreement provides the
necessary immediate funding to the Company to prepare its products for the
retail market. Additionally, the on-going royalties on software sales into the
Education Market will provide additional profitability in future years. By
retaining the Company's substantial tax net operating loss carryforward, a
significant amount of future net taxable income can largely be sheltered from
federal taxes for many years to come.
In reaching its decision to approve the Acquisition Agreement, the
Company's Board of Directors considered the following information and factors:
(a) The desire of the Company's management to pursue the Education
Market.
(b) The Bopard's determination that the home and retail markets
present opportunities for the Company's Windows and DOS based
education software products that are not currently able to be
addressed with the Company's current personnel and financial
resources.
(c) The difficulty of pursuing both the Education Markets and the
home and retail markets given the Company's current personnel and
financial resources.
<PAGE>
(d) The need for funding to prepare the Company's products for the
home and retail markets and the consideration to be paid to the
Company under the Acquisition Agreement.
(e) The on-going royalties on software sales into the Education
market to be paid by WILC under the Acquisition Agreement.
(f) The ability of the Company to utilize its tax net operating loss
carryforwards to offset any potential gain from the sale of
assets from the Acquisition as well as future net taxable income.
The Board also considered the terms of the Acquisition Agreement and the
affect on the Acquisition of the Company's net tax operating loss carryforwards.
The Board also considered the following potentially negative factors
relating to the Acquisition: (i) the risks associated with attracting, retaining
and training an entire team of management, development, marketing, sales and
support for the Company; (ii) the risks associated with managing a new
organization with new personnel and a new market strategy; (iii) the risk of
WILC's inability to procure funding and necessary consents to assignment,
license and sublicense necessary to consumate the Acquisition; (iv) the
uncertainty of the royalties to be paid by WILC; (v) the risks inherent in
modifying and enhancing the Company's products and in developing new products
for the retail and home markets; and (vi) the need to develop new distribution
channels for the Company's products in the home and retail markets.
In view of the wide variety of factors, both positive and negative,
considered by the Board, the Board did not find it practical to, and did not,
quantify or otherwise assign relative weights to the specific factors
considered. After taking into consideration all of the factors set forth above,
the Board concluded that the Acquisition was in the best interest of the Company
and its stockholders and that the Company should proceed with the Acquisition.
ACCOUNTING TREATMENT
At closing, this transaction will be accounted for under the "Purchase
Method" in accordance with Generally Accepted Accounting Principles. This method
could result in a gain from the sale of certain of the Company's assets as
described above.
FEDERAL INCOME TAX CONSEQUENCES
A taxable gain may result from this transaction if the initial License Fee
received by the Company is greater than the assets sold to WILC. The Company has
more than enough Tax Net Operating Loss Carryforward remaining to offset the
potential gain. The transaction will be accounted for under the provisions of
Statement of Financial Accounting Standards No. 109 ("SFAS 109").
WILC will pay all state and local sales, transfer, value-added, or other
similar taxes, and all recording and filing fees that may be imposed by reason
of the sale, transfer, assignment, and delivery of the Education Market Assets.
REGULATORY APPROVALS
The Company believes that it has complied with all applicable state and
federal regulations in connection with the Acquisition Agreement and does not
believe that any regulatory approvals of the Acquisition are required by any
state or federal government entity. See "Dissenters Rights" above.
STOCK PRICE PERFORMANCE
The high and low sales prices of the Company's Common Stock on June 30,
1996, the day prior to the signing of the Acquisition Agreement were $0.6875 and
$0.50, respectively. On August 14, 1996, the day prior to the press release
anouncing the Acquisition Agreement, the sales price high and low was $0.156 and
$0.125, respectively.
<PAGE>
ACCOUNTANTS
The Company's independent public accountants are Arthur Andersen LLP.
Representatives of Arthur Andersen LLP are expected to be present at the
shareholders' meeting, will have the opportunity to make a statement if they
desire to do so and are expected to be available to respond to appropriate
questions.
INTERESTS OF CERTAIN PERSONS
Barbara Morris, the Company's President, Chief Executive Officer and a
director, Carol Hamil, the Company's Vice President of Development, and Ralph
Brown, the Company's Chief Financial Officer are the only shareholders of WILC.
The Acquisition was approved by a disinterested majority of the Company's Board
of Directors by vote with Ms. Morris abstaining. Following the closing of the
Acquisition, Ms. Morris, Ms. Hamil and Mr. Brown are expected to resign as
officers and director, as applicable, of the Company. The Company's Board of
Directors intends to conduct a nationwide search for new executives to manage
the Company. Options held by Ms. Morris, Ms. Hamil and Mr. Brown to purchase
740,000, 370,000 and 180,000 shares of the Company's Common Stock, respectively,
will terminate effective upon the closing of the Acquisition Agreement.
The Company's Board of Directors unanimously recommends a vote "FOR" the
approval of the Acquisition Agreement with Wasatch Interactive Learning
Corporation.
PRINCIPAL AND MANAGEMENT SHAREHOLDERS
The following tables set forth the number of shares beneficially owned as
of July 31, 1996 by (i) each Director of the Company, (ii) each Named Officer
(as defined below), (iii) all executive officers and nominees for director as a
group and (iv) all persons known to the Company to be beneficial owners of more
than five percent of the Company's outstanding shares of Common Stock and
Preferred Stock, respectively:
Common Stock
Number
of Shares Percentage of
Beneficially Outstanding Shares
Name of Beneficial Owner Owned (1) of Common Stock (2)
- ------------------------ ------------ -------------------
Technology Funding, Inc.(3) 7,465,517 86.5
2000 Alameda de las Pulgas
San Mateo, CA 94403
Loyalhanna Venture Fund (formerly 313,240 8.7
Trivest Venture Fund) (4)
223 4th Avenue, 17th Floor
Pittsburgh, Pa.
Barbara Morris (5) 713,333 16.7
5250 South 300 West
Salt Lake City, Utah 84107
<PAGE>
Number
of Shares Percentage of
Beneficially Outstanding Shares
Name of Beneficial Owner Owned (1) of Common Stock (2)
- ------------------------ ------------ -------------------
Jeffrey Keimer (6) 299,433 7.7
702 Marshall Road
Redwood City, California 94063
Carol Hamil (7) 356,666 9.1
5250 South 300 West
Salt Lake City, Utah 84107
Ralph Brown (8) 175,555 4.8
5250 South 300 West
Salt Lake City, Utah 84107
Directors and Executive Officers 1,544,987 30.2
as a group (6 persons) (8)
Preferred Stock
Percentage of
Number of Shares Outstanding Shares
Name of Beneficial Owner Beneficially Owned(1) of Preferred Stock(2)
- ------------------------ -------------------- -------------------
Technology Funding, Inc.(3) 7,300,000 74.3
2000 Alameda de las Pulgas
San Mateo, CA 94403
Jeffrey Keimer(6) 9,629 *
Directors and Executive Officers 9,629 *
as a group (6 persons) (9)
* Less than 1%
(1) Unless otherwise noted, each person or group identified possesses sole
voting and investment power with respect to all shares shown as beneficially
owned, subject to community property laws where applicable. A person is deemed
to be the beneficial owner of Common Stock or Preferred Stock, respectively,
that can be acquired by such person within 60 days of July 31, 1996 upon the
exercise of options or warrants.
(2) Each beneficial owner's percentage ownership is determined by assuming
options and warrants that are held by such person (but not those held by any
other person) and which are exercisable for Common Stock or Preferred Stock,
respectively, within 60 days of July 31, 1996 have been exercised.
(3) Ms. Carolyn Poe and Mr. Gregory T. George, directors of the Company,
are employees of Technology Funding, Inc., which is a managing partner of
Software Fund II, Technology Funding Partners I, Technology Funding Partners II,
Technology Funding Private Reserve Fund and Technology Funding Secured Investors
III. Together, these funds own 2,400,486 shares of Common Stock, hold warrants
to purchase an additional 3,065,031 shares of Common Stock and own 2,000,000
shares of Series A Preferred Stock that is convertible on a share for share
basis into Common Stock. Additionally, these funds own 5,300,000 shares of
Series C Preferred Stock which is not convertible into common stock.
(4) Includes 7,822 shares of Common Stock subject to warrants exercisable
within 60 days of July 31, 1996.
(5) Represents 713,333 shares of Common Stock subject to options
exercisable within 60 days of July 31, 1996. These options will be terminated
upon closing of the Acquisition.
<PAGE>
(6) Represents 289,804 shares of Common Stock subject to warrants
exercisable and 9,629 shares of Series "A" Preferred Stock that is convertible
into Common Stock within 60 days of July 31, 1996.
(7) Represents 356,666 shares of Common Stock subject to options
exercisable within 60 days of July 31, 1996. These options will be terminated
upon closing of the Acquisition.
(8) Represents 175,555 shares of Common Stock subject to options
exercisable within 60 days of July 31, 1996. These options will be terminated
upon closing of the Acquisition.
(9) Includes 9,629 shares of Series A Preferred Stock convertible into
Common Stock within 60 days of July 31, 1996 and 1,245,554 shares of Common
Stock subject to options and 289,804 shares of Common Stock subject to warrants
exercisable within 60 days of July 31, 1996.
PROPOSALS OF SHAREHOLDERS FOR NEXT ANNUAL MEETING
The Company must receive proposals from Shareholders on or before
January 15, 1997, in order to have such proposals evaluated for inclusion in the
proxy statement relating to the Company's next Annual Meeting of Shareholders.
OTHER MATTERS
The management knows of no other matters which are likely to be brought
before the Special Meeting. If any other business requiring a vote of the
Shareholders should properly come before the Special Meeting, the proxies will
be voted by the persons named therein in accordance with their judgment in such
matters.
By Order of the Board of Directors
/s/Barbara Morris
--------------------------
Barbara Morris, President
<PAGE>
OTHER INFORMATION
General Description of Business
Wasatch Education Systems Corporation (the "Company" or "Wasatch"),
incorporated in 1988 in the State of Utah, develops and markets computer-aided
instructional systems ("CAI Systems") for the pre-school, elementary, secondary,
adult education and home school markets. The Company's products are primarily
used by students enrolled in United States schools between kindergarten and the
twelfth grade ("K-12"), as well as by adult students enrolled in basic education
programs and students receiving schooling at home. Schools utilize the Company's
products to offer students self-paced, individualized courses in reading,
writing, science, mathematics, life skills and high school equivalency (GED)
test preparation. The CAI Systems furnished by the Company are typically used by
students to supplement their regular instructional programs.
The Company currently markets and sells its products through a direct sales
force, independent marketing representatives, and two dealers. See
"Business--Marketing and Sales". In addition to receiving revenues from initial
product license fees and sales (including software licenses, training, and
printed materials), the Company also receives fees in subsequent years for
customer support, software upgrades, teacher training, and printed materials.
The Company intends to pursue a new strategy in new markets for its
products and will be prohibited for a significant period of time from engaging
in its traditional business in the Education Market. In pursuing the
Acquisition, the Company will retain its core products and technology and the
funds received from the proceeds of the Acquisition. The Company will still
receive royalties from the revenue generated by the business as described in the
Proxy Statement; however, the business conducted in the Education Market as
described above will be performed by WILC. The Company will focus its efforts in
the home and retail markets. Channels are expected to be developed through the
Internet, retail distribution and direct sales.
The Market
With the introduction of personal computers in the late 1970's and early
1980's, schools began utilizing drill-and-practice, diskette-based educational
software. In the Company's view, the networking capability of MS-DOS/Windows
compatible equipment created a market for courseware which addresses broad
curriculum needs. These networked products contrast with earlier software
designed for stand-alone (non-networked) computers.
After the Acquisition is completed, the Company will be selling the
Company's products into the home and retail markets. Individuals and families
with MS-DOS and Windows compatible equipment can utilize the Company's software
for their children directly in their homes. The market for retail educational
products is extremely large in relation to the current sales levels of the
Company and therefore represents a significant opportunity to increase the
Company's sales volumes.
The home and retail markets are new markets for the Company in which the
Company has no experience. The Company has no customers or sales in these
markets. There can be no assurance that such markets will be receptive to the
Company's products, that the Company will be able to adapt and enhance its
products for such markets, that the Company will be able to compete in such
markets against competitors with significantly greater resources than the
Company or that the Company will be able to develop direct or indirect
distribution channels in such markets. Failure of these markets to be receptive
to the Company's products or of the Company to adapt and enhance its products
for such markets or to develop distribution channels would have a material
adverse effect on the Company and its business.
<PAGE>
The Company's Products
The Company provides what it characterizes as a "learning" system. The
system provides each student with self-paced, individualized lessons. Using a
personal computer as a fileserver, the system stores course software (known as
"Courseware") and student data and transmits programs to student workstations as
needed. The fileserver can be connected to as many as 100 student workstations
equipped with color monitors. A printer is also attached to the system to
service the needs of the users. Individual workstations can be located in one
place, such as a home or a school computer laboratory, or the network can be
arranged to distribute workstations in different classrooms throughout the
school.
The Company believes that its Courseware offers several features which make
it attractive to customers. These include automatic record-keeping, automatic
re-entry at the appropriate point in the lesson, the capability to store work
for later use and the emphasis on workplace knowledge in real world scenarios.
The networked, MS-DOS/Windows software also allows more elaborate lessons,
including such features as graphics, audio and animation. These features are
expected to provide the Company with a competitive advantage in the home and
retail markets. However, there can be no assurance that the Company will be able
to leverage such features for the home and retail markets or that such markets
will be receptive to such products.
The Company has designed its Courseware to emphasize content knowledge,
strategies, problem solving skills, critical thinking skills and process skills,
which distinguish it from educational software systems offered by other
companies. For example, the Company's science program focuses on developing the
student's content knowledge of physical, earth and life sciences as well as on
developing process skills such as observing phenomena and recording data.
Process skills are taught using computer tools such as data bases and word
processors, and other tools which are unique to individual courses. Because the
Courseware uses the computer as a problem-solving tool and as an instructional
vehicle, the Company believes that the Courseware serves to integrate process
skills and computer literacy into the traditional curriculum. This permits the
teacher to use the computer to evaluate student mastery of knowledge, computer
literacy and process skill development.
The Company developed new Courseware called Projects for the Real WorldTM
that was introduced into the market during the fiscal year ended June 30, 1994
to address concerns about the need for "real world" based teaching methods
emphasizing work place knowledge, as advocated by the U.S. Department of Labor
in its report "Secretary's Commission on Achieving Necessary Skills" or SCANS.
The Company's new software is designed for K-8 and provides a new approach to
student interactive learning. The Company's Projects for the Real WorldTM
features highly interactive Courseware that requires an elevated level of
critical thinking in real world, work place scenarios.
On February 25, 1991, the Company entered into a joint research and
software development project in mathematics with Rutgers University's Center for
Mathematics, Science and Computer Education. The project, to develop a
tool-based elementary mathematics product, was headed by Dr. Warren Crown. The
Company began marketing these products during the fiscal year ended June 30,
1994 and will pay a royalty to Rutgers on all sales.
In the spring of 1995, the Company developed and began selling individual
units of its Courseware on CD-ROM.
<PAGE>
All of the Company's products can be delivered in both networked
environment and non-networked individual workstation environments via CD-ROM
technology.
The Company expects to modify and enhance its products to make them more
desirable to home and retail users by adding more game capabilities and higher
order graphics such as 3D capabilities. The Company intends to adapt and enhance
its products for the home and retail markets. However, there can be no assurance
that the Company will be successful in such efforts.
Services
In addition to licensing Courseware, the Company provides on-site
Courseware installation, ongoing training, and telephone customer support.
Training consists of multiple in-service sessions throughout the school year and
a multi-year training plan. Company consultants work with teachers and school
principals in order to develop curriculum focus and integrate the Company's
Courseware into classroom instruction. Customer support is available during
extended working hours to Company customers via a toll-free number. Many
installations are sold with a modem which provides a telecommunication link
between the school and the Company's customer service personnel for remote
diagnostics.
The Company will no longer provide the services described above after the
Acquisition. These services will be performed by WILC. The Company expects,
however, to continue to provide customer support to its new customers in the
Home and retail markets. The Company is in the process of recruiting appropriate
personnel to perform such services. However, there can be no assurance that the
Company will be able to attract or retain appropriate personnel.
Research and Product Development
As in most of the software industry, rapid technological change and market
demands require the Company to continually enhance its existing products.
Although school curricula has remained relatively standard from location to
location and from year to year (and the Company believes it will continue to do
so), the need to add additional products to the Company's current product line
requires the Company to continually broaden its product line to remain
competitive.
From its inception in 1985 to June 30, 1995, the Company has cumulatively
spent $15,515,000 for research and product development. During the fiscal years
ended June 30, 1995 and 1994, the Company spent approximately $309,000 and
$227,000, respectively, on expensed product development. In addition, the
Company spent approximately $1,269,000 and $2,455,000 in the fiscal years ended
June 30, 1995 and 1994, respectively, on product development that was
capitalized. Within a given curriculum area, the Company's development strategy
typically focuses on early completion of a core of software modules. As a
result, products in a given curriculum area are typically brought to market
after 12 to 15 months of development.
