Form 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended June 30, 1996
[ ] TRANSITIONAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURI-
TIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from to
Commission file number 0-17190
WASATCH EDUCATION SYSTEMS CORPORATION
-------------------------------------
(Name of small business issuer in its charter)
UTAH 87-0458433
---- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5250 South 300 West, Suite 101
Salt Lake City, Utah 84107
-------------------- -----
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (801) 261-1001
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
--------------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
Issuer's revenues for fiscal year ended June 30, 1996 were $3,500,251.
The aggregate market value of the voting stock held by non-affiliates
computed by the average bid and asked prices of such stock as of September 8,
1996 was $446,154.
The number of shares outstanding of issuer's common stock as of September
8, 1996 was 3,579,229.
<PAGE>
FORM 10-KSB
PART I
ITEM 1. BUSINESS
--------
General Description
- -------------------
Wasatch Education Systems Corporation (the "Company" or "Wasatch") began
operations in 1984, was incorporated in 1988 in the State of Utah. The Company
develops and markets computer instructional systems ("CAI Systems") for the
pre-school, elementary, secondary, adult education and home school markets.
Schools utilize the Company's products to offer their students self-paced,
individualized courses in reading, writing, science, life skills and high school
equivalency ("GED") test preparation as well as phonics, basic skills, job
skills and interdisciplinary, real world based projects. The CAI Systems sold by
the Company are typically used to supplement a school's regular instructional
programs.
The Company markets and sells its products through dealer organizations
and independent sales representatives. See "Business--Marketing and Sales". In
addition to receiving revenues from initial product sales (including software
license fees, teacher training, installation and printed materials), the Company
also receives fees in subsequent years for customer support, software upgrades,
teacher training and printed materials.
The Market
- ----------
With the introduction of personal computers in the schools in the late
1970's and early 1980's, drill and practice type courseware on diskettes became
popular. Later, as the advantages of networking these personal computers
together and sharing software and data files became apparent, integrated
learning systems ("ILS") which address broad curriculum needs became the
standard for schools throughout the country that were introducing their students
to technology based learning. Currently, both comprehensive ILS solutions as
well as individual stand alone courseware is popular in the markets serviced by
the Company. The Company offers both comprehensive ILS and individualized
courseware products for sale.
The Company's Products
----------------------
The Company provides 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 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 recordkeeping, 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.
<PAGE>
The Company has designed its project-based multimedia Courseware to present
skills in meaningful and engaging real-world settings. Students using the
Wasatch Courseware are drawn into stimulating worlds of problem-solving where
they locate and use information, identify resources, observe different careers
in action, and make decisions to solve problems and produce products. Students
also have access to extensive scored learning activities which give the support
and practice needed to produce the products required for each project. The
Company's Courseware combines powerful educational content with a rich variety
of easy-to-use integrated tools redefining educational courseware for the
kindergarten through adult learner.
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.
In the spring of 1995, the Company developed and began selling individual
units of its Courseware on CD-ROM.
Two new courses were developed and introduced by the Company during fiscal
year 1996. One course, Basic Skills for the Real World, is comprised of eight
units designed for adult and alternative education students. This course is
useful with students who are beginning readers, using over 70 hours of audio to
present a variety of life and job skills. The second course, Job Skills for the
Real World, helps students explore their interests and career options and learn
effective methods to obtain a job utilizing their skills. A third course,
Phonics for the Real World which was released in July 1996, is designed for
primary grade students. It is a fully-voiced multimedia phonics-in-context
program which is useful as a self-contained phonics program or as a companion
product to the Projects for the Real World for grades K-3.
Fiscal year 1996 development projects also included programming all MS
Windows products to run with MS Windows 95 and Novell 4.x with VLM's.
All of the Company's products run in a managed environment which provides
reporting of data such as courseware scores and time on task. All Courseware can
be delivered via local networks or non-networked CD-ROM on individual
workstations.
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.
<PAGE>
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 1984 to June 30, 1996, the Company has cumulatively
spent $16,421,000 for research and product development. During the fiscal years
ended June 30, 1996 and 1995, the Company spent approximately $336,000 and
$309,000, respectively, on expensed product development. In addition, the
Company spent approximately $570,000 and $1,269,000 in the fiscal years ended
June 30, 1996 and 1995, 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 provided by continuing operations. The new
products will improve the Company's offerings in K-12 communication arts and
adult basic education. 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.
Marketing and Sales
- -------------------
The Company sells its products to a variety of customers including K-12
school districts, private schools, universities, adult education centers and
corporate education centers. As of June 30, 1996, the Company had two full time
sales managers who directed 30 geographically-based dealer organizations and
independent sales representatives. The Company has non-exclusive arrangements
with its dealers and independent representatives that can be terminated by
either party at any time without cause. The Company sells its products both as a
comprehensive, bundled Integrated Learning System (ILS) and as individual units.
The MS DOS and MS Windows based products can run on local network or on stand
alone PC computers. As of June 30, 1996, the Company had sold its products to
over 370 school districts for use in 905 schools on approximately 20,000
individual networked workstations throughout the United States.
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 efforts of the
sales representatives have been augmented this past year with catalog mailings
and follow up telemarketing efforts. These efforts not only result in direct
sales, they also identify potential ILS customers that require the attention of
the sales representatives.
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. These companies
generally distribute their products via telemarketing and catalog sales to
individuals as well as school districts.
<PAGE>
The second category of competitor is the group of companies producing
comprehensive, ILS courseware primarily for networked systems. These companies
generally market to school districts and adult sites with direct sales forces or
dealer groups. The Company believes that its major competitors in this second
category are Computer Curriculum Corporation, a division of Viacom, Jostens
Learning Corporation and IBM/Eduquest. These competitors have far greater
resources than those of the Company's. Some of these competitors have entrenched
market positions and established trade names, trademarks and intellectual
property rights.
Although the Company believes that its products compete effectively with
its competitors in term of price, quality and features, there can be no
assurance that the Company will be able to remain 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 some companies may hold a position of dominance in
certain portions of the market, no one company dominates the entire market. The
Company competes against different companies depending on the type of sale and
the region of the United States.
Product Protection
- ------------------
The Company's success is dependent to a large extent on its ability to
protect its proprietary interest in its software products. To achieve this end,
the Company requires its employees to enter into confidentiality agreements and
asks all customers to sign license agreements that prohibit the reproduction or
other unauthorized use of the Company's proprietary software; however, not all
customers have signed such licensing 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 not 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 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 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.
<PAGE>
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 alternative sources, 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 4 persons in sales, marketing, and
related activities; 7 persons in product development; 11 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.
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.
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, 1996, a small number of
school districts generated a disproportionate amount of the Company's annual
revenues. (See Note 9 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.
<PAGE>
At June 30, 1996, 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 $224,000. This amount will be
recognized as revenue during fiscal year 1997 as the services are completed.
ITEM 2. 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 taxes) through March 31, 1997 is $115,236. The Company also entered into a
three-year lease on property located in Park City, Utah through December 31,
1998. The annual base rent (inclusive of taxes) through December 31, 1996 is
$71,016. (See Note 6 to the Financial Statements.)
ITEM 3. LEGAL PROCEEDINGS
-----------------
No legal proceedings against the Company were pending as of June 30, 1996.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The Company held its Annual Meeting of Shareholders on January 26, 1996.