The Company intends to continue making significant investments in product
development activities with funds produced through continuing operations. There
can be no assurance, however, that the Company will be able to respond
adequately to technological advances in its marketplace or that it will be able
to develop or market successfully any new products.
All of the Company's development personnel are expected to become employees
of WILC and will cease providing services to the Company. The Company will need
to train new personnel to develop and enhance the Company's products for the
home and retail markets. These personnel are not likely to be familiar with the
Company's products and will require significant training.
<PAGE>
Marketing and Sales
The Company's early marketing strategy targeted the major urban school
districts as its core business. In April 1985, the Company installed its
products at three pilot sites in Chicago. By the end of 1985, the Company had
installations in 19 school districts serving a total of 26 schools. As of June
30, 1995, the Company had sold its products to over 360 school districts for use
in 870 schools on approximately 18,000 individual networked workstations
throughout the United States. (See Note 8 to the Financial Statements.)
As of June 30, 1995 the Company sells its products through a geographically
based direct sales force consisting of two full-time sales representatives with
an additional nine independent marketing representatives and two dealers. In
addition to qualifying prospects and calling on both existing and prospective
customers, the Company's sales representatives host users' conferences and
attend national trade shows and conferences. The Company markets its products to
a variety of customers including K-12 school districts, private schools,
universities, adult education centers, the home market and corporate education
centers. The Company is expanding its school marketing efforts through catalog
mailings and follow up telemarketing efforts.
The Company has recently organized a catalog sales division that
incorporates a published catalog of all the Company's modular products and a
telemarketing group. Catalog mailings to key school districts are followed up by
the direct sales efforts of the telemarketers. This marketing strategy attempts
to capitalize on the trend of some school districts to buy modular products at
the school level rather than the district level.
The Company will be required to develop new sales channels oriented into
the retail and home markets. These channels may include the Internet, retail
distribution and direct sales. However, the Company has not yet established any
such channels. Failure of the Company to successfully develop channels for
distributing its products to the home and retail markets would have a material,
adverse effect on the Company's business.
Competition
The K-12 computer-aided instruction market is highly competitive. The
Company categorizes its competitors into two types. The first type of competitor
is the diskette or CD-ROM based educational software publisher. While these
companies serve a growing market, they generally distribute their products via
telemarketing and catalog sales to individuals as well as school districts.
The second category of competitor is the growing group of companies
producing comprehensive courseware primarily for networked systems. These
companies generally market to school districts with direct sales forces. The
Company believes that its major competitors in this second category are Jostens
Learning Corporation, Computer Curriculum Corporation and IBM. These competitors
have far greater resources than those of the Company. Some of these competitors
have entrenched market positions and established trade names, trademarks and
intellectual property rights.
Some of the products of the Company's competitors emphasize
drill-and-practice skills as opposed to the reasoning and thinking skills
emphasized by the Company's courseware. Although the Company believes that it
has priced its products competitively, there can be no assurance that the
Company will be able to remain price-competitive in the future or with respect
to new products. The Company believes that each of its competitors has
approached the market from a different standpoint and has targeted specific
market segments. Although Jostens Learning Corporation is believed to have a
dominant share of the K-8 market, no single company dominates the entire market,
and the Company competes against different companies with respect to different
products.
The Company will be facing new competitors in the home and retail market.
The industry has seen larger competitors such as Softkey and CUC purchase a
number of smaller competitors. This could provide the Company an opportunity to
capture shelf space at retail stores but it also may make it more difficult for
smaller companies to compete in the industry.
<PAGE>
Product Protection
The Company's success is dependent to a large extent on its ability to
protect its proprietary interest in its software products. In addition, the
Company requires its employees to enter into confidentiality agreements with it,
and its license agreements with school districts prohibit the reproduction or
other unauthorized use of the Company's proprietary software; however, not all
school districts have entered into such license agreements.
Several circuits of the United States Court of Appeals, as well as
federal district courts, have held that governmental entities may be immune from
suit for copyright infringement. Such immunity protection would extend to states
and their alter egos but not to other political subdivisions. If school district
customers were to be viewed as alter egos of their respective states, the
Company could be denied protection from copyright infringement as to these
customers, even if such protection would otherwise be available. However, the
Company should still be entitled to contractual protections under any license
agreements it has executed with such districts.
The Company believes that the rapid pace of technological change in the
computer software industry renders patent, trade secret and copyright
protections less significant than the knowledge, ability, and experience of the
Company's personnel, name recognition and on-going maintenance.
Suppliers
The objective of the Company is to sell proprietary software to
customers without accompanying of computer equipment and supplies, or third
party software except where the addition of the third party software compliments
or augments the Company's software. However, at times the Company must
coordinate the sale of its products with third party computer hardware and
peripherals as well as third party software in order to satisfy the bid
specifications of certain customers. In these instances, the Company must rely
upon the delivery of products and services from various suppliers and has
established certain relationships with these suppliers to provide continuity of
supply.
Computer Hardware: The Company has non-binding, non-contractual
relationships with several manufacturers of computers used as student
workstations and fileservers. These vendors install and provide on-going support
for their hardware. Wasatch does not provide on-going hardware support nor does
it offer hardware as "Wasatch approved". The Company does however, provide
standardized computer configurations to achieve uniformity of all suppliers'
products sold.
Third Party Software: The Company purchases software products from
third parties to fill gaps in the Company's proprietary product lines. Such
software products constitute a small percentage of the Company's business but
nevertheless, provide both necessary and appropriate products for specific
market needs. In the event such software sources were to cease to be available
to the Company, the Company would be required to find alternatives, and there
can be no assurance that it would be successful in doing so. The Company also
purchases and resells books from several publishers.
Employees
As of June 30, 1996, the Company employed 26 persons on the basis of
full-time equivalent employment including 3 persons in sales, marketing, and
related activities; 6 persons in product development; 9 persons in customer
support and operations; 4 persons in servicing and consulting; and 4 persons in
general administration and finance.
The Company believes that its future success will depend, in part, on
its ability to recruit and retain highly skilled sales and technical personnel
(including senior management as the Company expands its marketing efforts).
<PAGE>
None of the Company's employees is represented by a labor union. The
Company has experienced no work stoppage and believes that its employee
relations are good.
All of the employees currently working for the Company are expected to
resign and begin working for WILC after the Acquisition.
Significant Customers
The Company's products are marketed primarily to public school districts,
adult education facilities, corporations and recently to school districts and
adult education sites through telemarketing and catalog sales.
For all periods from inception through June 30, 1995, a small number of
school districts generated a disproportionate amount of the Company's annual
revenues. (See Note 8 to the Financial Statements.)
The Company must continually seek new customers for its products because
most of the Company's revenue is from non-recurring initial sales of software,
not from recurring annual license fees. Accordingly, the Company is not
particularly dependent on any individual customer(s) for future revenues.
Backlog
On June 30, 1996, the Company's backlog was immaterial, all of which was
shipped during the first quarter of fiscal year 1997. The Company does not
generally have a significant backlog as a result of the following factors. Even
though the sales cycle is lengthy, when a customer actively places an order it
is generally important that delivery be made quickly. The Company does not
manufacture or maintain significant inventory of computer hardware; it merely
installs its software on hardware manufactured, and often delivered, by third
parties. The Company's backlog was immaterial on June 30, 1995 and June 30, 1994
and the nine months ended March 31, 1996. All of the Company's backlog will be
transfered to WILC in the Acquisition.
At June 30, 1995, the Company had recorded deferred revenue with respect to
cash receipts for services, which consist primarily of training and maintenance,
yet to be performed in the amount of $367,000. This amount was recognized as
revenue during fiscal year 1996 as the services are completed.
PROPERTIES
The Company's headquarters and its research and development facilities are
located at the same facility in Salt Lake City, Utah. Effective April 1, 1996
the Company entered into a three year lease agreement with its current landlord
on a variable term lease through March 31, 1999. The annual base rent (inclusive
of payment of taxes) through March 31, 1997 is $115,239. The Company also has a
three lease on property located in Park City, Utah through December 31, 1998.
The annual base rent (inclusive of payment of taxes) through December 31, 1996
is $71,016. (See Note 6 to the financial statements.)
<PAGE>
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(A) Market Price Data
The Company's Common Stock began trading in the over-the-counter market
in October 1988. Prices were quoted in the National Association of Security
Dealers Automated Quotation System ("NASDAQ") under the symbol WESC. On January
31, 1991, the Company was granted by NASDAQ a conditional continued listing on
NASDAQ, and the Company's symbol was temporarily changed to WESCC. On July 8,
1991, the Company's symbol was changed back to WESC as the company met the
minimum equity requirement of NASDAQ. The Company was delisted on June 16, 1992
for failure to meet certain requirements for inclusion in the NASDAQ system. The
Company is currently reviewing the requirements to be relisted on the NASDAQ
exchange. The Company's Common Stock is now traded on the NASDAQ Bulletin Board.
The following table sets forth the range of the high and low bid quotations for
the stock for the fiscal year quarters indicated, as reported by the applicable
NASDAQ trading market. The quotations represent prices between dealers and do
not include retail markups, markdowns or commissions and may not necessarily
reflect actual transactions.
HIGH LOW
Fiscal Year Ended June 30, 1994
1st Quarter ended September 30, 1993 $1.000 $0.750
2nd Quarter ended December 31, 1993 1.000 0.625
3rd Quarter ended March 31, 1994 0.500 0.125
4th Quarter ended June 30, 1994 0.313 0.125
Fiscal Year Ended June 30, 1995
1st Quarter ended September 30, 1994 $0.313 $0.125
2nd Quarter ended December 31, 1994 0.219 0.094
3rd Quarter ended March 31, 1995 0.156 0.094
4th Quarter ended June 30, 1995 0.156 0.094
(B) Approximate Number of Equity Security Holders
As of June 30, 1995, the Company had 427 common and preferred
stockholders of record.
(C) Dividends
The Company has never paid a dividend on its Preferred Stock. As of
June 30, 1995, the Preferred Stock dividends in arrears amounted to $90,866.
Under Utah corporate law, the Company is restricted from paying dividends on its
Common Stock until the accumulated dividends on its Preferred Stock are paid and
the Company has achieved positive retained earnings. Only the Series B Preferred
Stock is entitled to dividends. The Series A Preferred Stock is not entitled to
dividends. The Series C Preferred Stock is entitled to dividends under certain
circumstances (see Note 6).
The Company has never paid a cash dividend on its Common Stock. The
current policy of the Company is to retain any earnings for the operation of its
business. The Company intends for the foreseeable future to continue this policy
of retaining earnings achieved to finance the development of its business.
<PAGE>
Overview:
The Company currently develops and markets computer-aided CAI Systems for
the pre-school, elementary, secondary, adult education and home school markets.
The Acquisition will significantly change the Company's business. Following the
Acquisition, WILC will have the exclusive rights for a significant period of
time to develop such markets. The Company expects to direct its efforts
exclusively on developing and marketing its CAI Systems for the home and retail
markets.
In pursuing the Acquisition, the Company will retain its core products and
technology and the funds received from the proceeds of the Acquisition. The
Company's prospects must be considered in light of the risks, expenses and
difficulties encountered by companies in the early stage of development,
particularly companies in new and rapidly evolving markets. To address these
risks, the Company must, among other things, continue to upgrade its
technologies and commercialize products and services incorporating such
technologies. There can be no assurance that the Company will be successful in
addressing such risks.
The home and retail markets are new markets for the Company in which the
Company has no experience. The Company currently has no customers or sales in
these markets. There can be no assurance that such markets will be receptive to
the Company's products, that the Company will be able to adapt and enhance its
products for such markets, that the Company will be able to compete in such
markets against competitors with significantly greater resources than the
Company or that the Company will be able to develop direct or indirect
distribution channels in such markets. Failure of these markets to be receptive
to the Company's products or of the Company to adapt and enhance its products
for such markets or to develop distribution channels would have a material
adverse effect on the Company's business and results of operations.
The Company's current employees, including all of the Company's management,
development, marketing and sales personnel, are all expected to become employees
of WILC. The Company is in the process of recruiting personnel to pursue the new
business of the Company. Competition for such personnel is intense in the
software industry. There can be no assurance that the Company will be able to
attract and retain sufficient qualified personnel to operate the Company's new
business. failure of the Company to attract or retain such personnel would have
a material adverse effect on the Company's business, financial condition and
results of operations.
The Company's future results of operations are uncertain and subject to
flucuation. Following the Acquisition, the Company's revenues will consist
exclusively of royalties received from WILC until the Company is able to develop
channels for its products in the home and retail markets. There can be no
assurance that the Company will develop such channels or achieve revenue growth
or profitability. Because of such factors and others, the Company's operating
history is not an indicator of future performance since it will pursue entirely
new markets for its products. Additional factors that may affect operating
results include the timing of customer orders, the timing of expenses incurred
by the Company in anticipation of hiring personnel and modifying, enhancing and
releasing products for the home and retail markets, changes in pricing policies
of the Company and its competitors, variation in the mix of Compamny's products
licensed, the mix of direct and indirect sales, personnel changes and general
economic factors. Any unfavorable changes in these or other factors could have a
material adverse effect on the Company's business, financial condition and
results of operation.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results of Operations:
Fiscal Year 1995 compared to Fiscal Year 1994:
The following are explanations of significant period to period changes for
the fiscal year ended June 30, 1995 compared to the fiscal year ended June 30,
1994.
Revenue for the fiscal year ended June 30, 1995 of $5,475,000 decreased
$460,000 or 8 percent, compared to $5,935,000 for the fiscal year ended June 30,
1994. Courseware license revenues increased 26 percent or $851,000 to $4,167,000
for the fiscal year ended June 30, 1995, from $3,316,000 for the fiscal year
ended June 30, 1994. This increase is primarily the result of more effective
marketing of the Company's new MS-Windows based software, including the new
"Projects for the Real WorldTM" courseware. Additionally, the Company
experienced success with proprietary Courseware sales through its newly
introduced catalog sales division. Services and other revenues decreased
$1,311,000 or 50 percent to $1,308,000 for the fiscal year ended June 30, 1995
from $2,619,000 for the fiscal year ended June 30, 1994. Of this, $761,000 is
the result of the Company eliminating, except in limited situations, computer
hardware for sale along with its Courseware. Support renewal revenues decreased
$385,000 to $845,000 at June 30, 1995 from $1,230,000 in fiscal 1994. This
decrease is primarily the result of the Company lowering its annual customer
support renewal fee.
Gross margins increased $3,631,000 to $3,682,000 at June 30, 1995 from
$51,000 at June 30, 1994. This increase is primarily the result of increased
software sales, significantly reduced low margin hardware sales, lower training
costs and reduced amortization of courseware development costs as result of the
Company writing off a substantial portion of its deferred MS-DOS based
courseware costs during fiscal year 1994. The gross margin as a percent of
revenue increased 66 percent to 67 percent for the fiscal year ended June 30,
1995 from 1 percent for the fiscal year ended June 30, 1994. The gross margin as
a percent of revenue for service and other revenues increased $81,000 to
$486,000 or 37 percent for the fiscal year ended June 30, 1995 from $405,000 or
15 percent for the fiscal year ended June 30, 1994. This increase was due to a
reduction in training costs and significantly reduced low margin hardware sales.
Operating expenses decreased by 15 percent or $501,000 to $2,749,000
for the fiscal year ended June 30, 1995 from $3,251,000 for the fiscal year
ended June 30, 1994. Of this, $382,000 is a decrease in sales and marketing
expenses. This decrease is primarily the result of the reduction of the
Company's internal sales representatives and lower selling costs associated with
direct sales. The Company's sales effort has shifted to independent sales
representatives and dealers. General and administrative expenses decreased
$202,000 to $1,450,000 at June 30, 1995 from $1,652,000 at June 30, 1994. This
decrease is due primarily to reduced personnel in finance and administration as
well as technical support. The Company's research and development costs
increased by $82,000 due to the Company expensing a larger percentage of
courseware development costs.
Operating income increased by $4,133,000 to income of $933,000 for the
fiscal year ended June 30, 1995 from a loss of $3,200,000 for the fiscal year
ended June 30, 1994.
<PAGE>
Net interest expense increased by $11,000 to $756,000 for the fiscal year
ended June 30, 1995 from $745,000 for the fiscal year ended June 30, 1994. This
increase was primarily the result of interest on higher debt levels, including
interest accrued on convertible subordinated debentures and interest on
$5,500,000 of related party debt. Effective June 30, 1995, all related party
debt was converted into a combination of Series C non-convertible preferred
stock and common stock. Additionally, in this transaction over $1.0 million in
accrued, unpaid interest, was forgiven and recognized as an extraordinary gain
on the fiscal year ended June 30, 1995 income statement.