The following members of the Board of Directors were elected for one-year terms
expiring at the meeting of shareholders in 1997, or until their respective
successors are elected and qualified.
Name Shares Voted For Shares Withheld
---- ---------------- ---------------
Barbara Morris 2,902,316 4,706
Gregory George 2,901,688 5,334
Jeffrey Keimer 2,901,837 5,125
Carolyn Poe 2,903,339 3,623
The shareholders ratified the adoption of the Company's 1995 Executive Officer
Stock Option Plan.
Shares Voted For Shares Voted Against Abstentions
---------------- -------------------- -----------
2,486,752 19,219 5,752
The shareholders ratified the adoption of the Company's 1995 Employee Stock
Option Plan.
Shares Voted For Shares Voted Against Abstentions
---------------- -------------------- -----------
2,493,107 15,201 3,415
The shareholders ratified the appointment of Arthur Andersen LLP as independent
public accountants for the Company for the fiscal year ended June 30, 1996.
Shares Voted For Shares Voted Against Abstentions
---------------- -------------------- -----------
2,903,065 1,115 2,842
<PAGE>
FORM 10-KSB
PART II
ITEM 5. 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 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, 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
Fiscal Year Ended June 30, 1996
- -------------------------------
1st Quarter ended September 30, 1995 $0.156 $0.094
2nd Quarter ended December 31, 1995 2.625 0.094
3rd Quarter ended March 31, 1996 0.750 0.500
4th Quarter ended June 30, 1996 0.500 0.500
(B) Approximate Number of Equity Security Holders
---------------------------------------------
As of June 30, 1996, the Company had 497 common and preferred stockholders
of record.
(C) Dividends
---------
The Company has never paid a dividend on its Preferred Stock. As of June
30, 1996, 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 7 to the Financial Statements).
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>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
--------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Results of Operations:
- ----------------------
Fiscal Year 1996 compared to Fiscal Year 1995:
The following are explanations of significant period to period changes for
the fiscal year ended June 30, 1996 compared to the fiscal year ended June 30,
1995.
Revenue for the fiscal year ended June 30, 1996 of $3,500,000 decreased
$1,975,000 or 36 percent, compared to $5,475,000 for the fiscal year ended June
30, 1995. Courseware license revenues decreased 36 percent or $1,483,000 to
$2,684,000 for the fiscal year ended June 30, 1996, from $4,167,000 for the
fiscal year ended June 30, 1995. This decrease is primarily attributable to the
downtime incurred from the reorganization of the Company's sales force. The
Company has shifted from a combination of a direct sales force and dealers to
exclusively dealers and 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 year as schools with Chapter I money available seemed
reluctant to commit these funds. Services and other revenues decreased $492,000
or 38 percent to $816,000 for the fiscal year ended June 30, 1996 from
$1,308,000 for the fiscal year ended June 30, 1995. Of this, $101,000 is the
result of the Company eliminating, except in limited situations, the sale of
computer hardware along with its Courseware. Support renewal revenues for the
fiscal year ended June 30, 1996 of $537,000 decreased $308,000 or 36 percent
compared to $845,000 for the fiscal year ended June 30, 1995. This decrease is
primarily the result of delays in receiving annual contracts from customers, the
most notable of which was the Chicago area schools where approval of the annual
contract has been delayed.
Gross margins decreased $1,678,000 to $2,004,000 at June 30, 1996 from
$3,682,000 at June 30, 1995. This decrease is primarily the result of lower
overall sales. The gross margin as a percent of revenue decreased 10 percent to
57 percent for the fiscal year ended June 30, 1996 from 67 percent for the
fiscal year ended June 30, 1995. The gross margin as a percent of revenue for
service and other revenues increased 9 percent to 46 percent for the fiscal year
ended June 30, 1996 from 37 percent for the fiscal year ended June 30, 1995.
Operating expenses decreased by 6 percent or $167,000 to $2,558,000 for the
fiscal year ended June 30, 1996 from $2,725,000 for the fiscal year ended June
30, 1995. Of this, $180,000 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 increased $56,000 to $1,482,000 at
June 30, 1996 from $1,426,000 at June 30, 1995. The Company's research and
development costs increased by $27,000 due to the Company expensing a larger
percentage of courseware development costs.
Operating income decreased by $1,511,000 to a loss of $554,000 for the
fiscal year ended June 30, 1996 from income of $957,000 for the fiscal year
ended June 30, 1995.
<PAGE>
Net interest expense decreased by $595,000 to $161,000 for the fiscal year
ended June 30, 1996 from $756,000 for the fiscal year ended June 30, 1995. This
increase was primarily the result of $5,500,000 of related party debt which was
converted into a combination of Series C non-convertible preferred stock and
common stock. Additionally, in this transaction over $1,000,000 in accrued,
unpaid interest was forgiven and recognized as an extraordinary item on the June
30, 1995 statement of operations.
The net income for the Company decreased $1,934,000 to a loss of $85,000
for the fiscal year ended June 30, 1996 from income of $1,219,000 for the fiscal
year ended June 30, 1995. This decrease is the result of lower overall sales.
Liquidity and Capital Resources:
- --------------------------------
The Company ended June 30, 1996 with liquid assets (cash and accounts
receivable) of $988,000, a decrease of 43 percent or $756,000 from June 30, 1995
when liquid resources were $1,744,000. Accounts receivable decreased $759,000 or
46 percent to $889,000 at June 30, 1996 from $1,648,000 at June 30, 1995. This
decrease was the result of lower sales during the fourth quarter of fiscal year
1996. Cash increased by $24,000 primarily due to a more concerted effort to
collect outstanding accounts receivable.
Current assets decreased by $776,000 or 42 percent to $1,092,000 at June
30, 1996 from $1,868,000 at June 30, 1995. This decrease was primarily the
result of a $759,000 decrease in accounts receivable discussed above which was
partially offset by an increase of $24,000 in cash.
Long-term assets decreased $521,000 or 11 percent, to $4,212,000 at June
30, 1996 from $4,733,000 at June 30, 1995. Of this, $424,000 was a decrease in
courseware development costs resulting from increased levels of amortization and
lower overall development dollars being capitalized. Fixed assets declined
$77,000 due primarily to normal depreciation of fixed assets.
Current liabilities increased by $615,000 to $1,852,000 at June 30, 1996
from $1,237,000 at June 30, 1995. Of this increase, $1,197,000 resulted from the
classification of the convertible subordinated debentures from long-term to
short-term liabilitites. Accounts payable decreased $190,000. Accrued
liabilities decreased $295,000 primarily as the result of the payment of an
accrued sales tax liability as well as a decline in accrued royalties to third
party software suppliers. Deferred revenue decreased $143,000 primarily as a
result of the Company lowering its annual renewal fee charged in fiscal year
1996, in connection with a corresponding decrease in the level of services
offered.
The Company's working capital balance decreased by $1,391,000 to a deficit
balance of $760,000 at June 30, 1996 from a positive position of $631,000 at
June 30, 1995. This decrease primarily resulted from the classification of
$1,197,000 of convertible subordinated debentures from long-term to short-term
liabilities. The Company's working capital needs will be provided for by
continuing operations
<PAGE>
Stockholders' equity decreased by $715,000 to $3,452,000 at June 30, 1996
from $4,167,000 at June 30, 1995. This decrease is the result of a net loss of
$715,000.