The net income for the Company increased $4,575,000 during the fiscal year
ended June 30, 1995 to income of $1,219,000 from a loss of ($3,356,000) for the
fiscal year ended June 30, 1994.
The following are explanations of significant period to period changes for
the nine months ended March 31, 1996 and 1995.
Revenue for the nine months ended March 31, 1996 of $2,498,000 decreased
$1,222,000 or 33 percent, compared to the nine months ended March 31, 1995.
Revenue from courseware license rights decreased by $843,000 or 31 percent to
$1,874,000 for the nine months ended March 31, 1996 from $2,717,000 for the nine
months ended March 31, 1995.
This decrease is primarily attributable to the reorganization and
enlargement of the Company's sales force. The Company has shifted from a
combination of a direct sales force and dealers to exclusively dealers and has
built a network comprised of over 30 dealers with approximately 80-90 total
representatives marketing the Company's products. During the first half of
fiscal year 1996, the Company focused on putting into place and training these
dealer organizations. Due to the time involved in training the dealers and the
relatively long sales lead times in the industry (6-9 months), sales levels
declined. Additionally, the overall market was very sluggish during the nine
months as schools with Chapter I money available seemed reluctant to commit
these funds. Services and other revenues decreased $378,000 or 38 percent to
$624,000 for the nine months ended March 31, 1996 from $1,002,000 for the nine
months ended March 31, 1995. Of this decrease, $101,000 is the result of lower
text and consumable sales which resulted from the lower courseware sales.
Customer support renewal revenues decreased $284,000 to $398,000 at March 31,
1996 from $682,000 at March 31, 1995. This decrease is primarily the result of
the Company lowering its annual customer support renewal fee, with a
corresponding reduction in the support requirements for the renewal contracts.
This decrease was partially offset by an increase in other related service
revenues.
Gross margins decreased by $566,000 or 31 percent to $1,264,000 for the
nine months ended March 31, 1996 from $1,830,000 for the nine months ended March
31, 1995. This decrease is primarily the result of lower overall sales.
Operating expenses increased by 37 percent or $488,000 to $1,815,000 for
the nine months ended March 31, 1996 from $1,327,000 for the nine months ended
March 31, 1995. General and administrative expenses increased $378,000 or 59
percent to $1,024,000 for the nine months ended March 31, 1996 from $646,000 at
March 31, 1995. This increase was primarily due to an increase in legal fees due
to litigation as discussed below and accruals made for certain key employee
incentive programs. Sales and marketing expenses increased $135,000 or 32
percent to $563,000 for the nine months ended March 31, 1996 from $428,000 for
the nine months ended March 31, 1995. This increase is primarily the result of
the increased effort during the first nine months of fiscal year 1996 to
establish and train the dealer network. Additionally, dealer commissions were
reclassified from cost of good sold to sales and marketing expense.
Operating income decreased by $1,054,000 to a deficit of $551,000 for the
nine months ended March 31, 1996 compared to operating income of $503,000 for
the nine months ended March 31, 1995.
During the nine months ended March 31, 1996 the Company recognized other
income of $70,000 relating to a litigation settlement involving an outside
development firm which was under contract to port certain of the Company's
windows products to certain Microsoft and a Macintosh platforms, the latter of
which was not performed.
<PAGE>
Net interest expense decreased by $607,000 to $122,000 for the nine months
ended March 31, 1996 from $729,000 for the nine months ended March 31, 1995.
This decrease is primarily the result of the debt to equity conversion which was
effective on June 30, 1995, wherein, $5,500,000 in related party debt was
exchanged for a combination of 5,300,000 shares of Series C Non-convertible
Redeemable Preferred Stock and 1,666,666 shares of common stock.
Liquidity and Capital Resources:
The Company ended June 30, 1995 with liquid assets (cash, accounts
receivable and contract receivable) of $1,744,000, an increase of 14 percent or
$212,000 from June 30, 1994 when liquid resources were $1,532,000. Accounts
receivable increased $362,000 or 28 percent to $1,648,000 at June 30, 1995 from
$1,286,000 at June 30, 1994. This increase was the result of increased sales in
the fourth quarter of the fiscal year ended June 30, 1995. Cash decreased by
$130,000 primarily due to the more timely payments of commissions made to
independent sales representatives during this fiscal year, versus the delayed
payments made last fiscal year to direct sales representatives.
At March 31, 1996, the Company had liquid resources (cash and accounts
receivable) of $1,133,000, a decrease of 35 percent or $611,000 from June 30,
1995 when liquid resources were $1,744,000. Cash increased $92,000 primarily as
a result of efforts to collect outstanding accounts receivable. Accounts and
contract receivables decreased $704,000 or 42 percent to $964,000 primarily due
to the lower overall sales level.
Current assets increased by $129,000 or 7 percent to $1,868,000 at June
30, 1995 from $1,739,000 at June 30, 1994. This increase was the result of a
$362,000 increase in accounts receivable discussed above which was partially
offset by a decrease of $233,000 in cash, inventory and other current assets.
Current assets decreased by $632,000 or 34 percent to $1,236,000 at
March 31, 1996 from $1,868,000 at June 30, 1995. This decrease was primarily the
result of a $704,000 decrease in accounts receivable, with an offsetting
increase in cash of $92,000.
The increase in long-term assets of $242,000 or 5 percent, to
$4,733,000 at June 30, 1995 from $4,491,000 at June 30, 1994 was due primarily
to an increase in courseware development costs of $436,000 net of amortization.
Fixed assets declined of $173,000 due primarily to normal depreciation of fixed
assets.
Long-term assets as of March 31, 1996 were $4,368,000 compared to
$4,733,000 at June 30, 1995. This decrease was primarily the result of increased
amortization and a lower level of courseware development costs being
capitalized.
Current liabilities decreased by $6,347,000 to $1,237,000 at June 30,
1995 from $7,584,000 at June 30, 1994. Of this decrease, $5,500,000 resulted
from the conversion of related party debt to a combination of Series C
non-convertible preferred stock and common stock. Additionally, in this
transaction over $1.0 million in accrued, unpaid interest, was forgiven and
recognized as an extraordinary gain in the fiscal year ended June 30, 1995
income statement. This transaction was the primary reason for the net decrease
in both accounts payable and accrued interest payable to related parties of
$687,000. Deferred revenue decreased primarily as a result of the Company
lowering its annual renewal fee charged in fiscal year 1995.
Current liabilities of the Company increased by $803,000 to $2,040,000
at March 31, 1996 from 1,237,000 at June 30, 1995. Of this increase, $1,197,000
is the change in classification of the convertible subordinated debentures from
long-term to short-term liabilities. Accounts payable decreased $115,000 as a
result of an effort to pay vendors within the agreed payment terms. Other
accrued liabilities decreased $213,000 primarily as a result of the payment
during the nine months of commissions and tax liabilities that were accrued as
of June 30, 1995.
<PAGE>
Effective June 30, 1995, the Company converted all related party debt
totaling $5,500,000 as discussed above. (See Note 3 to the Financial
Statements.)
The Company's working capital balance increased by $6,476,000 to a positive
position of $631,000 at June 30, 1995 from a deficit balance of $5,845,000 at
June 30, 1994. This increase is primarily the result of the conversion of
$5,500,000 related party debt into equity and a corresponding net decrease in
accounts payable and accrued interest payable to related parties of $687,000.
Liquid assets (cash, accounts receivable and contract receivable) of the Company
increased by $212,000 during the fiscal year ended June 30, 1995.
The Company's working capital decreased by $1,435,000 from $631,000 at June
30, 1995 to a deficit of $804,000 at March 31, 1996. This decrease is primarily
the result of the change in classification of the convertible subordinated
debentures from long-term to short-term liabilities and lower accounts
receivable.
Stockholders' equity increased by $6,719,000 to a positive equity position
of $4,167,000 at June 30, 1995 from a deficit of $2,552,000 at June 30, 1994.
This increase is primarily the result of the conversion of $5,500,000 of related
party debt to a combination of Series C non-convertible preferred stock and
common stock, and net income of $1,219,000.
Stockholders' equity decreased by $602,000 to $3,565,000 at March 31, 1996
from $4,167,000 at June 30, 1995 due to the $602,000 net loss for the nine month
period.
In the opinion of management, debt and equity capital resources should be
increased for the Company to fully pursue its goals in the next twelve months.
The Company is addressing the need for longer-term growth capital by pursuing
new sources of investment funding. Additionally, the Company has secured a
source for its short-term working capital needs through an accounts receivable
financing arrangement. While management believes that the Company can continue
its current operating strategy without additional funding, cash flows are
difficult to forecast accurately. Therefore, there can be no assurance that
additional capital will not be required, nor that it will be available on terms
which are acceptable to the Company. The Company has $1,197,000 of convertible
subordinated debentures that are due on July 31, 1997. Funds from operations may
not be adequate to repay these debentures. Should the Company not have available
funds to repay these debentures it will pursue an extension of the due date.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Wasatch Education Systems Corporation:
We have audited the accompanying balance sheet of Wasatch Education Systems
Corporation as of June 30, 1995 and the related statements of operations,
stockholders' equity and cash flows for each of the two years in the period
ended June 30, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Wasatch Education Systems
Corporation at June 30, 1995 and the results of its operations and its cash
flows for each of the two years in the periods ended June 30, 1995 in conformity
with generally accepted accounting principles.
/s/ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
August 4, 1995
<PAGE>
<TABLE>
<CAPTION>
Financial Statements
Wasatch Education Systems Corporation
Balance Sheet
Assets June 30, March 31,
1995 1996
(Unaudited)
------------------- -----------------
<S> <C> <C>
Current assets:
Cash $ 76,151 $ 168,481
Accounts receivable, net of allowance for doubtful accounts of $15,000 1,648,105 964,295
Contract receivable 20,079 -
Inventories 75,187 68,238
Other current assets 48,176 35,293
------------------ -----------------
Total current assets 1,867,698 1,236,307
Equipment, furniture and fixtures, net of accumulated
depreciation of $659,211 and $629,129, respectively 283,696 243,438
Courseware development costs, net of accumulated
amortization of $1,101,567 and $1,836,407, respectively 4,411,391 4,086,471
Other assets, net 38,333 38,333
=================== =================
Total assets $6,601,118 $5,604,549
=================== =================
Liabilities and stockholders' equity Current liabilities:
Convertible subordinated debentures $ - $1,197,000
Accounts payable 316,012 201,077
Accrued employee costs 193,190 299,268
Other accrued liabilities 360,625 55,273
Deferred revenue 367,234 287,202
------------------- -----------------
Total current liabilities 1,237,061 2,039,820
------------------- -----------------
Convertible subordinated debentures 1,197,000 -
------------------- -----------------
Commitments (Note 5)
Stockholders' equity:
Preferred stock, 20,000,000 shares authorized:
Series A convertible redeemable, 4,439,870 and $4,429,870 shares outstanding,
$4,439,870 and $4,429,870 involuntary liquidation value, respectively 4,665,724 4,665,724
Series B $.375 cumulative convertible redeemable, 91,151 shares
outstanding, $158,254 involuntary liquidation value 118,496 118,496
Series C redeemable, 5,300,000 shares outstanding,
$5,300,000 preferred liquidation value 5,300,000 5,300,000
Common stock, no par value; 200,000,000 shares authorized,
3,569,229 and 3,579,229shares outstanding, respectively 11,744,072 11,754,072
Accumulated deficit (17,661,235) (18,263,563)
------------------- -----------------
Total stockholders' equity 4,167,057 3,564,729
------------------- -----------------
Total liabilities and stockholders' equity $ 6,601,118 $ 5,604,549
=================== =================
The accompanying notes are an integral part of these balance sheets.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Wasatch Education Systems Corporation
Statements of Operations
Nine months Nine months Fiscal year Fiscal year
ended March 31, ended March 31, ended June 30, ended June 30,
1996 1995 1995 1994
(Unaudited) (Unaudited)
----------------- --------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Revenue:
Courseware license rights $ 1,873,516 $ 2,717,406 $ 4,167,357 $ 3,316,997
Services and other 624,194 1,002,286 1,307,824 2,618,997
----------------- --------------- ------------------ ----------------
2,497,710 3,719,692 5,475,181 5,935,092
----------------- --------------- ------------------ ----------------
Cost of revenue:
Courseware license rights 771,132 654,802 970,986 3,670,111
Services and other 462,939 1,235,026 822,202 2,214,154
----------------- --------------- ------------------ ----------------
1,234,071 1,889,828 1,793,188 5,884,265
----------------- --------------- ------------------ ----------------
Gross margin 1,263,639 1,829,864 3,681,993 50,827
----------------- --------------- ------------------ ----------------
Operating expenses:
General and administrative 1,023,588 654,943 1,425,985 1,652,185
Sales and marketing 563,054 427,978 989,442 1,371,874
Research and development 228,116 252,965 309,358 227,266
----------------- --------------- ------------------ ----------------
1,814,758 1,326,886 2,724,785 3,251,325
----------------- --------------- ------------------ ----------------
Income (loss) from operations (551,119) 502,978 957,208 (3,200,498)
Other income 70,000 - - -
Interest expense, net of interest income (121,209) (728,514) (755,761) (744,988)
----------------- --------------- ------------------ ----------------
Income (loss) before income taxes and extraordinary items (602,328) (225,536) 201,447 (3,945,486)
Income tax benefit (provision) - - (4,029) 189,176
----------------- --------------- ------------------ ----------------
Income (loss) before extraordinary items (602,328) (225,536) 197,418 (3,756,310)
Extraordinary items, forgiveness of accrued interest and
forgiveness of debt, net of income tax (provision) benefit
of ($20,163) and $189,176, respectively - - 1,021,238 400,182
----------------- --------------- ------------------ ----------------
Net income (loss) (602,628) (225,536) 1,218,656 (3,356,128)
Unpaid and undeclared preferred stock dividends (13,368) (13,368) (34,182) (56,684)
================= =============== ================== ================
Net income (loss) attributable to common stockholders $ (615,966) $ (239,174) $ 1,184,474 $ (3,412,812)
================= =============== ================== ================
Primary income (loss) per common share:
Income (loss) before extraordinary items (.17) (.13) $ .03 $ (2.00)
Extraordinary items - - .16 .21
================= =============== ================== ================
Net income (loss) $ (.17) $ (.13) $ .19 $ (1,79)
================= =============== ================== ================
Fully dilutive income (loss) per common share:
Income (loss) before extraordinary items $ (.17) $ (.13) $ .04 $ (2.00)
Extraordinary items - - .08 .21
================= =============== ================== ================
Net income (loss) $ (.17) $ (.13) $ .12 $ (1.79)
================= =============== ================== ================
Weighted average common and common
equivalent shares outstanding
Primary 3,573,323 1,907,563 6,347,012 1,902,563
Fully dilutive 3,573,323 1,907,563 12,299,683 1,902,563
================= =============== ================== ================
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Wasatch Education Systems Corporation
Statements of Stockholders' Equity
For the Fiscal Years Ended June 30, 1994 and 1995,
And the Nine Months Ended March 31, 1996
(Dollars in thousands)
Series A Series B Series C Total
Preferred Stock Preferred Stock Preferred Stock Common Stock Stock-
--------------------------------------------------------------------------- Accumulated holders
Shares Amount Shares Amount Shares Amount Shares Amount Deficit Equity
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1993 2,875,546 $2,814 1,592,521 $1,460 - $ - 1,902,563 $11,544 $(15,524) $ 295
Issuance of Series A convertible
preferred stock, net of 659,980 510 509
issuance costs of $152,634
Conversion of Series B to Series
A convertible preferred stock 904,344 1,342 (1,501,370) (1,342)
Net loss (3,356) (3,356)
-------------------------------------------------------------------------------------------------
Balance at June 30, 1994 4,439,870 4,666 91,151 118 - - 1,902,563 11,544 (18,880) (2,552)
Issuance of Series C preferred
stock in conversion of debt to 5,300,000 5,300 5,300
equity
Issuance of common stock in
conversion of debt to equity 1,666,666 200 200
Net income 1,219 1,219
-------------------------------------------------------------------------------------------------
Balance at June 30, 1995 4,439,870 $4,666 91,151 $ 118 5,300,000 $5,300 3,569,229 $11,744 $(17,661) $4,167
Conversion of Series A preferred
stock into common stock (10,000) (10) 10,000 10 -0-
Net Loss (15) (15)
=================================================================================================
Balance at March 31, 1996 4,429,870 $4,656 91,151 $ 118 5,300,000 $5,300 3,579,229 $11,754 $(17,676) $ 4,182
=================================================================================================
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Wasatch Education Systems Corporation
Statements of Cash Flows
Nine months Nine months Fiscal year Fiscal year
ended March 31, ended March 31, ended June ended June
1996 1995 30, 1995 30, 1994
(Unaudited) (Unaudited)
---------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (602,328) $ (225,536) $ 1,218,656 $(3,356,128)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 873,973 752,735 1,036,922 1,482,963
Write-off of courseware development costs - - - 2,116,562
Extraordinary gains from forgiveness of debt and accrued
interest - - (1,041,581) (589,359)
Increase (decrease) in cash from:
Accounts and contract receivable 703,889 438,428 (341,873) (159,006)
Inventories (6,950) 8,686 29,990 62,360
Other current assets 12,844 68,054 52,938 61,616
Accounts payable (114,935) (216,480) (227,360) 315,140
Accrued interest payable to related parties - 608,990 - -
Accrued liabilities (199,274) (234,790) 541,572 (185,839)
Deferred revenue (80,032) (155,247) (119,618) 55,674
---------------- ----------------- --------------- -------------
Net cash provided by (used in) operating activities 587,227 1,044,842 1,149,646 (196,017)
---------------- ----------------- --------------- -------------
Cash flows from investing activities:
Purchase of equipment, furniture and fixtures (84,976) (19,405) (30,346) (95,307)
Additions to courseware development costs (409,920) (1,137,664) (1,269,193) (2,455,070)
Decrease in other assets - - 20,000 108,270
---------------- ----------------- --------------- -------------
Net cash used in investing activities (494,896) (1,157,069) (1,279,539) (2,442,107)
---------------- ----------------- --------------- -------------
Cash flows from financing activities:
Net borrowings under notes payable to related parties - - - 2,207,284
Proceeds from issuance of Series A preferred stock, net of
issuance costs of $152,634 - - - 509,665
---------------- ----------------- --------------- -------------
Net cash provided by financing activities - - - 2,716,949
---------------- ----------------- --------------- -------------
(Decrease) increase in cash 92,331 (112,227) (129,893) 78,825
Cash at beginning of year 76,150 206,043 206,043 127,218
================ ================= =============== =============
Cash at end of year $ 168,481 $ 93,816 $ 76,150 $ 206,043
================ ================= =============== =============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 121,715 $ 121,706 $ 161,595 $ 658,054
================ ================= =============== =============
Cash paid for income taxes $ 13,856 $ - $ 2,326 $ 11,131
================ ================= =============== =============
Supplemental disclosure of noncash investing and
financing activities:
Conversion of Series B preferred stock to series A
preferred stock $ - $ - $ - $ 1,342,097
================ ================= =============== =============
Issuance of Series C preferred stock in conversion of debt to
equity $ - $ - $5,380,000 $ -
================ ================= =============== =============
Issuance of common stock in conversion of debt to equity $ - $ - $ 200,000 $ -
================ ================= =============== =============
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
Wasatch Education Systems Corporation
Notes to Financial Statements
Note 1 DESCRIPTION OF BUSINESS
Wasatch Education Systems Corporation (the "Company") develops and
markets computer-aided instructional systems for the pre-school, elementary,
high school, secondary adult education and home school markets. Schools utilize
the Company's products to offer students self-paced, individualized courses in
reading, writing, science, mathematics, life skills and high school equivalency
("GED") test preparation. The Company grants credit to customers, substantially
all of whom are school districts located within the United States.
Effective June 30, 1995 an agreement with one of the Company's founding
investors was finalized, wherein $5.5 million in debt was exchanged for a
combination of Series C non-convertible preferred stock and common stock.
In addition to these financing arrangements, the Company has taken and
will continue to take action to improve profitability. Since June 30, 1992, the
Company's new management team has substantially revised the Company's strategic
direction. The Company has restructured its sales and training departments,
established relationships with outside dealer organizations and has plans to
expand more rapidly into the catalog and adult education markets as well as
continuing to emphasize the school market. Management has taken steps to
significantly reduce operating costs by reducing headcount, revising software
development plans to reduce development costs and the time to market for new
products, and renegotiating development contracts with outside developers. The
Company is subject to a number of risks associated with companies in a similar
stage of operations including dependence on key individuals, potential
competition from larger and more established companies and the need to maintain
adequate sources of financing.
Note 2 SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Company recognizes revenue in accordance with the provisions of
Statement of Position No. 91-1, "Software Revenue Recognition."
The Company sells computer educational software systems consisting of
license rights to proprietary courseware, instructional materials,
nonproprietary software and third party vendor software. Customer training and
support and software updates are usually included with licenses of initial
systems. In addition to selling computer education systems to new customers, the
Company receives revenue from annual fees for customer training, support,
maintenance, and software updates, as well as from ongoing sales of consumables.
Revenue from the initial sale of computer education systems to customers is
recognized on the date of shipment while revenue relating to training and
support, which is based on the fair value of such services, is deferred and
recognized when post contract support services have been performed, generally
within one year.
Revenue related to customer support and software maintenance renewals is
recognized over the period such services are provided. Revenue related to the
sale of instructional material is recognized when the material is shipped.
<PAGE>
Note 2 SIGNIFICANT ACCOUNTING POLICIES (continued)
Cash and Cash Equivalents
As of June 30, 1995 and March 31, 1996, the Company had demand deposits and
money market accounts totaling $138,000 and $168,000, respectively with First
Interstate Bank Corporation. These balances exceed the $100,000 limit for
insurance by the Federal Deposit Insurance
Corporation.
Inventories
Inventories, consisting primarily of finished goods, are recorded at the
lower of cost (first-in, first-out method) or market value and include
courseware, textual materials and third party computer software.
Equipment, Furniture and Fixtures
Equipment, furniture and fixtures are recorded at cost. Major additions and
improvements are capitalized, while minor replacements, maintenance and repairs
that do not increase the useful lives of the property are expensed as incurred.
Depreciation is provided using the straight-line method over the
estimated useful lives of the property, which range from three to five years.
Courseware Development Costs
Courseware development costs incurred subsequent to establishment of
technological feasibility are capitalized in the accompanying balance sheets.
Technological feasibility for the Company's computer courseware products is
based upon achievement of a detailed program design free of high-risk
development issues. The establishment of technological feasibility and the
ongoing assessment of recoverability of capitalized courseware development costs
require considerable judgment by management with respect to certain external
factors, including, but not limited to, anticipated future gross revenues,
estimated economic life and changes in technology. For the fiscal year ended
June 30, 1995 and the nine months ended March 31, 1996, the Company invested
approximately $2,455,000 and $410,000, respectively, in the development of
several new product lines, some of which began shipping during the fiscal year
ended June 30, 1995. The Company has approximately $1,224,000 of unamortized
costs related to current year products. No interest was capitalized during the
fiscal years ended June 30, 1995 and the nine months ended March 31, 1996.
Amortization of capitalized courseware development costs begins when the
courseware is first sold and is calculated using the straight-line method over
five years, the estimated economic lives of the products. Amortization expense
for the fiscal years ended June 30, 1995 and the nine months ended March 31,
1996 was approximately $834,000 and $735,000, respectively. As of September 1,
1993, the Company determined that the appropriate economic useful life for its
products was five years as opposed to three years previously used. Accordingly,
the Company prospectively revised the remaining lives of its products from three
to five years. This revision caused the reported loss for fiscal year ended June
30, 1994 to be less than it otherwise would have been by approximately $240,000,
after the effects of income taxes.
<PAGE>
Note 2 SIGNIFICANT ACCOUNTING POLICIES (continued)
Income (Loss) Per Common Share
Primary income per common share is computed by dividing net income (loss)
by the weighted average number of shares of common stock and common stock
equivalents outstanding during the year. For purposes of primary income (loss)
per common share, common stock equivalents include shares issuable upon
conversion of the Company's convertible preferred stock but exclude outstanding
stock, warrants and options. Fully diluted income (loss) per common share is
computed based on the weighted average number of shares of common stock and
common stock equivalents outstanding during the year and include the shares
issuable upon conversion of the Company's convertible preferred stock and the
exercise of all dilutive warrants and options outstanding.
Interim Results (Unaudited)
The accompanying balance sheet at March 31, 1996, the statements of
operations and cash flows for the nine months ended March 31, 1996 and the
statement of stockholders' equity for the nine months ended march 31, 1996 are
unaudited. In the opinion of management, these statements have been prepared on
the same basis as the audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
statement of the results of the interim periods. The data disclosed in the notes
to financial statements for these periods are also unaudited. Results for the
unaudited nine month period ended March 31, 1996 are not necessarily indicative
of the results to be expected for the Company's full fiscal year.
Note 3 DEBT
The Company completed two private placements of convertible subordinated
debentures during 1990 and received a total of $3,670,000. Such debentures are
redeemable by the Company upon not less than 30 days nor more than 60 days
written notice. Interest is payable each March, June, September and December.
The debentures were convertible into Common Stock of the Company during April
1993 and 1994 at conversion prices of either $19.50 or $21.60 per share, however
no such conversions took place. The debentures are subordinated to all present
and future debt of the Company. At June 30, 1995 and March 31, 1996 (Unaudited),
$1,197,000 of the debentures remain outstanding. The debentures, originally due
July 1, 1995, have been extended to July 31, 1996. The extension was ratified by
the 66 2/3 percent majority vote required by debenture holders.
On July 1, 1993, the Company negotiated settlement with a vendor for full
discharge of an outstanding obligation of $533,228. Under the terms of this
agreement, the Company was required to pay $50,000 in five monthly installments
of $10,000 each beginning August 1, 1993. The $483,228 difference between the
liability discharge and the settlement (net of $155,000 of income taxes) was
recognized as an extraordinary gain in the fiscal year 1994 financial
statements.
On January 12, 1994, the Company negotiated a settlement with a vendor for
full discharge of an outstanding obligation totaling $106,130. The discharge of
the outstanding obligation (net of $34,068 of income taxes) was recognized as an
extraordinary gain in the fiscal year 1994 financial statements.
Effective June 30, 1995, an agreement with certain of the Company's
principal stockholders was finalized wherein $5.5 million in debt was exchanged
for a combination of 5,300,000 shares of Series C redeemable Preferred Stock and
1,666,666 shares of Common Stock. The Series C Redeemable Preferred Stock was
exchanged at a price of $1 per share and the Common Stock was exchanged at a
price of $.12 per share. Certain warrants were issued and amended in connection
with the conversion (see Note 6). Additionally, $1,041,401 of accrued interest
was forgiven resulting in extraordinary income for the fiscal year ended June
30, 1995.
<PAGE>
Note 4 INCOME TAXES
Effective July 1, 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." SFAS No.
109 requires the use of the liability method for financial reporting purposes
which differs from the deferred method previously required by generally accepted
accounting principles. The adoption of SFAS No. 109 had no effect on the
Company's financial statements since a valuation allowance has been provided
against all deferred tax assets. The provision for income taxes for the year
ended June 30, 1995 includes the following components:
Current tax provision:
Federal $371,000
State 69,000
------------
440,000
------------
Deferred tax provision:
Federal 22,000
State 4,000
------------
26,000
------------
466,000
Less benefit from utilization of
net operating loss carryforward (442,000)
------------
24,000
Less provision related to
extraordinary items (20,000)
------------
Provision for income taxes $ 4,000
============
<PAGE>
The components of deferred tax assets as of June 30, 1995 and March 31,
1996 are as follows:
June 30, March 31,
1995 1996
----------------------------
Tax net operating loss $4,372,000 $4,581,000
Revenue deferred for
financial reporting 140,000 109,000
Reserves and accrued
liabilities 41,000 85,000
----------------------------
Total deferred tax assets 4,553,000 4,775,000
Valuation allowance (4,553,000) (4,775,000)
----------------------------
Net deferred tax assets $ - $ -
============================
As of June 30, 1995, the Company has available net operating losses for
Federal income tax purposes and financial reporting purposes of approximately
$11,506,000 and $13,681,000, respectively. The tax net operating losses will
begin expiring in 2004. Net operating losses for tax purposes differ from net
operating losses for financial reporting purposes primarily as a result of the
accounting treatment for accrued liabilities and deferred revenue.
The following table summarizes the appropriate net operating losses
available to the Company for Federal income tax purposes.
Year Expiration
of Loss Amount Date
---------- ----------- -----------
12/31/1989 $ 2,488,000 12/31/2004
12/31/1990 1,428,000 12/31/2005
12/31/1991 3,857,000 12/31/2006
6/30/1992 2,849,000 6/30/2007
6/30/1993 341,000 6/30/2008
6/30/1994 543,000 6/30/2009
-----------
Total tax net operating loss carryforwards $11,506,000
Certain of these net operating losses may be limited by ownership
changes which occurred on August 17, 1988, and June 30, 1993 based on Section
382 of the Internal Revenue Code.
<PAGE>
Note 5 COMMITMENTS
The Company leases its facilities and certain equipment under noncancelable
operating leases. As of June 30, 1995, the minimum future rentals to be paid
under the leasing arrangements amounted to $93,000, $15,000, and $4,000 for the
years ending June 30, 1996, 1997 and 1998, respectively. The Company's
facilities lease expires on March 31, 1996. Rent expense was $142,000 and
$166,000 for the fiscal years ended June 30, 1995 and 1994, respectively.
During 1990, the Company signed a contract with Education Testing Service
("ETS") which required the Company to develop curricula to help facilitate the
passing of the National Teachers Exam. The contract required ETS to fully fund
up to $2,000,000 of the development costs for the program. Costs in excess of
$2,000,000 and less than $3,669,000 would be partially funded by the Company and
costs exceeding $3,669,000 would be totally funded by the Company. The Company
will owe ETS a royalty for all of the product sold by the Company. The Company
will receive a royalty for all of the product sold by ETS after ETS has
recovered its advance against royalties.
The Company has entered into several agreements which provide for royalty
payments by the Company based on net sales of certain software products. The
Company recognized royalty expense of $127,000 and $195,000 during the fiscal
years ended June 30, 1995 and 1994, respectively.
Note 6 STOCKHOLDERS' EQUITY
Series A Preferred Stock
Pursuant to a private offering memorandum dated May 5, 1993, the Company
issued 4,439,870 shares of Series A Convertible Redeemable Preferred Stock
("Series A Preferred Stock") to accredited investors and a limited number of
non-accredited investors at $1.00 per share; of which 1,121,500 shares were
issued for cash, 2,000,000 shares were issued for the conversion of related
party debt and 1,318,370 shares were issued for the conversion of Series B
Preferred Stock.
The Series A Preferred Stock is convertible at any time into Common Stock
at the conversion ratio of one Common Share for one Series A Preferred Share.
The Series A holder is not entitled to any dividends. Series B Preferred
Stockholders who converted to Series A waived their rights to any dividends upon
conversion. Series A Preferred Stock has no voting rights except in matters
directly related to the Series A Preferred Stock.
The Series A Preferred Stock is redeemable at any time or from time to time
by the Company upon 90 days prior written notice and payment to the holder of
$1.00 per share. Shareholders are entitled, at their option, to convert their
shares of Series A Preferred Stock into Common Stock of the Company prior to the
stated redemption date.
Upon the dissolution or liquidation of the Company, or upon any
distribution of its assets by way of return of capital, the holders of the
Series A Preferred Stock are entitled to receive and be paid an amount equal to
$1.00 per share before any sum shall be paid to, or any assets distributed
among, holders of Common Stock.
<PAGE>
Note 6. STOCKHOLDERS' EQUITY (continued)
Series B Preferred Stock
The Series B $.375 Cumulative Convertible Redeemable Preferred Stock
("Series B Preferred Stock") is convertible at any time into restricted Common
Stock of the Company at the conversion rate of one common share for each six
shares of Series B Preferred Stock. However, each share of Series B Preferred
Stock issued in exchange for the debentures which had a conversion privilege to
Common Stock at the rate of $19.50 per share (instead of the $21.60 per share
conversion rate which pertains to all other debentures) is entitled to convert
such shares of Series B Preferred Stock into Common Shares of the Company at the
rate of one Common Share for each five shares of Series B Preferred Stock. As of
June 30, 1995, only 91,151 shares of the Series B Preferred Stock remained
outstanding after the conversion of 1,866,534 shares to Series A Preferred
Stock. The Series B Preferred Stock has no voting rights except in matters
directly related to the Series B Preferred Stock.
The Series B Preferred Stock is redeemable at any time or from time to
time by the Company upon 90 days prior written notice and payment to the holder
of $1.30 per share, together with the amount of accrued dividends accumulated on
such shares on the redemption date. Shareholders are entitled, at their option,
to convert their Series B Preferred Stock to Common Stock of the Company prior
to the stated redemption date.
The holders of the Series B Preferred Stock were entitled to receive
cumulative dividends thereon at the rate of $.2025 per annum for each share,
which rate increased to $.375 per annum per share effective June 1, 1994, for
all Series B Preferred Stock then outstanding, as and when declared by the Board
of Directors. The Company has the option to pay these dividends to shareholders
who elect to convert their Series B Preferred Shares to Common Shares, in cash,
Common Stock or any combination of cash and Common Stock.
At June 30, 1995, accumulated unpaid dividends on Series B Preferred
Stock were $90,866. In accordance with the Company's Articles of Incorporation,
the Company may only declare and pay dividends out of unreserved and
unrestricted surplus. Surplus is the excess of the net assets of a corporation
over its stated capital. At June 30, 1995, no dividends have been declared or
paid as the Company had an accumulated deficit of $17,661,235.