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. 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. At June 30, 1996, $1,197,000 of convertible
subordinated debentures remain outstanding. The debentures, originally due July
31, 1996, have been extended to January 31, 1997. The extension was ratified by
the 66 2/3 percent vote required by debenture holders.
Effective July 1, 1996 the Company entered into an Acquisition agreement
with Wasatch Interactive Learning Corporation ("WILC"). The Company, pending
shareholder approval, has agreed to sell WILC the Education Market net assets of
the Company relating to or arising out of the Company's business of developing,
marketing and licensing proprietary and third party educational software and
related products and services in the Education Market. The Company, pending
shareholder approval, also has granted an exclusive, worlwide license to WILC to
market the Company's products and develop derivative products in the Education
Market. The Company will receive cash of $1,500,000 and future royalties. In
addition, the Company will retain all capitalized courseware costs, convertible
subordinated debentures and tax net operating loss carryforwards.
<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, 1996 and the related statements of operations,
stockholders' equity and cash flows for each of the two years in the period
ended June 30, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in Note 10 to the financial statements, pending shareholder
approval, the Company entered into an agreement, effective July 1, 1996, with
Wasatch Interactive Learning Corporation ("WILC") to sell to WILC the Education
Market net assets of the Company in exchange for cash of $1,500,000 and future
royalties based on sales by WILC of Education Market products and subsequently
developed derivative products. Should this sale be consummated by the Company,
its financial position and results of operations will be substantially different
in future periods. The Company intends to pursue other markets with the proceeds
of the contemplated sale of the Education Market net assets.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Wasatch Education Systems
Corporation as of June 30, 1996 and the results of its operations and its cash
flows for each of the two years in the period ended June 30, 1996 in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
August 8, 1996 (except with
respect to the matter discussed in
Note 10 for which the date is
September 24, 1996
<PAGE>
ITEM 7. Financial Statements
Wasatch Education Systems Corporation
Balance Sheet
Assets June 30,
1996
------------
Current assets:
Cash $ 99,614
Accounts receivable, net of allowance for doubtful
accounts of $15,000 888,681
Inventories 66,682
Other current assets 36,839
------------
Total current assets 1,091,816
Equipment, furniture and fixtures, net of accumulated
depreciation of $571,683 206,444
Courseware development costs, net of accumulated
amortization of $2,095,898 3,987,277
Other assets, net 18,333
============
Total assets $ 5,303,870
============
Liabilities and stockholders' equity
Current liabilities:
Convertible subordinated debentures $ 1,197,000
Accounts payable 125,733
Accrued employee costs 239,334
Other accrued liabilities 65,673
Deferred revenue 224,241
------------
Total current liabilities 1,851,981
------------
Commitments (Note 6)
Stockholders' equity:
Preferred stock, 20,000,000 shares authorized:
Series A convertible redeemable, 4,429,870 shares
outstanding, 4,429,870 involuntary liquidation value 4,655,724
Series B $.375 cumulative convertible redeemable,
91,151 shares outstanding, $158,254 involuntary
liquidation value 118,496
Series C redeemable, 5,300,000 shares outstanding,
$5,300,000 preferred liquidation value 5,300,000
Common stock, no par value; 200,000,000 shares
authorized, 3,579,229 shares outstanding 11,754,072
Accumulated deficit (18,376,403)
------------
Total stockholders' equity 3,451,889
------------
Total liabilities and stockholders' equity $ 5,303,870
============
The accompanying notes are an integral part of this balance sheet.
<PAGE>
Wasatch Education Systems Corporation
Statements of Operations
Fiscal year Fiscal year
ended June ended June
30, 1996 30, 1995
------------- -------------
Revenue:
Courseware license rights $2,684,488 $4,167,357
Services and other 815,763 1,307,824
------------- -------------
3,500,251 5,475,181
------------- -------------
Cost of revenue:
Courseware license rights 1,053,028 970,986
Services and other 443,363 822,202
------------- -------------
1,496,391 1,793,188
------------- -------------
Gross margin 2,003,860 3,681,993
------------- -------------
Operating expenses:
General and administrative 1,411,566 1,425,985
Sales and marketing 809,604 989,442
Research and development 336,361 309,358
------------- -------------
2,557,531 2,724,785
------------- -------------
(Loss) income from operations (553,671) 957,208
Interest expense, net of interest income 161,497 755,761
------------- -------------
(Loss) income before income taxes and (715,168) 201,447
extraordinary item
Income tax provision - (4,029)
------------- -------------
(Loss) income before extraordinary item (715,168) 197,418
Extraordinary item, forgiveness of accrued
interest, net of income tax provision of
$20,163 in fiscal year 1995 - 1,021,238
------------- -------------
Net (loss) income (715,168) 1,218,656
Unpaid and undeclared preferred stock
dividends 18,184 34,182
============= =============
Net (loss) income attributable to common
stockholders $ (733,352) $1,184,474
============= =============
Primary (loss) income per common share:
(Loss) income before extraordinary items $ (.20) $ .03
Extraordinary item .00 .16
============= =============
Net (loss) income $ (.20) $ .19
============= =============
Fully dilutive (loss) income per common
share:
(Loss) income before extraordinary item $ (.20) $ .04
Extraordinary item .00 .08
============= =============
Net (loss) income $ (.20) $ .12
============= =============
Weighted average common and common
equivalent shares outstanding
Primary 3,574,800 6,347,012
Fully dilutive 3,574,800 12,299,683
============= =============
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
Wasatch Education Systems Corporation
Statements of Stockholders' Equity
For the Fiscal Years Ended June 30, 1996 and 1995
(Dollars in thousands)
<CAPTION>
Series A Series B Series C Total
Preferred Stock Preferred Stock Preferred Stock Common Stock Accumulated Stockholders'
-------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount Deficit Equity/Deficit
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 5,300,000 5,300 5,300
conversion of debt
to equity
Issuance of common
stock in conversion 1,666,666 200 200
of debt to equity
Net loss 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 income (715) (715)
=======================================================================================================
Balance at June 30, 1996 4,429,870 $4,656 91,151 $ 118 5,300,000 $5,300 3,579,229 $11,754 $(18,376) $ 3,452
=======================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Wasatch Education Systems Corporation
Statements of Cash Flows
Fiscal year Fiscal year
ended June ended June
30, 1996 30, 1995
------------- -------------
Cash flows from operating activities:
Net (loss) income $ (715,168) $1,218,656
Adjustments to reconcile net (loss)
income to net cash
provided by operating activities:
Depreciation and amortization 1,158,218 1,036,922
Extraordinary gain from forgiveness
of accrued interest - (1,041,581)
Increase (decrease) in cash from:
Accounts and contract receivable 779,503 (341,873)
Inventories 8,505 29,990
Other current assets 11,337 52,938
Accounts payable (190,279) (227,360)
Accrued liabilities (248,806) 541,572
Deferred revenue (142,993) (119,618)
------------- -------------
Net cash provided by operating
activities 600,317 1,149,646
------------- -------------
Cash flows from investing activities:
Purchase of equipment, furniture and
fixtures (86,636) (30,346)
Additions to courseware development costs (570,217) (1,269,193)
Decrease in other assets 20,000 20,000
------------- -------------
Net cash used in investing
activities (636,853) (1,279,539)
------------- -------------
Increase (decrease)in cash 23,464 (129,893)
Cash at beginning of year 76,150 206,043
------------- -------------
Cash at end of year $ 99,614 $ 76,150
============= =============
Supplemental disclosure of cash flow
information:
Cash paid for interest $ 161,497 $ 161,595
============= =============
Cash paid for income taxes $ 13,856 $ 2,366
============= =============
Supplemental disclosure of noncash investing
and
financing activities:
Conversion of Series A preferred stock
into common stock $ 10,000 $ -
============= =============
Issuance of Series C preferred stock in
conversion of debt to equity $ - $5,300,000
============= =============
Issuance of common stock in conversion
of debt to equity $ - $ 200,000
============= =============
The accompanying notes are an integral part of these statements.
<PAGE>
Wasatch Education Systems Corporation
Notes to Financial Statements
Note 1 NATURE OF OPERATIONS
--------------------
Wasatch Education Systems Corporation (the "Company" or "Wasatch") develops
and markets computer instructional systems ("CAI Systems") for the pre-school,
elementary, secondary, adult education and home school markets. Schools utilize
the Company's products to offer their students self-paced, individualized
courses in reading, writing, science, life skills and high school equivalency
("GED") test preparation as well as phonics, basic skills, job skills and
interdisciplinary, real world based projects. The CAI Systems sold by the
Company are typically used to supplement a school's regular instructional
programs. 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 $5,500,000 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 is taking 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.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Pending shareholder approval, the Company has entered into an agreement
with Wasatch Interactive Learning Corporation to sell the Company's Education
Market net assets (see Note 10). If this sale is consummated, the operations of
the Company will change substantially in fiscal year 1997.
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."
<PAGE>
Note 2 SIGNIFICANT ACCOUNTING POLICIES (continued)
-------------------------------------------
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, 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.
Cash and Cash Equivalents
- -------------------------
As of June 30, 1996, the Company had demand deposits and money market
accounts totaling approximately $100,000 with First Interstate Bank 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 sheet.
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. It is reasonably possible
that those estimates of anticipated future gross revenues, the remaining
estimated economic life of the product, or both will be reduced significantly in
the near term. For the fiscal years ended June 30, 1996 and 1995, the Company
invested approximately $570,000 and $1,269,000, respectively, in the development
of several new product lines, some of which began shipping during the fiscal
year ended June 30, 1996. The Company has approximately $559,000 of unamortized
costs related to current year products. No interest was capitalized during the
fiscal years ended June 30, 1996 and 1995.
<PAGE>
Note 2 SIGNIFICANT ACCOUNTING POLICIES (continued)
-------------------------------------------
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, 1996 and 1995 was approximately $994,000 and
$834,000, respectively.
Income (Loss) Per Common Share
- ------------------------------
Primary income per common share is computed by dividing net income by the
weighted average number of shares of common stock and common stock equivalents
outstanding during the year. For purposes of primary income per common share,
common stock equivalents include shares issuable upon conversion of the
Company's convertible preferred stock but exclude outstanding warrants and
options. Fully diluted income 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.
Primary and fully diluted loss per common share is computed by dividing net
loss by the weighted average number of common shares outstanding during the
year.
Recent Accounting Pronouncement
- -------------------------------
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121. "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121").
SFAS No. 121 is effective for fiscal years beginning after December 15, 1995.
Management does not expect that the adoption of SFAS No. 121 will have a
material impact on the Company's financial position or results of opreations.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123. "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123 is effective for fiscal years
beginning after December 15, 1995. Management does not expect that the adoption
of SFAS No. 123 will have a material impact on the Company's financial position
or results of opreations.
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, 1996, $1,197,000 of the debentures
remain outstanding. The maturity date of the debentures has been extended to
January 31, 1997. The extension was ratified by the 66 2/3 percent majority vote
required by debenture holders.
Effective June 30, 1995, an agreement with certain of the Company's
principal stockholders was finalized wherein $5,500,000 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 an extraordinary gain for the fiscal
year ended June 30, 1995.
<PAGE>
Note 4 INCOME TAXES
------------
The Company accounts for income taxes using ther parameteres og Statement
of Financial Accounting Standards ("SFAS") No. 109. SFAS No. 109 requires the
use of the liability method for financial reporting purposes. The Company
provides a valuation allowance against all deferred tax assets.
The components of the Company's deferred tax assets as of June 30, 1996 and
June 30, 1995 are as follows:
June 30, June 30,
1995 1996
---------- ----------
Tax net operating losses $5,324,000 $4,372,000
Deferred software costs 363,000 -
Revenue deferred for
financial reporting 85,000 140,000
Reserves and accrued
liabilities 24,000 41,000
---------- ----------
Total deferred tax assets 5,796,000 4,553,000
Valuation allowance (5,796,000) (4,553,000)
---------- ----------
Net deferred tax assets $ -- $ --
========== ==========
As of June 30, 1996, the Company has available net operating losses for
Federal income tax purposes and financial reporting purposes of approximately
$14,009,000 and $14,397,000, 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 $ 1,872,000 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 1,706,000 6/30/2009
6/30/1994 1,956,000 6/30/2011
-----------
Total tax net operating loss carryforwards $14,009,000
===========
Utilization of some of these net operating losses may be limited by an
ownership change which occurred on June 30, 1993 based on Section 382 of the
Internal Revenue Code.
<PAGE>
Note 5 LICENSE AGREEMENT
-----------------
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 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.
Note 6 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 amount to $211,000, $203,000, $136,000, 8,000 and
$2,000 for the years ending June 30, 1997, 1998, 1999, 2000 and 2001
respectively. The Company's facilities lease expires on March 31, 1996. Rent
expense was $130,000 and $142,000 for the fiscal years ended June 30, 1996 and
1995, respectively.
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 $53,000 and $127,000 during the fiscal
years ended June 30, 1996 and 1995, respectively.
Note 7 STOCKHOLDERS' EQUITY
--------------------
Series A Preferred Stock
- ------------------------
Pursuant to a private offering memorandum, 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.
<PAGE>
Note 7 STOCKHOLDERS' EQUITY (continued)
--------------------------------
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.
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, 1996, 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, 1996, 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, 1996, no dividends have been declared or paid as the
Company had an accumulated deficit of $18,376,403.
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.
<PAGE>
Note 7 STOCKHOLDERS' EQUITY (continued)
--------------------------------
Series C Preferred Stock
- ------------------------
The Series C Redeemable Preferred Stock ("Series C Preferred Stock") has a
par value of $1.00 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 were 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.
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 $1.00 per share.
Stock Warrants
- --------------
The following table summarizes warrants outstanding at June 30, 1996.
Warrants
Outstanding at Exercise
June 30, 1996 Expiration Dates Price
------------- ------------------- -------------
94,942 12/31/96 $4.50
381,679 6/30/2000 $1.31
226,000 12/31/96 $.50
549,714 6/30/98 $.50
3,773,092 6/30/2000 $.50
-------------
5,025,427
=============
<PAGE>
Note 7 STOCKHOLDERS' EQUITY (continued)
--------------------------------
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.