Upon the dissolution or liquidation of the Company, or upon any
distribution of its assets by way of return of capital, the holders of the
Series B Preferred Stock shall be entitled to receive and be paid an amount
equal to $1.30 per share, plus all unpaid accumulated dividends thereon, without
interest, before any sum shall be paid to or any assets distributed among the
holders of the Common Stock.
Series C Preferred Stock
The Series C Redeemable Preferred Stock ("Series C Preferred Stock") has a
par value of $1 per share, has no voting rights and is not convertible into
shares of Common Stock or other preferred stock. Effective June 30, 1995
5,300,000 shares of Series C Preferred Stock are reflected as outstanding,
although the physical certificates will be issued subsequent to that date. The
holders of Series C Preferred Stock are entitled to receive dividends at the
rate of $.10 per annum for the first five years subsequent to June 30, 1995.
However, during this first five year period, dividends shall not be cumulative
and shall be payable when and if declared by the Board of Directors. After the
expiration of five years, dividends shall accrue on a cumulative basis and must
be declared, set apart and paid in each ensuing year before payment of any
dividends on Series A Preferred Stock, Series B Preferred Stock or Common Stock.
<PAGE>
Note 6 STOCKHOLDERS' EQUITY (continued)
The dividends that accrue on a cumulative basis will do so at a rate that
increases from the initial $.10 per annum by the sum of (1) $.02 per share plus
(2) $.02 per share multiplied by the difference between the number of one year
periods elapsed since June 30, 1995 and the number of annual dividends of at
least $.10 per share which were in fact paid during the first five years after
June 30, 1995.
The Company has the right to redeem its Series C Preferred Stock at any
time by paying the redemption price as defined in the stock purchase agreement,
which is $1.10 per share during the first year subsequent to June 30, 1995.
Thereafter, this redemption price is adjusted each year by adding to the
previous redemption price an amount equal to (1) $.10 per share plus (2) $.01
per share multiplied by the difference between the number of years elapsed since
June 30, 1995 and the number of annual dividends paid in an amount of at least
$.10 per share during the first five years after June 30, 1995, plus (3) an
amount equal to all accrued and unpaid dividends.
Upon the dissolution or merger of the Company, holders of the Series C
Preferred Stock are entitled to receive an amount equal to the redemption price
which was in effect prior to the commencement of the current year before any
amounts are paid to the holders of Series A Preferred Stock, Series B Preferred
Stock or Common Stock. For the first year subsequent to June 30, 1995, the
liquidation preference is $1 per share.
Stock Warrants
The following table summarizes warrants outstanding at June 30, 1995.
Warrants Outstanding at
June 30, 1995 Expiration Dates Exercise Price
- ------------------------ ------------------- --------------
103,173 12/31/94 - 12/31/96 $4.20 - $9.00
381,680 6/30/2000 $1.31
775,714 8/31/98 $.50
3,773,092 6/30/2000 $.50
- -------------------------
5,033,659
=========================
During the fiscal year ended June 30, 1994, the Company issued warrants
to purchase 600,000 shares of Common Stock at a price of $.50 per share in
connection with the extension of due dates on related party debt. In connection
with the exchange of debt for Series C Preferred Stock and Common Stock
discussed in Note 3, 489,490 additional warrants with an exercise price of $.50
per share were issued. Existing warrants totaling 3,665,082 with expiration
dates ranging from April 1997 through February 1999 were amended to extend the
expiration dates to June 30, 2000. The exercise price of all of these warrants
exceeded the fair market value of the Company's Common Stock as of their grant
dates.
<PAGE>
Note 6 STOCKHOLDERS' EQUITY (continued)
Stock Options
The following table summarizes stock option activity for all stock option plans
combined.
Fiscal Fiscal
Year ended Year ended
June 30, 1995 June 30, 1994
------------------ -----------------
Number of options:
Outstanding at the beginning
of the year 1,791,428 1,505,198
Granted - 1,661,000
Exercised - -
Canceled or expired (392,910) (1,374,770)
================= ==================
Outstanding at the end
of the year 1,398,518 1,791,428
================== ==================
Option price range per share:
Outstanding at the beginning
of the year $.50-$3.00 $.50-$3.00
Granted - $.50-$0.60
Exercised - -
Canceled or expired $.50-$3.00 $.50-$3.00
Outstanding at the end of the year $.50-$3.00 $.50-$3.00
The Company has granted nonqualified stock options to officers and
employees under the 1989 Stock Option Plan. On March 14, 1991, the Board of
Directors approved a repricing of all non-performance based options issued to
officers and employees with exercise prices in excess of $3.00 to be repriced to
$3.00, that all three part performance based options issued prior to March 14,
1991 be repriced to $3.00 and that the option agreement be amended to reflect an
eight year vesting schedule with one-eighth of the options vested at the end of
the first year and the remainder vesting monthly on a proportional basis. For
each profitable quarter, one-third of the options subject to the eight year
vesting will accelerate to a four year vesting beginning with the first day of
the profitable quarter. Certain performance options issued in 1988 were repriced
to $3.00 and amended to reflect an eight year vesting effective on the issue
date with one-sixth of the total accelerated to four years when any consecutive
three quarter period results in a 50% increase in cumulative gross profit over
the same three quarter period twelve months earlier.
On March 14, 1991, the Company issued 33,689 options to employees at a
price of $3.00 per share, with vesting according to the three part performance
plan discussed above. On the same date, the Company also issued 25,000 options
to an officer of the Company at a price of $3.00 per share, which is subject to
an eight year vesting with six performance triggers related to gross profit also
discussed above.
On January 12, 1994, the Company adopted the 1994 Executive Officer
Stock Option Plan (the "EOSO Plan") and reserved 1,750,000 shares of Common
Stock for issuance thereunder. A summary of the EOSO Plan is as follows:
<PAGE>
Note 6 STOCKHOLDERS' EQUITY (continued)
The EOSO Plan permits the granting of options that are intended to
qualify either as Incentive Stock Options ("ISOs") or Nonqualified Stock Options
("NQSOs"). The option exercise price for each ISO must be no less than 100% of
the "fair market value" (as defined in the EOSO Plan) of a share of Common Stock
at the time such option is granted (except in the case of a 10% stockholder, in
which case the exercise price must be no less than 110% of the fair market
value). The exercise price for each NQSO option is determined by the Committee
at the time of grant.
As of June 30, 1995, 1,190,000 options had been granted to officers and
directors. Of these, 1,020,000 options were granted at an exercise price of $.50
per share and 170,000 options were granted at an exercise price of $.60 per
share, which was the fair market value on the respective dates of grant. The
options for 1,020,000 shares of Common Stock were fully vested as of March 1994.
The options for 170,000 shares become exercisable as to 33 1/3 percent of the
total option shares at option grant date, and shall be exercisable as to an
additional 1/36th of the total option shares at each one month interval
thereafter until the option is exercisable with respect to 100% of the total
option shares. The option shall expire ten years from date of grant.
On January 12, 1994, the Company adopted the 1994 Employee Stock Option
Plan (the "ESOP Plan") and reserved 300,000 shares of Common Stock for issuance
thereunder. The ESOP Plan permits the granting of options that are intended to
qualify either as ISOs or NQSOs. The exercise price for each ISO option must be
no less than 100% of the "fair market value"(as defined in the ESOP Plan) of a
share of Common Stock at the time such option is granted (except in the case of
a 10% stockholder, in which case the exercise price must be no less than 110% of
the fair market value). The stock exercise price for each NQSO option is
determined by the Committee at the time of grant.
As of June 30, 1995, 81,000 options had been granted to employees at
$.60 per share, which was the fair market value at the date of grant. The
options become exercisable as to 25 percent of the total option shares at date
of grant, and shall be exercisable as to an additional 1/48th of the total
option shares at each one month interval thereafter until the option is
exercisable with respect to 100% of the total option shares. The options expire
ten years from date of grant.
The EOSO and ESOP Plans are administered by a committee of the Board (the
"Committee") consisting of at least two members of the Board who are
"disinterested persons" as that term is defined under the Securities and
Exchange Act. Subject to the terms of the EOSO and ESOP Plans, the Committee
determines the persons who are to receive options, the number of shares subject
to each option and the terms and conditions of such option. The Committee also
has the authority to construe and interpret any provisions of the EOSO and ESOP
Plans or any options granted thereunder.
Due to the lack of stockholder ratification, both the 1994 EOSO plan and
the 1994 ESOP plan lapsed. New EOSO and ESOP plans were adopted on September 30,
1995. These 1995 plans are identical to the 1994 plans in all respects. All
options granted under the 1994 plans were granted again under the 1995 plans,
with identical terms including a vesting schedule based on the original January
12, 1994 issuance date. Options were not granted to any employees who have left
the employment of the Company. Options granted to Officers and Directors under
the 1995 EOSO plan on September 1, 1995 were identical to those listed as
outstanding on June 30, 1995. Options granted to employees on September 1, 1995
were identical in terms as those outstanding as of June 30, 1995; however, the
number of options granted under the 1995 plan numbered only 56,000 compared to
81,000 options outstanding as of June 30, 1995, due to the termination of
certain employees.
<PAGE>
Note 7 401(k) PLAN
The Company adopted a 401(k) salary deferral plan (the "Plan") during
1990, covering substantially all employees. While the plan allows for Company
contributions, none were made during the fiscal years ended June 30, 1995 and
1994. The Company paid expenses on behalf of the Plan for 1995 and 1994 which
were nominal and included only administration costs.
Note 8 SIGNIFICANT CUSTOMERS
The Company sells its products and services almost exclusively to
school districts and other governmental organizations located across the
continental United States, principally in California, Illinois, Indiana,
Missouri and Texas. Historically, the Company has experienced a low level of
uncollectible accounts receivable and expects this trend to continue in the
future. During the fiscal years ended June 30, 1995 and 1994, ten percent or
more of the Company's revenues were generated from individual customers as
follows:
Fiscal year ended Fiscal year ended
June 30, June 30,
1995 1994
Sales to Customer A $291,000 $978,000
Percentage of Total Revenues 5% 18%
Sales to Customer B $721,000 $ -0-
Percentage of Total Revenues 13%
Note 9 SUBSEQUENT LICENSE AGREEMENT (UNAUDITED)
Effective September 30, 1995, the Company entered into a licensing agreement
with The Roach Organization, Inc., doing business as TRO Learning ("TRO"). The
license agreement grants TRO a world-wide, non-transferable, exclusive license
to distribute certain of the Company's products as part of the courseware system
marketed by TRO. The term of the agreement and the license is two years and one
month commencing September 30, 1995 and ending October 31, 1997. The Company
recognized income from a one-time licensing fee of $550,000 upon execution of
the agreement which is non-refundable. Additionally, TRO has guaranteed a
minimum royalty revenue to the Company of $800,000 for the period beginning
November 1, 1996 through June 30, 1997. The Company has no future obligations
with respect to service, support or product.
WASATCH EDUCATION SYSTEMS CORPORATION
87-0458433
(I.R.S. Employer Identification No.)
EXHIBIT INDEX:
10.61 Acquisition Agreement dated July 1, 1996 between the Company and
Wasatch Interactive Learning Corporation
99.B4 Notice of Dissenters' Rights.
99.B4 Dissenter's Rights Under Section 16-10a-1301 et seq. Utah Revised
Business Corporation Act.
Acquisition Commitment
This Acquisition Commitment (the "Commitment") is dated as of July 1,
1996, (the "Effective Date") by and between WASATCH EDUCATION SYSTEMS
CORPORATION, a Utah corporation (the "Seller"), and a new corporation ("Newco")
to be formed by BARBARA MORRIS, RALPH BROWN, and CAROL HAMIL (collectively, the
"Management Group").
RECITALS:
A. The Management Group are presently employed as senior officers of
Seller with responsibility for managing the business of Seller.
B. Newco is interested in licensing certain intellectual property
from Seller and in acquiring certain tangible and intangible
assets of the Seller (collectively the "Education Market
Assets"), to engage in the development, marketing, and sale of
education products in the Education Market (as defined below).
Seller will retain ownership rights in its intellectual property
(including existing products) to engage in development,
marketing, and sale of education products in the Home Market (as
defined below).
C. Seller and Newco intend that this Commitment shall constitute a
binding agreement subject only to the conditions specifically set
forth below.
NOW, THEREFORE, in consideration of the foregoing and the respective
covenants and agreements hereinafter contained, the parties hereto hereby agree
as follows:
1. Consent and Waiver; Exclusive Negotiation. Seller hereby ratifies
and confirms the Consent and Waiver of Conflicts of Interests (the "Consent and
Waiver") attached hereto as Exhibit A to this Commitment and Seller agrees that
the Consent and Waiver shall remain in full force and effect until the first to
occur of the following (the "Expiration Date"): (a) three (3) months from the
date hereof; or (b) notice from Newco to Seller that Newco is unable to complete
the purchase transaction contemplated by this Commitment. If Newco has made
reasonable progress towards consummation of this Commitment prior to the
Expiration Date, but is unable to close prior to the Expiration Date, Newco may
extend the Expiration Date in one (1) month increments, subject to Seller's
consent which shall not be unreasonably withheld. Until the Expiration Date,
Seller shall deal exclusively with Newco with regard to a disposition of the
Education Market Assets. Seller shall fully cooperate with Newco and make
reasonable efforts to support Newco's efforts to secure necessary debt or equity
financing. However, Seller does not represent or warrant, and shall not be
responsible for, Newco's success in raising the desired financing.
2. Description of Education Market Assets. Seller hereby agrees to sell
to Newco, and Newco agrees to purchase the Education Market Assets of Seller
relating to or arising out of Seller's business (the "Business") of developing,
marketing and licensing proprietary and third party educational software and
related products and services in the Education Market. The Education Market
Assets shall include the following:
(a) All cash, bank deposits, and cash equivalents relating to the
Education Market as of the Closing Date;
(b) All accounts receivable and other entitlements to payment under
all contracts, licenses, and other arrangements relating to the
Education Market;
(c) All distributor agreements, customer contracts, renewals, and
installed base of licensees of the Seller's products relating to
the Education Market, including but not limited to the Product
Distribution Agreements with TRO;
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(d) All inventory and raw materials, including CD-ROMs, printed
instructional and training materials, brochures, and marketing
materials relating to the Education Market;
(e) All tangible property, including all office equipment, computers
and related equipment, audio-visual equipment, desks, chairs,
leasehold improvements, library and reference materials, trade
show equipment and displays, file cabinets, and other supplies
and personal property relating to the Education Market;
(f) All insurance policies on persons, property, and risks relating
to the Education Market;
(g) All outstanding bids, proposals, and purchase orders of Seller
relating to the Education Market;
(i) All files and records of Seller in hard copy or magnetic format
relating to the Education Market, including customer and vendor
lists and files, advertising materials and signs, correspondence,
and equipment warranty information and maintenance records;
(j) All contracts and agreements with employees, independent
marketing representatives, dealers, and sales agents of Seller
relating to the Education Market;
(k) All leasehold interests in property and leased equipment relating
to the Education Market; and
(l) All third party software licenses (excluding the Third Party
Software identified on Schedule II), programs, development tools,
and utilities used in the Business for the Education Market,
including without limitation all word processing, spreadsheet,
database, graphics and desktop publishing, project management,
product testing and authoring programs.
Newco shall pay all state and local sales, transfer, value-added, or other
similar taxes, and all recording and filing fees that may be imposed by reason
of the sale, transfer, assignment, and delivery of the Education Market Assets.
Risk of loss to the Education Market Assets shall pass from the Seller to Newco
at the Closing. All Assets shall be sold free and clear of all liens and
encumbrances except those expressly assumed by Newco. The Education Market
Assets shall specifically exclude ownership rights in Seller's intellectual
property, products, and related copyrights, capitalized development costs, net
operating losses, and other tax benefits which shall remain with Seller.