Stock Options
- -------------
The following table summarizes stock option activity for all stock option plans
combined.
Fiscal Fiscal
Year ended Year ended
June 30, June 30,
1996 1995
------------- ------------
Number of options:
Outstanding at the
beginning 1,398,518 1,791,428
of the year
Granted 100,000 -
Canceled or expired (35,022) (392,910)
============= =============
Outstanding at the end
of the year 1,463,496 1,398,518
============= =============
Option price range per
share:
Outstanding at the
beginning of the year $.50-$3.00 $.50-$3.00
Granted $.12 -
Canceled or expired $3.00 $.50-$3.00
Outstanding at the end of
the year $.12-$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.
<PAGE>
Note 7 STOCKHOLDERS' EQUITY (continued)
--------------------------------
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 September 30, 1995, the Company adopted the 1995 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:
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, 1996, 1,290,000 options had been granted to officers and
directors. Of these, 1,020,000 options were granted at an exercise price of $.50
per share, 170,000 options were granted at an exercise price of $.60 per share
and 100,000 options were granted at an exercise price of $.12 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 were fully vested on January 1, 1996. The options expire ten
years from the date of grant.
On September 30, 1995, the Company adopted the 1995 Employee Stock
OptionPlan (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 exercise price for each NQSO
option is determined by the Committee at the time of grant.
As of June 30, 1996, 48,000 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 66 1/2 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 the 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.
<PAGE>
Note 7 STOCKHOLDERS' EQUITY (continued)
--------------------------------
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 October 1, 1995 were identical to those listed as
outstanding on June 30, 1995. Options granted to employees on October 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 48,000 compared to
56,000 options outstanding as of June 30, 1995, due to the termination of
certain employees.
Note 8 401(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, 1996 and
1995. The Company paid expenses on behalf of the Plan for 1996 and 1995 which
were nominal and included only administration costs.
Note 9 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,
1996 1995
-------- --------
Sales to Customer A $347,000 $721,000
Percentage of Total Revenues 10% 13%
Sales to Customer B $555,000 $ -
Percentage of Total Revenues 16%
<PAGE>
Note 10 SUBSEQUENT EVENTS
-----------------
Pending shareholder approval, the Company entered into an agreement,
effective July 1, 1996, with Wasatch Interactive Learning Corporation ("WILC"),
to sell to WILC the Education Market net assets of the Company relating to or
arising out of the Company's business of developing, marketing and licensing
proprietary and third party educational software and related products and
services in the Education Market. The Company, pending shareholder approval,
also has granted an exclusive, worldwide license to WILC to market the Company's
products and develop derivative products in the Education Market. The Company
will receive cash of $1,500,000 and future royalties based on sales by WILC of
Education Market products and subsequently developed derivative products. The
Company will retain all capitalized courseware costs, convertible subordinated
debentures and tax net operating loss carryforwards.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
FORM 10-KSB
PART III
ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF
REGISTRANT; Compliance with Section 16(a) of the Exchange Act.
The following table lists certain information regarding the executive
officers and directors of the Company as of June 30, 1996.
Name Age Position
- ---- --- --------
Barbara Morris 48 Chairman of the Board of Directors
President and Chief Executive Officer
Gregory George 47 Director
Jeffrey Keimer 53 Director, Secretary
Carolyn Poe 56 Director
Carol Hamil 48 Vice President of Development
Ralph Brown 46 Chief Financial Officer
Barbara Morris has been President, Chief Executive Officer and a director
of the Company since February 1992 and was elected to the position of the
Chairman of the Board of Directors in February 1995. She was President of
Tapestry Learning, a wholly-owned subsidiary of Jostens Learning Corporation,
both educational software companies, from March 1990 to October 1991. From May
1986 to March 1990, Ms. Morris was Vice President of Sales and Marketing for
Prescription Learning Corporation, an educational company, and Jostens Learning
Corporation.
Gregory George has been a Vice President of TFI since August 1985 and has
been a general partner of Technology Funding Limited since July 1987. Mr. George
is a director of ViewLogic, Inc., a public corporation.
Jeffrey Keimer has been the Company's Corporate Secretary since February
1992 and a director since August 1991. Mr. Keimer has been President and Chief
Executive Officer of Unison Capital Group, a broker dealer and a member of the
National Association of Securities Dealers, Inc. (the "NASD"), since 1987.
Carolyn Poe has been a Vice President of TFI since August 1993. She was a
senior Vice President of the Boston Company, an investment management company,
from January 1990 to December 1992. From September 1988 to January 1990 Ms. Poe
was a Vice President of Silicon Valley Bank.
Carol Hamil has been the Company's Vice President of Development since
January 1992. Previously, she served as Vice President of Development for
Tapestry Learning, a wholly-owned subsidiary of Jostens Learning Corporation,
from March 1990 to January 1992. From 1984 to 1990, Ms. Hamil served as Director
of Language Arts and software designer for Prescription Learning Corporation.
Ralph Brown has been the Company's Chief Financial Officer since April
1993. Prior to joining the Company, Mr. Brown was Chief Financial Officer for
Conpack Inc., a packaging company, from January 1986 until March 1993.
<PAGE>
ITEM 10: EXECUTIVE COMPENSATION
----------------------
The following table sets forth all compensation awarded to, earned by, or
paid for services rendered in all capacities to the Company for the fiscal year
ended June 30, 1996 by (i) the Company's Chief Executive Officer and (ii) the
Company's other executive officers whose annual salary and bonus exceeded
$100,000 (the "Named Officers").
Summary Compensation Table
Name and Annual Compensation(1) Long-Term Compensation Awards
Principal ---------------------- -----------------------------
Position Year Salary($) Bonus($) Options(#)
-------- ---- -------- -------- ----------
Barbara Morris 1996 175,000 -0- 60,000
President and Chief 1995 175,000 120,000 680,000(2)
Executive Officer 1994 175,000 25,000 -0-
Carol Hamil 1996 120,000 -0- 30,000
Vice President of 1995 120,000 50,000 340,000(2)
Development 1994 115,000 50,000 -0-
(1) The salary and bonus amounts (i) include all amounts attributable to
services performed in each fiscal year even if payment for such services
was in the next fiscal year, and (ii) excludes all amounts attributable to
services performed in years other than specified fiscal year that were
paid in the indicated fiscal year.
(2) These options were issued in January 1994 to replace options granted in
the fiscal year ended June 30, 1993. These options lapsed in January 1995
due to the lack of shareholder ratification. On October 1, 1995 ,
replacement options in the same amount and terms were issued under the new
1995 EOSO plan; however, based on the original Board of Directors grant of
these options, they survived the lapse of the 1994 EOSO plan as
Non-Qualified Stock Options with similar terms.
<PAGE>
The following table sets forth certain information concerning stock
options granted during the fiscal year ended June 30, 1996 to the Named
Officers:
Option Grants in Last Fiscal Year
Individual Grants
-----------------
Percent of
Total
Options
Granted to
Options Employees Exercise Expiration
Name Granted(#) in Fiscal Year Price($/share) Date
---- ---------- -------------- -------------- ----
Barbara Morris 60,000 60% $.12 9/30/2005
Carol Hamil 30,000 30% $.12 9/30/2005
The following table sets forth information regarding exercises of stock
options during the fiscal year ended June 30, 1996 by the Named Officers and
presents certain information with respect to the number of shares covered by
both exercisable and nonexercisable stock options held on June 30, 1996 by each
of the Named Officers. Also reported are values for "in-the-money" stock options
that represent the positive spread between the respective exercise prices of
outstanding stock options and the fair market value of the Common Stock as of
June 30, 1996 ($0.50) based upon the average bid price reported by the National
Quotation Bureau, Inc.
<TABLE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
<CAPTION>
Value of
Number of Unexercised
Number Unexercised In-the-Money
of Options Options
Shares at Fiscal at Fiscal
Acquired Value Year-end(#) Year-end($)
Name on Exercise Realized Exercisable/Nonexercisable Exercisable/Nonexercisable
---- ----------- -------- -------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Barbara - - 713,333 26,667 12,667 10,113
Morris
Carol - - 356,666 13,334 6,333 5,067
Hamil
</TABLE>
<PAGE>
ITEM 11: SECURITY OWNERSHIP OF CERTAIN OWNERS AND MANAGEMENT
The following tables set forth the number of shares beneficially owned as
of June 30, 1996 by (i) each Director of the Company, (ii) each Named Officer(as
defined below), (iii) all executive officers and directors 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
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) (9)
<PAGE>
Preferred Stock
---------------
Number
of Shares Percentage of
Beneficially Outstanding
Name of Beneficial Owner Owned (1) Shares of Outstanding
------------------------ --------- ---------------------
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 9,629 *
Officers 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 June 30, 1995 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 June 30, 1995 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 (collectively referred to as the "TFI
Funds"). 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 June 30, 1995.
(5) Represents 713,333 shares of Common Stock subject to options exercisable
within 60 days of June 30, 1995.
(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 June 30, 1995.
(7) Represents 356,666 shares of Common Stock subject to options exercisable
within 60 days of June 30, 1995.
(8) Represents 175,555 shares of Common Stock subject to options exercisable
within 60 days of June 30, 1995.
<PAGE>
(9) Includes 9,629 shares of Series "A" Preferred Stock convertible into
Common Stock within 60 days of June 30, 1995 and 1,190,000 shares of
Common Stock subject to options and 289,804 shares of Common Stock subject
to warrants exercisable within 60 days of June 30, 1995.
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
During April 1992, Technology Funding Secured Investors III ("TFSI III")
extended to the Company a $1,000,000 term loan, bearing interest at 12% per
annum and having an initial maturity date of October 1, 1992. In April of 1993,
the Maturity Date of the loan was extended to April 1, 1994 and warrants were
issued allowing TFSI III to purchase 150,000 shares of Common stock at $0.50 per
share. In addition, existing warrants held by various TFI funds were restated to
allow TFSI III to purchase 2,000,000 shares of Common Stock at $0.50 per share.
In April of 1993, the Company borrowed an additional $300,000 from TFSI III,
bringing the loan principal balance to $1,300,000. On April 14, 1994 the Company
borrowed an additional $200,000 from TFSI III on a secured promissory note. On
April 29, 1994 and again on May 17, 1994 an additional $250,000 was borrowed by
issuing secured promissory notes.
On December 31, 1991, TFSI III extended to the Company a $2,000,000
revolving line of credit (limited to 95% of "eligible" accounts receivable),
bearing interest at 12% per annum and having an initial maturity date of
November 30, 1992. The maturity date of the loan was extended to December 31,
1993 in April 1993. In connection with this revolving line of credit, the
Company granted warrants to TFSI III for 166,667 shares of the Company's Common
Stock at $3.00 per share. In April 1993, these warrants were repriced to $0.50
per share, and additional warrants were issued to TFSI III for 166,666 shares of
Common Stock at $0.50 per share. In July 1993, the total amount the Company
could borrow under this revolving line of credit increased from $2,000,000 to
$3,000,000 for which the Company issued warrants for the purchase of 50,000
shares of Common Stock at an exercise price of $0.50 per share. In February
1994, the credit limit under the revolving line of credit was again increased
from $3,000,000 to $3,500,000 and the maturity date was extended to June 30,
1994, for which the Company issued warrants for the purchase of 550,000 shares
of Common Stock at a price of $0.50 per share. Under the new agreement, if net
borrowings exceed 95% of eligible receivables a higher interest rate would
result to the Company.
On June 30, 1995, the Company converted all related party debt totaling
$5,500,000 into a combination of Series C non-convertible preferred stock and
common stock. 5,300,000 shares of Series C non-convertible preferred stock were
issued with a $1.00 per share face value and a $1.23 preferred liquidation value
and 1,666,666 shares of common stock were issued at $0.12 per share. No
additional warrants were issued in connection with the conversion.
<PAGE>
FORM 10-KSB
PART III
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(A) Exhibits
3.1 Articles of Incorporation*
3.2 Bylaws*
10.5 Agreement dated October 14, 1987, between Wasatch Education Systems,
Inc. and Grant Von Harrison*
10.6 Agreement dated April 30, 1987, between Dr. Dale Johnson, Bonne
vonHoff Johnson and Wasatch Education
Systems, Inc.*
10.7 License Agreement between Harvard Associates, Inc. and Wasatch
Education Systems*
10.11 Letter Agreement dated May 21, 1987, between Computerware
Consultants, Inc., and Wasatch Education Systems for marketing
Kinderlogo product*
10.15 Preferred Stock Purchase Agreement between Wasatch Education Systems,
Inc. and Purchasers (Ronald E. Berger, et al.)*
10.30 Licensing Agreement effective March 31, 1991 between the Company and
Computer Curriculum Corporation**
10.34 Licensing agreement dated January 8, 1993 between the Company and
Rutgers University.
10.35 Licensing agreement dated June 1, 1993 between the Company and Science
Research Associates.
10.36 Software development agreement dated May 20, 1993 between the Company
and Learningways Inc.
10.41 Private Placement Memorandum for up to $1,000,000 in new cash sales of
Series "A" preferred stock.
10.50 Wasatch Education Systems Corporation 1994 Executive Officer Stock
Option Plan, adopted August 31, 1995.
10.51 Wasatch Education Systems Corporation 1994 Employee Stock Option Plan,
adopted August 31, 1995.
10.52 Wasatch Education Systems Corporation Executive Officer Stock Option
Plan of 1994 form.
10.53 Wasatch Education Systems Corporation Employee Stock Option Plan of
1994 form.
10.54 Agreement dated January 3, 1990 between Wasatch Education Systems
Corporation and Educational Testing
Service ("ETS").
10.55 Software development agreement dated October 6, 1994 between the
Company and Integrated Information Systems, Inc.
10.56 Systems integration alliance agreement dated May 18, 1995 between
BDM Federal, Inc. and Wasatch Education Systems Corporation.
10.57 Debt to Equity conversion agreement dated June 30, 1995 between the
Company and Technology Funding Secured Investors III.
10.58 Product Distibution Agreement dated September 30, 1995 between the
Company and TRO Learning, Inc.
10.59 Office Space Lease agreement dated April 1, 1996 between the Company
and the Dr. W.C. Swanson Foundation.
10.60 Office Space Lease agreement dated October 20, 1996 between the
Company and William J. Wirthlin, Jr.
10.61 Acquisition agreement dated July 1, 1996 between the Company and
Wasatch Interactive Learning Corporation.