3. Grant of Licenses; Exclusivity Period. Seller shall grant to Newco
the following licenses and distribution rights with respect to the Licensed
Programs (as described on Schedule I attached hereto) and Third Party Software
(as described on Schedule II attached hereto):
(a) A non-exclusive, perpetual, fully paid-up, worldwide right and license
to use, copy or otherwise reproduce, modify, correct defects or
deficiencies in, and to prepare Newco Derivative Works (as defined
below) based on, all or any portion of the Licensed Programs
(specifically including any and all lesson content);
(b) A perpetual, worldwide right and license to market, distribute, and
sublicense the Licensed Programs and Newco Derivative Works of the
Licensed Programs in the Education Market, directly or through
sub-distributors, dealers, Independent Marketing Representatives
("IMRs") or other third parties, subject to the royalty obligations set
forth in Section 6 below. The foregoing license shall be exclusive
during the Exclusivity Period (as defined below);
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(c) Commencing upon expiration of the Exclusivity Period, a non-exclusive,
perpetual, worldwide right and license to market, distribute, and
sublicense the Licensed Programs and Newco Derivative Works of the
Licensed Programs in the Home Market, subject to the royalty
obligations set forth in Section 6 below;
(d) A non-exclusive perpetual, worldwide right and sublicense to use, copy
or otherwise reproduce, modify, correct defects or deficiencies in, and
to prepare Newco Derivative Works based on, all or any portion of the
Third Party Software, subject to the provisions and royalties, if any,
due to the original licensors of the Third Party Software;
(e) A perpetual, worldwide right and sublicense to market, distribute, and
sublicense the Third Party Software and Newco Derivative Works of the
Third Party Software in the Education Market, directly or through
sub-distributors, dealers, IMRs, or other third parties, subject to the
provisions and royalties, if any, due to the original licensors of the
Third Party Software. The foregoing license shall be exclusive during
the Exclusivity Period;
(f) Commencing upon expiration of the Exclusivity Period, a non-exclusive,
perpetual, worldwide right and sublicense to market, distribute and
sublicense the Third Party Software and Newco Derivative Works of the
Third Party Software in the Home Market, directly or through
sub-distributors, dealers, IMRs, or other third parties, subject to the
provisions and royalties, if any, due to the original licensors of the
Third Party Software; and
(g) A non-exclusive, perpetual, worldwide right and sublicense to market,
distribute and sublicense the Licensed Programs, the Third Party
Software, and Newco Derivative Works of the Licensed Programs or Third
Party Software, in the Internet Market, directly or through
sub-distributors, dealers, IMRs, or other third parties, subject to the
provisions and royalties, if any, due to the original licensors of the
Third Party Software and the royalty provisions of Section 6 below.
All licenses of Licensed Programs from Seller to Newco shall include source code
and object code, but all sublicenses from Newco shall be object code only.
Notwithstanding the foregoing grants of licenses and sublicenses to Newco,
Seller reserves all rights not explicitly granted herein, including the
perpetual, worldwide right to use, copy or otherwise reproduce, modify, correct
defects or deficiencies in, prepare and distribute Seller Derivative Works based
upon, and market, distribute, and sublicense the Licensed Programs, Third Party
Software, and Seller Derivative Works of the Licensed Programs or Third Party
Software, in the Home Market and Internet Market, directly or through
sub-distributors, dealers, IMRs or other third parties, subject to the
provisions and royalties, if any, due to the original licensors of the Third
Party Software. The foregoing reservation of rights shall be exclusive to Seller
for the Home Market during the Exclusivity Period, i.e., during the Exclusivity
Period Newco shall not market, distribute, or sublicense through retail channels
to the Home Market the Licensed Programs, Third Party Software, or Newco
Derivative Works of the Licensed Programs.
Notwithstanding any of the foregoing provisions to the contrary, during the
Exclusivity Period Seller shall not market, distribute, or sublicense to the
Education Market the Licensed Programs, Third Party Software or Seller
Derivative Works of the Licensed Programs. The provisions of the foregoing
sentence shall not apply to inadvertent or incidental sales of the Licensed
Programs, Third Party Software or Derivative Works of the Licensed Programs to
education institutions in the Education Market so long as the sales occur
through a retail distribution channel and result from general marketing
activities or catalogs that are not substantially directed or targeted at
educators or educational institutions in the Education Market.
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For purposes of this Commitment, "Education Market" means the following markets
for standalone products (program resides and runs on one workstation only) and
networked products (program runs on more than one workstation concurrently, with
multiple workstations connected to a common server): (i) preschool education
institutions, facilities, and programs, both public and private; (ii) K-12
education institutions, facilities, and programs, both public and private; (iii)
juvenile and adult basic education institutions, facilities, and programs, both
public and private, including correctional facilities and corporate sites; (iv)
post-secondary educational institutions, facilities, and programs, including
vocational schools and community colleges; (v) individuals (or parents of minor
students) who are enrolled in the foregoing educational institutions,
facilities, or programs, provided the sales are made through such institutions,
facilities, or programs (as opposed to retail sales); and (vi) organizations
directly affiliated with the above education institutions, such as PTAs.
For purposes of this Commitment, "Home Market" means the following markets: (i)
retail or off-the-shelf sales to individual end-users; and (ii) direct channel
sales, including mail order, directed to individual end-users. Seller shall
develop new product names for the Home Market so that products offered by Seller
in the Home Market are distinguishable from products offered by Buyer in the
Education Market. Seller shall in all events have the right, where accurate and
appropriate, to refer to Wasatch Education Systems as the development origin of
products it offers in the Home Market. In the event Seller introduces a
"networked" product for the Home Market during the Exclusivity Period, Seller
shall (i) provide Buyer at least 3 months' prior written notice of the
anticipated release date; and (ii) label the "networked" product as follows:
"Not Intended for School Use".
For purposes of this Commitment, "Internet Market" shall mean distribution or
delivery of the Licensed Programs, Third Party Software, or Derivative Works to
end users over a wide area network using electronic data communications
technology as presently implemented in the Internet or as hereafter designed for
use in conjunction with telephone, cable, wireless, or other types of data
transmission systems.
The "Exclusivity Period" shall be a period of one (1) year from the Closing
Date; provided, however, that the Exclusivity Period may be extended upon
payment of certain Minimum Royalties by Newco to Seller as follows:
Minimum Royalty Due Date New Exclusivity Period
- --------------- ----------------------- -----------------------
$ 500,000 End of 1st License Year Two (2) License Years
$ 500,000 End of 2nd License Year Three (3) License Years
$ 500,000 End of 3rd License Year Four (4) License Years
$ 500,000 End of 4th License Year Five (5) License Years
Minimum Royalties paid under this Section 3 shall be credited against royalties
due under Section 6 below for Net Revenues, and royalties paid under Section 6
below for Net Revenues shall be applied to satisfy the Minimum Royalty
obligations. In the event the royalties due under Section 6 below for any
License Year are less than the Minimum Royalty paid for that License Year, an
amount equal to the Minimum Royalty paid for that License Year minus the actual
royalties payable for that License Year under Section 6 below shall be credited
against royalties due under Section 6 below for Net Revenues in subsequent
License Years. In the event royalties paid under Section 6 below for Net
Revenues in any License Year exceed the Minimum Royalty due for that License
Year, an amount equal to the Section 6 royalties actually paid minus the Minimum
Royalty shall be credited against Minimum Royalties next falling due under this
Section 3 for subsequent License Years.
<PAGE>
4. Assumption of Liabilities. On the Closing Date, Newco shall assume (and
indemnify Seller against) the following liabilities and obligations
(collectively the "Assumed Liabilities"):
(a) Liabilities of the Seller relating to its business in the
Education Market or to this Acquisition which are shown on the
most recent balance sheet of Seller and/or are otherwise known to
the Management Group, excepting the following which Seller shall
retain: (i) indebtedness and obligations evidenced by certain
debentures having a face principal amount of $1.2 million; and
(ii) any and all obligations and commitments of Seller to its
shareholders or directors who are not Seller's employees;
(b) Obligations to the existing installed base of Education Market
customers for software support and maintenance arising before and
after the Closing Date;
(c) Royalties owed to third party licensors on account of (i)
Seller's sublicensing of Third Party Software to its customers
before the Closing Date; and (ii) Newco's sublicensing of Third
Party Software to its customers from and after the Closing Date,
but specifically excluding Seller's sublicensing of Third Party
Software to its customers after the Closing Date.
5. Cash Purchase Price. In addition to the assumption of the Assumed
Liabilities, Newco shall pay to Seller cash consideration ("Cash Consideration")
in the amount of One Million Five Hundred Thousand Dollars ($1,500,000), payable
at the Closing. At its option, Newco may discharge the royalty obligations set
forth in Section 6 below and the Minimum Royalty payments under Section 3 above
by paying to Seller, on the Closing Date or within one (1) year after the
Closing Date, an additional Cash Consideration of Three Million Five Hundred
Thousand Dollars ($3,500,000) for a total Cash Consideration of Five Million
Dollars ($5,000,000), in which event Newco's licenses in the Education Market
shall be perpetually exclusive and the Exclusivity Period shall be deemed to be
5 years for all other purposes.
6. Royalty Payments to Seller. In addition to assuming the Assumed
Liabilities and paying the Cash Consideration, Newco shall pay to Seller
royalties based upon Net Revenues collected by Newco from the distribution and
licensing of the Licensed Programs and Newco Derivative Works during the five
(5) year period commencing on the Closing Date (each of the five (5) years
during this period is sometimes referred to as a "License Year.") The royalties
shall be calculated as follows:
(a) On Net Revenues derived from licenses of the Licensed Programs
(existing code and educational content), the royalty shall be
ten percent (10%) of said Net Revenues;
(b) On Net Revenues from Newco Derivative Works which are
modifications or enhancements of the Licensed Programs (code
and content), the royalty shall be five percent (5%) of said
Net Revenues until aggregate royalties paid to Seller on said
Net Revenues are equal to the fully burdened cost of
developing such Newco Derivative Works; thereafter the royalty
shall be ten percent (10%) of said Net Revenues;
(c) On Net Revenues from Newco Derivative Works which are all new
code, but which are based substantially upon the educational
content of the Licensed Programs, the royalty shall be two and
one-half percent (2.5%) of said Net Revenues until aggregate
royalties paid to Seller on said Net Revenues are equal to the
fully burdened costs of developing such Newco Derivative
Works; thereafter the royalty shall be five percent (5%) of
said Net Revenues.
<PAGE>
For purposes of this Commitment, "Net Revenues" shall mean gross monies actually
received by Newco from the distribution or sublicensing of the Licensed Programs
or Newco Derivative Works, less the following: sales, use, and excise taxes,
tariff duties, packing, insurance, shipping and similar charges separately
invoiced and reimbursed by customers, reasonable amounts of credits or refunds
for returns, and credits, discounts, rebates and promotional allowances. "Net
Revenues" shall not include monies received by Newco for installation services,
consulting or training services, maintenance and upgrade services and support
purchased separately from the initial sublicense, sales or leases of hardware or
peripheral devices, sales or licenses of Third Party Software (as to which Newco
makes payment directly to the original licensor thereof), sales of print
materials, or sales, licenses or sublicenses or software products or works other
than the Licensed Programs or Newco Derivative Works of the Licensed Programs.
Royalties owed under this Section 6 shall be due and payable annually within
forty five (45) days after the end of Newco's fiscal year. For purposes of this
Commitment, "Newco Derivative Works" shall mean any software programs offered by
Newco an integral part of which includes substantial code or instructional
content of the Licensed Programs; and "Seller Derivative Works" shall mean any
software programs offered by Seller an integral part of which includes
substantial code or instructional content of the Licensed Programs. Except for
the royalty obligations owed by Newco to Seller on Newco Derivative Works,
neither Seller nor Newco shall acquire any intellectual property rights or
licenses in the Derivative Works of the other.
7. Adjustment to Cash Consideration. In arriving at the Cash Consideration
set forth in Section 5 above and the royalty payments set forth in Section 6
above (collectively, the "Purchase Price"), the parties have attempted to make a
reasonable and good faith allocation of value between the assets and business
being sold or transferred to Newco under this Agreement (the "Sold Business")
and the assets and business being retained by Seller (the "Retained Business").
However, neither party is entirely comfortable that the Purchase Price properly
reflects the appropriate allocation of value between the Sold Business and the
Retained Business. Therefore, Seller and Newco hereby agree that the Purchase
Price shall be adjusted as set forth below in the event there is an acquisition,
merger, or sale of all or substantially all of the assets (the "Acquisition") of
the Sold Business or Retained Business:
(a) In the event of an Acquisition of the Sold Business, Newco or its
successor shall have the option of discharging the royalty
obligations set forth in Section 6 above by paying to Seller an
amount equal to $3,500,000, which royalty discharge amount shall
be paid within thirty (30) days after the closing of the
Acquisition. In the event Newco or its successor does not
exercise the foregoing option, the royalty obligations set forth
in Section 6 above shall be expressly assumed by the successor
company in the Acquisition and continue in full force and effect
against said successor.
(b) In the event of an Acquisition of the Sold Business within two
(2) years after the Closing Date, then, in addition to the
payment of any royalty or royalty buyout under subsection (a)
above, the Purchase Price shall be increased by an amount
calculated as follows (the "Increased Amount") based upon the
"Net Sold Business Acquisition Proceeds":
Portion of
Net Sold Business
Month of Sold Business Acquisition AcquisitionProceeds
---------------------------------- -------------------
1-12 months after Closing Date 10.00%
13-16 months after Closing Date 7.50%
17-20 months after Closing Date 5.00%
21-24 months after Closing Date 2.50%
25 or more months after Closing Date 0.00%
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For purposes of this Commitment, "Net Sold Business
Acquisition Proceeds" shall mean (a) the total cash
consideration, plus the Fair Market Value of property or
stock, received by Newco or its Shareholders as payment in the
Sold Business Acquisition, less all commissions and
out-of-pocket expenses of the Sold Business Acquisition, minus
(b) the sum of (i) the Cash Consideration paid to date, (ii)
the aggregate royalties paid to date under Section 6 above or
subsection 7(a) above, and (iii) in the case of an asset sale,
the debts and obligations owed to creditors of Newco
immediately prior to the Sold Business Acquisition. The
Increase Amount of the Purchase Price shall be paid by Newco
to Seller within thirty (30) days after the closing of the Net
Sold Business Acquisition.
(c) In the event of an Acquisition of the Retained Business within
two (2) years after the Closing Date, then notwithstanding the
payment of any royalty or royalty buyout under subsection (a)
above, the Purchase Price shall be decreased by an amount
calculated as follows (the "Decreased Amount") based upon the
"Net Retained Business Acquisition Proceeds":
Portion of
Month of Net Retained Business
Retained Business Acquisition Acquisition Proceeds
----------------------------- ---------------------
1-12 months after Closing Date 10.00%
13-16 months after Closing Date 7.50%
17-20 months after Closing Date 5.00%
21-24 months after Closing Date 2.50%
25 or more months after Closing Date 0.00%
For purposes of this Commitment, "Net Retained Business
Acquisition Proceeds" shall mean (a) the total cash
consideration, plus the Fair Market Value of property or
stock, received by Seller or its Shareholders as payment in
the Retained Business Acquisition, less all commissions and
out-of-pocket expenses of the Retained Business Acquisition,
minus (b) the sum of (i) Seller's shareholder indebtedness and
Preferred Stock liquidation preferences as of the Closing
Date, and (ii) in the case of an asset sale, the debts and
obligations owed to creditors of Seller immediately prior to
the Retained Business Acquisition.
(d) For purposes of subsections (b) and (c) above, "Fair Market
Value" shall be determined by agreement between Newco and Seller;
provided, however, that if Newco and Seller cannot agree upon
Fair Market Value by the closing date, Newco and Seller shall
each appoint an appraiser qualified to value the property or
stock received, and if the two appraisers so appointed cannot
agree upon Fair Market Value within twenty (20) days after the
Acquisition closing date, the two appraisers shall jointly select
a third appraiser and the Fair Market Value shall be the average
of the three appraisals. The Decreased Amount of the Purchase
Price shall be offset against the next royalties due by Newco to
Seller under Section 6 above.
<PAGE>
8. Transition Support and Services. At the Closing, Newco shall deliver
to Seller copies of all source code and object code with respect to the Licensed
Programs and Third Party Software, together with copies of scripts, functional
specifications, design documents, story boards, programming notes and other
documentation relating to the foregoing; provided however, that Newco's
obligations shall be limited to materials which presently exist and are within
the possession or control of Newco. For a period of six (6) months after the
Closing Date, Newco shall provide to Seller technical assistance on a "best
efforts, as available" basis to support Seller's use of the Licensed Programs
and development of Seller Derivative Works of the Licensed Programs. This
support shall consist of timely telephone, fax, or e-mail responses to specific
questions of Seller relating to the code or documentation of the Licensed
Programs that can be readily answered by Newco without the need for substantial
research or analysis on the part of Newco.
At the Closing, the Management Group shall deliver to Seller copies of all files
and records of Seller in hard copy or magnetic format relating to the Education
Market and/or the Licensed Products and Third Party Software (including, without
limitation, those assets listed above in Sections 2 (c, d, f, i, j, and l) which
might assist Seller in continuing its business in an orderly and efficient
manner. In particular, Newco shall provide to Seller accounting assistance on a
"best efforts, as available" basis to support Seller's ownership and use of the
capitalized development, net operating losses, and other tax benefits which
remain with Seller. Seller shall hold all such material and information
confidential, not disclose it to third parties, and use it solely for its own
internal purposes in connection with its business in the Home Market.
9. Conditions to Closing. Newco's obligations under this Commitment are
contingent upon satisfaction of the following conditions:
(a) Approval of this Commitment by the Board of Directors of Seller
on or before July 1, 1996;
(b) Newco's obtaining the necessary cash or other financing to pay
the Cash Consideration;
(c) Newco's obtaining the required consents, if any, of third parties
to an outright assignment or transfer of Education Market Assets;
and
(d) Newco's obtaining the required consents, if any, of third parties
to a license of the Licensed Programs and sublicense of Third
Party Software, on terms acceptable to Newco.