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-KSB (continued)
-----------------------------------------------
11 Earnings per share calculation
11.1 Earnings per share calculation
16 Letter on change in certifying accountant.
*Previously filed as Exhibits to Registration Statement No. 33-23885
which became effective October 4, 1988, which are incorporated herein
by reference.
**Previously filed as exhibits to report on Form 10-K for the year
ended December 31, 1990.
(B) Reports on Form 8-K
-------------------
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
WASATCH EDUCATION SYSTEMS CORPORATION
By: /s/ Barbara Morris
-------------------------
Barbara Morris, President
<PAGE>
SIGNATURES
- ----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Barbara Morris Chairman of the Date: September 30 , 1996
- ----------------------- Board of Director, ----------------------
Barbara Morris President and CEO
/s/ Ralph J. Brown Chief Financial Officer Date: September 30 , 1996
- ----------------------- ----------------------
Ralph J. Brown
/s/ Jeffrey W. Keimer Director Date: September 30 , 1996
- ----------------------- ----------------------
Jeffrey W. Keimer
/s/ Gregory T. George Director Date: September 30 , 1996
- ----------------------- ----------------------
Gregory T. George
/s/ Carolyn Poe Director Date: September 30 , 1996
- ----------------------- ----------------------
Carolyn Poe
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Balance sheet and Income Statement dated June 30, 1996 on Form 10-KSB, and is
qualified in its entirety by reference to such Form 10-KSB dated June 30, 1996.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 99,614
<SECURITIES> 0
<RECEIVABLES> 903,681
<ALLOWANCES> 15,000
<INVENTORY> 66,682
<CURRENT-ASSETS> 1,091,816
<PP&E> 778,127
<DEPRECIATION> 571,683
<TOTAL-ASSETS> 5,303,870
<CURRENT-LIABILITIES> 1,851,981
<BONDS> 0
0
10,074,220
<COMMON> 11,754,072
<OTHER-SE> (18,376,403)
<TOTAL-LIABILITY-AND-EQUITY> 5,303,870
<SALES> 3,500,251
<TOTAL-REVENUES> 3,500,251
<CGS> 1,496,391
<TOTAL-COSTS> 1,496,391
<OTHER-EXPENSES> 336,361
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 161,497
<INCOME-PRETAX> (715,168)
<INCOME-TAX> 0
<INCOME-CONTINUING> (715,168)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (715,168)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
WASATCH EDUCATION SYSTEMS CORPORATION
87-0458433
(I.R.S. Employer Identification No.)
EXHIBIT INDEX:
10.58 Product Distibution Agreement dated September 30, 1995 between the
Company and TRO Learning, Inc.
10.59 Office Space Lease agreement dated April 1, 1996 between the Company
and the Dr. W.C. Swanson Foundation.
10.60 Office Space Lease agreement dated October 20, 1996 between the
Company and William J. Wirthlin, Jr.
10.61 Acquisition agreement dated July 1, 1996 between the Company and
Wasatch Interactive Learning Corporation.
PRODUCT DISTRIBUTION AGREEMENT
This Product Distribution Agreement (the "Agreement") is made by and
between Wasatch Education Systems ("Wasatch"), a Utah corporation, and The Roach
Organization, Inc., d.b.a. TRO Learning, Inc. ("TRO"), a Delaware corporation,
effective as of September 30, 1995 (the "Effective Date").
RECITALS
A. Wasatch has rights to those certain software products more fully
described on Exhibit A hereto.
B. TRO desires to have certain exclusive rights to market and
distribute such products bundled with TRO's PLATO(R) products.
C. Wasatch desires to grant TRO such rights pursuant to the terms and
conditions of this Agreement.
NOW, THEREFORE, in consideration of the promises, conditions and covenants
set forth below, Wasatch and TRO hereby agree as follows:
1. DEFINITIONS.
1.1 "Bundled Products" means TRO's PLATO(R) Learning System product
bundled with any or all of the Wasatch Products.
1.2 "Education Market" means the middle school, high school,
alternative education, and adult education markets (including community colleges
and workplaces as well as other specialized post-secondary markets).
1.3 "End User" means a direct or indirect customer of TRO who is
authorized by an End User Agreement to use a TRO Product solely for the End
User's internal business purposes.
1.4 "End User Agreement" means an end user license agreement meeting
the requirements of Section 4.1 below.
1.5 "Intellectual Property Rights" means patent rights, copyright
rights (including, but not limited to, rights in audiovisual works and moral
rights), trade secret rights, and any other intellectual property rights
recognized by the law of each applicable jurisdiction.
1.6 "Wasatch Affiliate" means any entity who owns or controls
Wasatch (e.g., a parent company), or which is owned or controlled by Wasatch
(e.g., a subsidiary) or by an entity who owns or controls Wasatch (e.g., a
"sister" company). For purposes of this definition, "control" means ownership of
at least fifty percent (50%) of the voting interest of an entity.
1.7 "Wasatch Products" means the Wasatch Windows products listed on
Exhibit A, including but not limited to any modifications or additions thereto
provided to TRO by Wasatch, together with all accompanying documentation.
<PAGE>
2. LICENSES.
2.1 Use. Wasatch hereby grants to TRO a non-exclusive,
non-transferable license to use the Wasatch Products for internal purposes only
during the term of this Agreement.
2.2 Reproduction. Subject to Section 10.1(b) below, Wasatch hereby
grants to TRO a non-exclusive, non-transferable license to reproduce the Wasatch
Products, in object code format only, as well as accompanying documentation,
solely for the purpose of creating the Bundled Products.
2.3 Distribution. Wasatch hereby grants to TRO a non-exclusive,
worldwide, non-transferable license during the term of this Agreement to market,
distribute and sublicense the Bundled Products, together with accompanying
documentation, to End Users in the Education Market.
2.4 Bundling. TRO is not authorized to market, distribute or
sublicense the Wasatch Products apart from the Bundled
Products.
3. LICENSE RESTRICTIONS.
3.1 Reverse-Engineering. TRO will not disassemble, decompile,
reverse-engineer or translate the Wasatch Products, or otherwise attempt to
derive the source code of the Wasatch Products.
3.2 Copying. Except as expressly authorized in Section 2.2 above,
TRO will not copy or otherwise reproduce the Wasatch Products, in whole or in
part, except for making a back-up or archival copy.
3.3 Modification. TRO will not modify the Wasatch Products in any
manner without Wasatch's prior written consent. Wasatch will consider TRO's
recommendations for modifications or extensions to the Wasatch Products;
provided, however, that if such modifications and/or extensions are implemented,
Wasatch shall own all right, title, and interest thereto, including without
limitation all Intellectual Property Rights therein, and TRO shall not be
entitled to compensation therefor.
3.4 Sale of Services. TRO will not use the Wasatch Products in any
manner to provide service bureau, time-sharing, or other computer services to
third parties.
3.5 Limited Rights. TRO's rights in the Wasatch Products are limited
to those expressly granted in this Agreement, and otherwise Wasatch expressly
reserves all right, title and interest in and to the Wasatch Products.
3.6 Distribution by Wasatch.
(a) Wasatch will not grant a license nor authorize any third
party to grant a sublicense with respect to distribution of the Wasatch Products
during the term of the Agreement to the following organizations: Computer
Curriculum Corporation, New Century, INVEST, Jostens, Centec, Mergent, Glencoe,
Skills Bank, IBM, Ideal Learning, or any other organization which publishes a
comprehensive adult software curriculum as of the Effective Date (the
"Competitor Companies"). Furthermore, Wasatch shall not participate in any joint
marketing efforts using the Wasatch Products with any of the Competitor
Companies through any established dealer networks that such Competitor Companies
may have.
(b) Notwithstanding Section 3.6(a), nothing in this Agreement
shall prevent Wasatch, any current or future Wasatch Affiliate, or its or their
marketing representatives and independent dealers from marketing or distributing
the Wasatch Products without restriction.
<PAGE>
4. END USER AGREEMENTS.
4.1 End User Agreement. TRO may not distribute any Wasatch Products
to any End User unless such End User is subject to a written end user software
license agreement (an "End User Agreement") with TRO that is no less restrictive
than the form of the end-user agreement attached hereto as Exhibit C. TRO will
promptly provide Wasatch with reasonable access to such End User Agreements upon
Wasatch's request.
4.2 Enforcement. TRO shall make reasonable efforts to enforce the
End User Agreements with its End Users.
5. DELIVERY.
5.1 Master Copies. Wasatch will deliver to TRO a master copy of the
Wasatch Products and copies of the related documentation when requested by TRO.
All shipping or other transportation charges for delivery of the Wasatch
Products to TRO, including insurance and special packaging, shall be paid by
TRO.
5.2 Windows 95. Wasatch will make reasonable efforts to deliver to
TRO versions of the Wasatch Products which are fully compatible with Microsoft
Windows 95 and Novell NetWare 4.1 by March 31, 1996.
6. PAYMENTS.
6.1 License Fee. The license fee for the Wasatch Products is
set forth on Exhibit B (the "License Fee").
6.2 Royalties. TRO shall pay royalties (the "Royalties") to Wasatch
as described in Exhibit B. Royalty payments shall be submitted with the
quarterly reports described in Section 7.2.
6.3 Late Payments. Payments made under this Agreement after their
due date will incur interest at a rate equal to 1.0% per month or the highest
rate permitted by applicable law, whichever is lower.
6.4 Taxes. All amounts payable under this Agreement are exclusive of
all sales, use, value-added, withholding, and other taxes and duties.
6.5 Acceleration on Termination. Upon any termination of this
Agreement, any unpaid balance of the License Fee shall become immediately due
and payable.
6.6 Costs and Expenses. Unless otherwise mutually agreed by the
parties in writing, each party shall bear its own costs and expenses incurred in
the performance of this Agreement. In particular, TRO shall bear all costs and
expenses associated with support service, marketing, packaging and distribution
of the Bundled Products.
7. RECORDS AND REPORTS.
7.1 TRO's Records. TRO will maintain accurate and complete records
and books of account during the term of this Agreement and for two (2) years
thereafter regarding the number of copies of the Wasatch Products distributed by
TRO and compliance with the terms and conditions of this Agreement.
<PAGE>
7.2 Reports. On or before the twentieth (20th) day immediately
following each of Wasatch's fiscal quarters, ending March 31, June 30, September
30, and December 31, TRO shall provide Wasatch with a report detailing all sales
of the Bundled Products made during the prior quarter. The report shall include:
(i) Total retail price for all Bundled Products shipped
during the quarter by TRO;
(ii) Names and the city and state of residence for all End
Users of the Bundled Products;
(iii) Total units shipped to End Users for each of the Wasatch
Products;
(iv) Royalty calculation, if applicable; and
(v) A check for Royalties due, if any.
7.3 Audit. An independent certified public accountant selected by
Wasatch may, upon reasonable notice and during normal business hours, inspect
the books and records of TRO upon which its reports are based. If upon
performing such audit, it is determined that TRO has underpaid Wasatch by an
amount greater than seven and one-half percent (7.5%) of the payments due
Wasatch in the period being audited, TRO will bear all reasonable costs and
expenses of such audit in addition to its obligation to make full payment under
Section 6 including, without limitation, any interest due under Section 6.3.
8. TECHNICAL SUPPORT.
8.1 By TRO. TRO will be solely responsible for providing
support to its End Users for the Bundled Products.
8.2 By Wasatch. During the term of this Agreement, Wasatch shall
provide TRO with (i) the most current versions of the Products, (ii) corrections
and updates as they become available, and (iii) reasonable technical support.
Wasatch agrees to maintain compatibility with successor versions of Microsoft
Windows 95 within a reasonable period of time following release of such
versions. Except as otherwise provided in this Agreement or in a separate
written agreement, Wasatch shall have no responsibility whatsoever for providing
support to TRO's End Users.
9. CONFIDENTIALITY.
9.1 Confidential Information. "Confidential Information" means: (i) the
source code of the Wasatch Products; (ii) the business or technical information
of either party, including but not limited to any information relating to
product plans, designs, costs, product prices and names, finances, marketing
plans, business opportunities, personnel, research, development, ideas,
algorithms, verification techniques or know-how; (iii) any information
designated by the disclosing party as "confidential" or "proprietary" and, if
orally disclosed, reduced to writing by the disclosing party within thirty (30)
days of such disclosure or, which under the circumstances, would be reasonably
considered to be confidential; and (iv) the terms and conditions of this
Agreement.
9.2 Exclusions of Confidential Information. Notwithstanding the
foregoing, "Confidential Information" will not include information that: (i) is
or becomes generally known or available by publication, commercial use or
otherwise through no fault of the receiving party; (ii) is known to the
receiving party at the time of disclosure without violation of any
confidentiality restriction and without any restriction on the receiving party's
further use or disclosure; or (iii) is independently developed by the receiving
party without use of the disclosing party's Confidential Information.
<PAGE>
9.3 Use and Disclosure Restrictions. During the term of this
Agreement and thereafter, neither party will use the other party's Confidential
Information except as permitted herein or disclose such Confidential Information
to any third party except to employees or contractors as is reasonably required
in connection with the exercise of its rights and obligations under this
Agreement (and only subject to binding use and disclosure restrictions at least
as protective as those set forth herein executed in writing by such employees or
contractors). However, the receiving party may disclose the other party's
Confidential Information: (i) pursuant to the order or requirements of a court,
administrative agency or other governmental body, provided that the receiving
party give reasonable notice to the disclosing party to contest such order or
requirement; and (ii) on a confidential basis to legal or financial advisors.
9.4 Injunctive Relief. Each party acknowledges that the Confidential
Information of the other party contains trade secrets of such other party, the
disclosure of which would cause irreparable harm to such other party for which
monetary damages would be inadequate. Accordingly, each party agrees and
acknowledges that the other party will be entitled to seek preliminary and
permanent injunctive relief and other equitable relief, in addition to any other
available remedies, for any breach of this Section 9.
10. PROPRIETARY RIGHTS.
10.1 Wasatch's Ownership.
(a) The Wasatch Products are and shall remain the sole and
exclusive property of Wasatch and its suppliers, if any, whether the Wasatch
Products are separate or bundled into a TRO Product. Wasatch's rights under this
subsection will include, but not be limited to: (i) all copies of the Wasatch
Products, in whole or in part; (ii) all Intellectual Property Rights in the
Wasatch