(e) Seller's obtaining the approval or forbearance, if required, of
its shareholders and debenture holders prior to consummation of
the Acquisition; provided that: (i) Seller shall use its best
efforts to obtain prior to July 31, 1996, any approval or
forbearance of debenture holders required for the consummation of
this Acquisition; (ii) Seller's Board of Directors shall prior to
July 15, 1996, determine whether shareholder approval is required
for the Acquisition, and, if required, (A) use its best efforts
to obtain prior to July 31, 1996, the shareholder commitment to
approve the consummation of this Acquisition from those
shareholders, or the shareholder's parent, subsidiary or related
entity, in which one of the disinterested directors of Seller is
an officer, director, corporate agent, or general partner; and
(iii) Seller's Board of Directors shall recommend the approval of
this Acquisition to all other shareholders in connection with the
notice of shareholders' meeting.
<PAGE>
10. Limited Warranty. Seller warrants that it has good and marketable title
to all Education Market Assets and that its conveyance of the same to Newco
shall vest in Newco good, marketable and unencumbered title to all Education
Market Assets. SELLER MAKES NO WARRANTY, EXPRESS OR IMPLIED, EXCEPT AS
SPECIFICALLY SET FORTH IN THIS COMMITMENT, AND HEREBY DISCLAIMS AND EXCLUDES ALL
WARRANTIES, WHETHER EXPRESS OR IMPLIED, INCLUDING ANY AND ALL WARRANTIES OF
MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR
NONINFRINGEMENT, OR QUALITY, WITH RESPECT TO THE EDUCATION MARKET ASSETS OR ANY
PART THEREOF, OR THE BUSINESS, OR THE ABSENCE OF ANY DEFECTS THEREIN, WHETHER
LATENT OR PATENT, IT BEING UNDERSTOOD THAT EXCEPT AS EXPRESSLY SET FORTH IN THIS
COMMITMENT, THE EDUCATION MARKET ASSETS AND THE BUSINESS ARE TO BE CONVEYED
THEREUNDER "AS IS, WHERE IS" ON THE CLOSING DATE, AND NEWCO SHALL RELY UPON ITS
OWN EXAMINATION THEREOF.
11. Cooperation of Seller to Effect Closing. Seller and Newco covenant to
cooperate in good faith to permit Closing of the transaction contemplated by
this Commitment, including the following:
(a) Continue to maintain, in all material respects, the Education
Market Assets in accordance with present practices of Seller's
Business; and
(b) With respect to Seller's Business, keep its books of account,
records, and files in accordance with existing practices of the
Business;
(c) Use commercially reasonable efforts to obtain all material
consents, waivers, authorizations, and approvals of all other
persons required in connection with the execution, delivery, and
performance by of this Commitment;
(d) Diligently cooperate in preparing and filing all documents
required to be submitted by Seller or Newco to governmental
entities in connection with such transactions and in obtaining
any consents, waivers, authorizations or approvals of the
governmental entities which may be required to be obtained by
Newco in connection with such transactions (which cooperation
shall include, without limitation, timely furnishing to Newco all
information concerning the Business which counsel to Newco
reasonably determines is required to be included in such
documents);
(e) Use commercially reasonable efforts to take, or cause to be
taken, all actions, and to do, or cause to be done, all things
necessary, proper, or advisable consistent with applicable law to
consummate and make effective in the most expeditious manner
practicable the transactions contemplated hereby.
12. Finders Fees. Seller and Newco each warrant to the other that it has
incurred no obligation to pay any finders fees or commissions in connection with
Newco's acquisition of the Education Market Assets and each agree to defend,
indemnify, and hold the other harmless from and against any and all liability
for any such commission, fee, or other compensation asserted by any person
claiming by, through, or under Seller or Newco, respectively, in
connection with these transactions.
13. Transferred Employees. Newco shall offer all employees of Seller
employment with Newco at the same title, salary, and responsibility, and Newco
shall assume all liabilities of Seller with respect to such transferred
employees, including but not limited to accrued wages, accrued vacation, sick
leave, employee reimbursements, and severance, if any; and Newco shall defend,
indemnify, and hold Seller harmless from and against any claims or liability for
such employee obligations.
14. Expenses. Each of the parties hereto shall pay its own expenses in
connection with this Commitment and the transactions contemplated hereby,
including, without limitation, any legal and accounting fees, whether or not the
transactions contemplated hereby are consummated.
<PAGE>
15. Bulk Sales Waiver. Newco waives compliance by Seller with any
applicable bulk sales laws that may apply to the transactions contemplated by
this Agreement.
16. Notices. Any notice or communication required or permitted by this
Commitment shall be in writing and shall be delivered as follows: (i) by
personal delivery to the party to whom the notice is to be given, (ii) by
overnight delivery service, (iii) by prepaid registered or certified mail,
return receipt requested, or (iv) by facsimile. Except for notice of a party's
change of address, which shall be effective only upon actual receipt, a notice
or communication shall be effective (a) in the case of personal service, upon
receipt by the party, (b) by overnight delivery, one (1) day after placing the
notice of communication in the care of the delivery service as confirmed by the
receipt provided by such service, (c) by registered or certified mail, five (5)
days after mailing, as confirmed by the date on the receipt provided by the
postal service, and (d) by facsimile transmission, upon transmission as
confirmed by telephone that such notice or communication has been received in
legible form. All notices or other communications shall be sent to the recipient
at the address listed below (or such other address that the receiving party may
have provided for the purpose of receiving notices and other communications in
accordance with this Section 16.8):
If to the Seller:
Wasatch Education Systems Corporation
c/o Technology Funding, Inc.
2000 Alameda de las Pulgas
San Mateo, CA 94403
Attention: Greg George
Fax: (415) 345-1797
Copy to:
Carolyn Poe
c/o Technology Funding, Inc.
2000 Alameda de las Pulgas
San Mateo, CA 94403
Jeff Keimer
Unison Capital Group
702 Marshall Street, Suite 401
Redwood City, CA 94063
If to Newco:
Wasatch Education Systems
5250 South 300 West, Suite 101
Salt Lake City, Utah 84107
Attention: Ralph Brown
Fax: (801) 269-1509
with copy to:
Neal B. Christensen, Esq.
20853 S. E. 123rd Street
Issaquah, Washington 98027
Fax: (206) 235-9170
<PAGE>
17. Public Announcements. The parties agree that after the signing of this
Commitment, neither party shall make any press release or announcement
concerning this transaction without the prior written approval of the other
party; provided however, that the parties shall negotiate in good faith a joint
press release or announcement to be released after the Closing. Such release
shall not reveal the material terms of the consummated transactions. If any such
announcement or other disclosure is required by law, the disclosing party agrees
to provide the nondisclosing party with prior notice and an opportunity to
comment on the proposed disclosure.
18. Parties in Interest. Nothing in this Commitment is intended to confer
any rights or remedies under or by reason of this Commitment on any persons
other than the Seller and Newco and their respective successors and permitted
assigns. Nothing in this Commitment is intended to relieve or discharge the
obligations or liability of any third persons to the Seller or Newco. No
provision of this Commitment shall give any third persons any right of
subrogation or action over or against the Seller or Newco.
19. Counterparts. This Commitment may be executed in counterparts, each of
which shall be deemed an original, but all of which shall constitute the same
instrument.
20. Closing Date. For purposes of this Commitment, the "Closing Date" shall
be the sooner of: (a) the Expiration Date (as defined in Section 1 above); or
(b) ten (10) days after the date on which Newco advises Seller that Newco is
ready, willing, and able to consummate the purchase of the Education Market
Assets and assumption of the Assumed Liabilities on the terms and provisions set
forth in this Commitment. On the Closing Date, all Education Market Assets shall
be transferred to Newco and Newco shall assume all Assumed Liabilities and
responsibilities relating to the Licensed Programs and Third Party Software as
set forth in this Commitment.
21. Entire Agreement. This Commitment contains the entire understanding
between the parties hereto with respect to the transactions contemplated hereby
and supersedes and replaces all prior and contemporaneous agreements and
understandings, oral or written, with regard to such transactions. All schedules
hereto and any documents and instruments delivered pursuant to any provision
hereof are expressly made a part of this Commitment as if completely set forth
herein. Seller acknowledges that Newco has not yet been formed, and agrees to
look solely to Newco, and not to any of the Management Group for performance or
satisfaction of any obligations undertaken for or on behalf of Newco.
IN WITNESS WHEREOF, the parties hereto have executed this Commitment by their
respective officers thereunto duly authorized on the date first written above.
SELLER: NEWCO:
WASATCH EDUCATION SYSTEMS WASATCH NEWCO,
CORPORATION, a Utah corporation a Utah Corporation to be formed
By /s/Gregory T. George By /s/Barbara Morris
--------------------- -----------------
Gregory T. George, Director Barbara Morris, President
NOTICE OF DISSENTERS' RIGHTS
(Under Section 16-10a-1301 et seq. Utah Revised Business Corporation Act)
Sale of Education Market Assets:
The Board of Directors of Wasatch Education Systems Corporation ("WESC") has
adopted an Acquisition Commitment (the "Acquisition Agreement"), subject to
Shareholder approval. A copy of the Acquisition Agreement is being furnished to
you contemporaneously with the delivery of this Notice. The Board of Directors
has recommended that Shareholders approve the Acquisition Agreement, pursuant to
which certain assets of WESC relating to the education market will be
transferred to Wasatch Interactive Learning Corporation ("WILC"), a corporation
organized and controlled by individuals who have previously served as senior
management of WESC.
Shareholder Approval:
Under Section 16-10a-1202 of the Utah Revised Business Corporation Act (the
"Act"), the Acquisition Agreement requires the affirmative vote of a majority of
the shares entitled to vote to approve the acquisition (the "Acquisition").
Attached hereto is a Notice of Special Shareholders Meeting and Proxy Statement
relating to the shareholders meeting for the purpose of approving the
Acquisition.
Dissenters' Rights:
Under Part 13 of the Act, Shareholders of WESC are or may be entitled to assert
"dissenters rights" in connection with the proposed Acquisition by WIL. A copy
of Part 13 of the Act is attached hereto.
Generally, a Shareholder may dissent from the proposed Acquisition transaction
and obtain cash payment of the fair value of his/her shares in the event the
Acquisition transaction is effectuated. Fair value of the shares means the value
of the shares immediately before the effective date of the Acquisition,
excluding any appreciation or depreciation in anticipation of the Acquisition.
A Shareholder who desires to exercise his or her dissenters' right, must:
1. Cause WESC to receive, before the Shareholder vote is taken,
written notice of his/her intent to demand payment for shares if
the proposed Acquisition is effectuated; and
2. Not vote any of his/her shares in favor of the proposed
Acquisition.
Notice must be sent in writing, postage prepaid, and adressed to the
Secretary of the Company at the Company's offices located at 5250 S. Commerce
Dr., Suite 101, Salt Lake City Utah 84107.
<PAGE>
RIGHTS OF A DISSENTING SHAREHOLDER TO DEMAND PAYMENT ARE LOST IF THE
DISSENTERVOTES IN FAVOR OF THE PROPOSAL OR FAILS TO GIVE WRITTEN NOTICE OF
INTENT TO DEMAND PAYMENT AS ABOVE DESCRIBED.
If the Acquisition is effectuated over the dissent of a Shareholder, a notice
will be sent to the Shareholder within ten (10) days after the effective date of
Acquisition approval by Shareholders. That notice will state when and where
written demand for payment must be sent and when certificates for shares must be
deposited by the Shareholder to effectuate the purchase of shares from the
dissenting Shareholder.
RIGHTS OF THE DISSENTER TO DEMAND PAYMENT MAY ALSO BE LOST IF THE DISSENTER
FAILS TO TIMELY MAKE WRITTEN DEMAND FOR PAYMENT AFTER RECEIVING THE SUBSEQUENT
NOTICE OF HOW TO MAKE WRITTEN DEMAND AND TENDER CERTIFICATES.
PART 13
DISSENTERS' RIGHTS
16-10a-1301. Definitions.
For purposes of Part 13:
(1) "Beneficial shareholder" means the person who is a beneficial owner of
shares held in a voting trust or by a nominee as the record shareholder.
(2) "Corporation means the issuer of the shares held by a dissenter before the
corporate action, or the surviving or acquiring corporation by merger or share
exchange of that issuer.
(3) "Dissenter" means a shareholder who is entitled to dissent from corporate
action under Section 16-10a-1302 and who exercises that right when and in the
manner required by Sections 16-10a-1320 through 16-10a-1328.
(4) "Fair value" with respect to a dissenter's shares, means the value of the
shares immediately before the effectuation of the corporate action to which the
dissenter objects, excluding any appreciation or depreciation in anticipation of
the corporate action.
(5) "Interest" means interest from the effective date of the corporate action
until the date of payment, at the statutory rate set forth in Section 15-1-1,
compounded annually.
(6) "Record shareholder" means the person in whose name shares are registered
in the records of a corporation or the beneficial owner of shares that are
registered in the name of a nominee to the extent the beneficial owner is
recognized by the corporation as the shareholder as provided in Section
16-10a-723.
(7) "Shareholder" means the record shareholder or the beneficial shareholder.
History:C.1953, 16-10a-1301, Effective Dates. - Laws 1992, ch 277,
enacted by L.1992, ch. 277,138. 249 makes the act effective on July
1, 1992.
COLLATERAL REFERENCES
Am. Jur 2d. - 18A Am. Jur 2d Corporations 836; A.L.R.-"Golden parachute"
19 Am. Jur 2d Corporations 2574, 2582 to 2586 defense to hostile
C.J.S. - 19 C.J.S. Corporations 799 to 801 corporate takeover, 66
A.L.R.4th 138.
Lockup option defense to
hostile corporate takeover
, 66 A.L.R.4th 180.
Key Numbers. -
Corporations 584.
16-10a-1302. Right to dissent.
(1) A Shareholder, whether or not entitled to vote, is entitled to dissent
from, and obtain payment of the fair value of shares held by him in the event
of, any of the following corporate actions:
(a) consummation of a plan of merger to which the corporation is a party
if:
(I) shareholder approval is required for the merger by Section
16-10a-1103 or the articles of incorporation; or
(ii) the corporation is a subsidiary that is merged with its parent
under Section 16-10a-1104;
(b) consummation of a plan of share exchange to which the corporation is a
party as the corporation whose shares will be acquired.
(C) consummation of a sales, lease, exchange, or other disposition of all,
or substantially all, of the property of the corporation for which a shareholder
vote is required under Subsection 16-10a-1202(1), but not including a sale for
cash pursuant to a plan by which all or substantially all of the net proceeds of
the sale will be distributed to the shareholders within one year after the date
of sale; and
(d) consummation of a sale, lease, exchange, or other disposition of all,
or substantially all, of the property of an entity controlled by the corporation
<PAGE>
if the shareholders of the corporation were entitled to vote upon the consent of
the corporation to the disposition pursuant to Subsection 16-10a-1202(2).
(2) A shareholder is entitled to dissent and obtain payment of the fair value
of his shares in the event of any other corporate action to the extent the
articles of incorporation, bylaws, or a resolution of the board of directors so
provides.
(3) Notwithstanding the other provisions of this part, except to the extent
otherwise provided in the articles of incorporation, bylaws, or a resolution of
the board of directors, and subject to the limitations set forth in Subsection
(4), a shareholder is not entitled to dissent and obtain payment under
Subsection (1) of the fair value of the shares of any class or series of shares
which either were listed on a national securities exchange registered under the
federal Securities Exchange Act of 1934, as amended, or on the National Market
System of the National Association of Securities Dealers Automated Quotation
System, or were held of record by more than 2,000 shareholders, at the time of:
(a) the record date fixed under Section 16-10a-707 to determine the
shareholders entitled to receive notice of the shareholders' meeting at
which the corporate action is submitted to a vote;
(b) the record date fixed under Section 16-10a-704 to determine
shareholders entitled to sign writings consenting to the proposed
corporate action; or
(c) the effective date of the corporate action if the corporate
action is authorized other than by a vote of shareholders.
(4) The limitation set forth in Subsection (3) does not apply if the
shareholder will receive for his shares, pursuant to the corporate action,
anything except:
(a) shares of the corporation surviving the consummation of the plan
of merger or share exchange; (b) shares of a corporation which at the
effective date of the plan of merger or share exchange
either will be listed on a national securities exchange registered
under the federal Securities Exchange Act of 1934, as amended, or on
the National Market System of the National Association of Securities
Dealers Automated Quotation System, or will be held of record by more
than 2,000 shareholders;
(c) cash in lieu of fractional shares; or
(d) any combination of the shares described in Subsection (4), or
cash in lieu of fractional shares.
(5) A shareholder entitled to dissent and obtain payment for his shares
under this part may not challenge the corporate action creating the entitlement
unless the action is unlawful or fraudulent with respect to him or to the
corporation.
History:C.1953, 16-10a-1302, Effective Dates. - Laws 1992, ch 277,
enacted by L.1992, ch. 277, 139. 249 makes the act effective on July 1
, 1992.
COLLATERAL REFERENCES
A.L.R. - Propriety of applying or its shareholders from minority
minority discount shareholders,to 13 A.L.R.5th 840
value of shares purchased by
corporation or
16-10a-1303. Dissent by nominees and beneficial owners.
(1) A record shareholder may assert dissenters' rights as to fewer than all
the shares registered in his name only if the shareholder dissents with respect
to all shares beneficially owned by any one person and causes the corporation to
receive written notice which states the dissent and the name and address of each
person on whose behalf dissenters' rights are being asserted. The rights of a
partial dissenter under this subsection are determined as if the shares as to
which the shareholder dissents and the other shares held of record by him were
registered in the names of different shareholders.
<PAGE>
(2) A beneficial shareholder may assert dissenters' rights as to shares
held on his behalf only if:
(a) the beneficial shareholder causes the corporation to receive the
record shareholder's written consent tot he dissent not later
than the time the beneficial shareholder asserts dissenters'
rights; and
(b) the beneficial shareholder dissents with respect to all shares of
which he is the beneficial shareholder.
(3) The corporation may require that, when a record shareholder dissents with
respect to the shares held by any one or more beneficial shareholders, each
beneficial shareholder must certify to the corporation that both he and the
record shareholders of all shares owned beneficially by him have asserted, or
will timely assert, dissenters' rights as to all the shares unlimited on the
ability to exercise dissenters' rights. The certification requirement must be
stated in the dissenters' notice given pursuant to Section 16-10a-1322.
History:C.1953, 16-10a-1303, Effective Dates. - Laws 1992, ch 277,
enacted by L.1992, ch.277, 140. 249 makes the act effective on July 1
, 1992.
16-10a-1320. Notice of dissenters' rights.
(1) If a proposed corporate action creating dissenters' rights under Section
16-10a-1302 is submitted to a vote at a shareholders' meeting, the meeting
notice must be sent to all shareholders of the corporation as of the applicable
record date, whether or not they are entitled to vote at the meeting. The notice
shall state that shareholders are or may be entitled to assert dissenters'
rights under this part. The notice must be accompanied by a copy of this part
and the materials, if any, that under this chapter are required to be given the
shareholders entitled to vote on the proposed action at the meeting. Failure to
give notice as required by this subsection does not affect any action taken at
the shareholders' meeting for which the notice was to have been given.
(2) If a proposed corporate action creating dissenters' rights under Section
16-10a-1302 is authorized without a meeting of shareholders pursuant to Section
16-10a-704, any written or oral solicitation of a shareholder to execute a
written consent to the action contemplated by Section 16-10a-704 must be
accompanied or preceded by a written notice stating that shareholders are or may
be entitled to assert dissenters' rights under this part, by a copy of this
part, and by the materials, if any, that under this chapter would have been
required to be given to shareholders entitled to vote on the proposed action if
the proposed action were submitted to a vote at a shareholders' meeting. Failure
to give written notice as provided by this subsection does not affect any action
taken pursuant to Section 16-10a-704 for which the notice was to have been
given.
History:C.1953, 16-10a-1320, Effective Dates. - Laws 1992, ch 277,
enacted by L.1992, ch. 277, 141. 249 makes the act effective on July 1
, 1992.
16-10a-1321. Demand for payment - Eligibility and notice of intent.
(1) If a proposed corporate action creating dissenters' rights under Section
16-10a-1302 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights:
(a) must cause the corporation to receive, before the vote is taken,
written notice of his intent to demand payment for shares if the
proposed action is effectuated; and
(b) may not vote any of his shares in favor of the proposed action.
(2) If a proposed corporate action creating dissenters' rights under Section
16-10a-1302 is authorized without a meeting of shareholders pursuant to Section
16-10a-704, a shareholder who wishes to assert dissenters' rights may not
execute a writing consenting to the proposed corporate action.
(3) In order to be entitled to payment for shares under this part, unless
otherwise provided in the articles of incorporation, bylaws, or a resolution
adopted by the board of directors, a shareholder must have been a shareholder
with respect to the shares for which payment is demanded as of the date the
<PAGE>
proposed corporate action creating dissenters' rights under Section 16-10a-1302
is approved by the shareholders, if shareholder approval is required, or as of
the effective date of the corporate action if the corporate action is authorized
other than by a vote of shareholders.
(4) A shareholder who does not satisfy the requirements of Subsections (1)
through (3) is not entitled to payment for shares under this part.
History:C.1953, 16-10a-1321, Effective Dates. - Laws 1992, ch 277,
enacted by L.1992, ch. 277, 142. 249 makes the act effective on July 1
, 1992.
16-10a-1322. Dissenters' notice.
(1) If proposed corporate action creating dissenters' rights under Section
16-10a-1302 is authorized, the corporation shall give a written dissenters'
notice to all shareholders who are entitled to demand payment for their shares
under this part.
(2) The dissenters' notice required by Subsection (1) must be sent no later
than ten days after the effective date of the corporate action creating
dissenters' rights under Section 16-10a-1302, and shall:
(a) state that the corporate action was authorized and the effective
date or proposed effective date of the corporate action;
(b) state an address at which the corporation will receive payment
demands and an address at which certificates for certificated
shares must be deposited;
(c) inform holders of uncertificated shares to what extent transfer
of the shares will be restricted after the payment demand is
received;
(d) supply a form for demanding payment, which form requests a
dissenter to state an address to which payment is to be made;
(e) set a date by which the corporation must receive the payment
demand and by which certificates for certificated shares must be
deposited at the address indicated in the dissenters' notice,
which dates may not be fewer than 30 nor more than 70 days after
the date the dissenters' notice required by Subsection (1) is
given;
(f) state the requirement contemplated by Subsection 16-10a-1303(3),
if the requirement is imposed; and
(g) be accompanied by a copy of this part.
History:C.1953, 16-10a-1322, Effective Dates. - Laws 1992, ch 277,
enacted by L.1992, ch. 277, 143. 249 makes the act effective on July 1
, 1992.
16-10a-1323. Procedure to demand payment.
(1) A shareholder who is given a dissenters' notice described in Section
16-10a-1322, who meets the requirements of Section 16-10a-1321, and wishes to
assert dissenters' rights must, in accordance with the terms of the dissenters'
notice:
(a) cause the corporation to receive a payment demand, which may be
the payment demand form contemplated in Section 16-10a-1322 (2)
(d), duly completed, or may be stated in another writing;
(b) deposit certificates for his certificated shares in accordance
with the terms of the dissenters' notice; and
(c) if required by the corporation in the dissenters' notice
described in Section 16-10a-1322, as contemplated by Section
16-10a-1327, certify in writing, in or with the payment demand,
whether or not he or the person on whose behalf he asserts
dissenters' rights acquired beneficial ownership of the shares
before the date of the first announcement to news media or to
shareholders of the terms of the proposed corporate action
creating dissenters' rights under Section 16-10a-1302.
(2) A shareholder who demands payment in accordance with Subsection (1)
retains all rights of a shareholder except the right to transfer the shares
<PAGE>
until the effective date of the proposed corporate action giving rise to the
exercise of dissenters' rights and has only the right to receive payment for the
shares after the effective date of the corporate action.
(3) A shareholder who does not demand payment and deposit share certificates
as required, by the date or dates set in the dissenters' notice, is not entitled
to payment for shares under this part.
History:C.1953, 16-10a-1323, Effective Dates. - Laws 1992, ch 277,
enacted by L.1992, ch. 277, 144. 249 makes the act effective on July 1
, 1992.
COLLATERAL REFERENCES
A.L.R. - Timeliness and sufficiency of tion or merger and of his demand
dissenting stockholder's notice of his for his shares, 40 A.L.R. 3d 260.
objection to consolida-
16-10a-1324. Uncertificated shares.
(1) Upon receipt of a demand for payment under Section 16-10a-1323 from a
shareholder holding uncertificated shares, and in lieu of the deposit of
certificates representing the shares, the corporation may restrict the transfer
of the shares until the proposed corporate action is taken or the restrictions
are released under Section 16-10a-1326.
(2) In all other respects, the provisions of Section 16-10a-1323 apply to
shareholders who own uncertificated shares.
History:C.1953, 16-10a-1324, Effective Dates. - Laws 1992, ch 277,
enacted by, L.1992 ch. 277, 145. 249 makes the act effective on July 1
, 1992.
16-10a-1325. Payment.
(1) Except as provided in Section 16-10a-1327, upon the later of the effective
date of the corporate action creating dissenters' rights under Section
16-10a-1302, and receipt by the corporation of each payment demand pursuant to
Section 16-10a-1323, the corporation shall pay the amount the corporation
estimates to be the fair value of the dissenter's shares, plus interest to each
dissenter who has complied with Section 16-10a-1323, and who meets the
requirements of Section 16-10a-1321, and who has not yet received payment.
(2) Each payment made pursuant to Subsection (1) must be accompanied by:
(a) (I) (A) the corporation's balance sheet as of the end of its most
recent fiscal year, or if not available, a fiscal year ending not more
than 16 months before the date of payment;
(B) an income statement for that year;
(C) a statement of changes in shareholders' equity for that
year and a statement of cash flow for that year, if the
corporation customarily provides such statements to
shareholders; and
(D) the latest available interim financial statements, if any;
(ii) the balance sheet and statements referred to in Subsection
(I) must be audited if the corporation customarily provides audited
financial statements to shareholders;
(b) a statement of the corporation's estimate of the fair value of the
shares and the amount of interest payable with respect to the shares;
(c) a statement of the dissenter's right to demand payment under Section
16-10a-1328; and
(d) a copy of this part.
History:C.1953, 16-10a-1325, Effective Dates. - Laws 1992, ch 277,
enacted by L.1992, ch. 277, 146. 249 makes the act effective on July 1
, 1992.
<PAGE>
16-10a-1326. Failure to take action.
(1) If the effective date of the corporate action creating dissenters' rights
under Section 16-10a-1302 does not occur within 60 days after the date set by
the corporation as the date by which the corporation must receive payment
demands as provided in Section 16-10a-1322, the corporation shall return all
deposited certificates and release the transfer restrictions imposed on
uncertificated shares, and all shareholders who submitted a demand for payment
pursuant to Section 16-10a-1323 shall thereafter have all rights of a
shareholder as if no demand for payment had been made.
(2) If the effective date of the corporate action creating dissenters' rights
under Section 16-10a-1302 occurs more than 60 days after the date set by the
corporation as the date by which the corporation must receive payment demands as
provided in Section 16-10a-1322, then the corporation shall send a new
dissenters' notice, as provided in Section 16-10a-1322, and the provisions of
Sections 16-10a-1323 through 16-10a-1328 shall again be applicable.
History:C.1953, 16-10a-1326, Effective Dates. - Laws 1992, ch 277,
enacted by L.1992, ch. 277, 147. 249 makes the act effective on July 1
, 1992.
16-10a-1327. Special provisions relating to shares acquired after announcement
of proposed corporate action.
(1) A corporation may, with the dissenters' notice given pursuant to Section
16-10a-1322, state the date of the first announcement to news media or to
shareholders of the terms of the proposed corporate action creating dissenters'
rights under Section 16-10a-1302 and state that a shareholder who asserts
dissenters' rights must certify in writing, in or with the payment demand,
whether or not he or the person on whose behalf he asserts dissenters' rights
acquired beneficial ownership of the shares before that date. With respect to
any dissenter who does not certify in writing, in or with the payment demand
that he or the person on whose behalf the dissenters' rights are being asserted,
acquired beneficial ownership of the shares before that date, the corporation
may, in lieu of making the payment provided in Section 16-10a-1325, offer to
make payment if the dissenter agrees to accept it in full satisfaction of his
demand.
(2) An offer to make payment under Subsection (1) shall include or be
accompanied by the information required by Subsection 16-10a-1325(2).
History:C.1953, 16-10a-1327, Effective Dates. - Laws 1992, ch 277,
enacted by L.1992, ch. 277, 148. 249 makes the act effective on July 1
, 1992.
16-10a-1328. Procedure for shareholder dissatisfied with payment or offer.
(1) A dissenter who has not accepted an offer made by a corporation under
Section 16-10a-1327 may notify the corporation in writing of his own estimate of
the fair value of his shares and demand payment of the estimated amount, plus
interest, less any payment made under Section 16-10a-1325, if:
(a) the dissenter believes that the amount paid under Section
16-10a-1325 or offered under Section 16-10a-1327 is less than the fair
value of the shares;
(b) the corporation fails to make payment under Section 16-10a-1325
within 60 days after the date set by the corporation as the date by
which it must receive the payment demand; or
(c) the corporation, having failing to take the proposed corporate
action creating dissenter's rights, does not return the deposited
certificates or release the transfer restrictions imposed on
uncertificated shares as required by Section 16-10a-1326.
(2) A dissenter waives the right to demand payment under this section unless
he causes the corporation to receive the notice required by Subsection (1)
within 30 days after the corporation made or offered payment for his shares.
<PAGE>
History:C.1953, 16-10a-1328, Effective Dates. - Laws 1992, ch 277,
enacted by L.1992, ch. 277, 149. 249 makes the act effective on July 1
, 1992.
16-10a-1330. Judicial appraisal of shares - Court action.
(1) If a demand for payment under Section 16-10a-1328 remains unresolved, the
corporation shall commence a proceeding within 60 days after receiving the
payment demand contemplated by Section 16-10a-1328, and petition the court to
determine the fair value of the shares and the amount of interest. If the
corporation does not commence the proceeding within the 60-day period, it shall
pay each dissenter whose demand remains unresolved the amount demanded.
(2) The corporation shall commence the proceeding described in Subsection (1)
in the district court of the county in this state where the corporation's
principal office, or if it has no principal office in this state, the county
where its registered office is located. If the corporation is a foreign
corporation without a registered office in this state, it shall commence the
proceeding in the county in this state where the registered office of the
domestic corporation merged with, or whose shares were acquired by, the foreign
corporation was located.
(3) The corporation shall make all dissenters who have satisfied the
requirements of Sections 16-10a-1321, 16-10a-1323, and 16-10a-1328, whether or
not they are residents of this state whose demands remain unresolved, parties to
the proceeding commenced under Subsection (2) as an action against their shares.
All such dissenters who are named as parties must be served with a copy of the
petition. Service on each dissenter may be by registered or certified mail to
the address stated in his payment demand made pursuant to Section 16-10a-1328.
If no address is stated in the payment demand, service may be made at the
address stated in the payment demand given pursuant to Section 16-10a-1323. If
no address is stated in the payment demand, service may be made at the address
shown on the corporation's current record of shareholders for the record
shareholder holding the dissenter's shares. Service may also be made otherwise
as provided by law.
(4) The jurisdiction of the court in which the proceedings is commenced under
Subsection (2) is plenary and exclusive. The court may appoint one or more
persons as appraisers to receive evidence and recommend decision on the question
of fair value. The appraisers have the powers described in the order appointing
them, or in any amendment to it. The dissenters are entitled to the same
discovery rights as parties in other civil proceedings.
(5) Each dissenter made a party to the proceeding commenced under
Subsection (2) is entitled to judgment:
(a) for the amount, if any, by which the court finds that the fair
value of his shares, plus interest, exceeds the amount paid by
the corporation pursuant to Section 16-10a-1325; or
(b) for the fair value, plus interest, of the dissenter's
after-acquired shares for which the corporation elected to
withhold payment under Section 16-10a-1327.
History:C.1953, 16-10a-1330, Effective Dates. - Laws 1992, ch 277,
enacted by L.1992, ch. 277, 150. 249 makes the act effective on July 1
, 1992.
16-10a-1331. Court costs and counsel fees.
(1) The court in an appraisal proceedings commenced under Section 16-10a-1330
shall determine all costs of the proceedings, including the reasonable
compensation and expenses of appraisers appointed by the court. The court shall
assess the costs against the corporation, except that the court may assess costs
against all or some of the dissenters, in amounts the court finds equitable, to
the extent the court finds that the dissenters acted arbitrarily, vexatiously,
or not in good faith in demanding payment under Section 16-10a-1328.
(2) The court may also assess the fees and expenses of counsel and experts for
the respective parties, in amounts the court finds equitable:
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(a) against the corporation and in favor of any or all dissenters if
the court finds the corporation did not substantially comply with the
requirements of Sections 16-10a-1320 through 16-10a-1328; or
(b) against either the corporation or one or more dissenters, in
favor of any other party, if the court finds that the party against
whom the fees and expenses are assessed acted arbitrarily, vexatiously,
or not in good faith with respect to the rights provided by this part.
(3) If the court finds that the services of counsel for any dissenter were of
substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to those counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited.
History:C.1953, 16-10a-1331, Effective Dates. - Laws 1992, ch 277,
enacted by L.1992, ch. 277, 151. 249 makes the act effective on July 1
, 1992.
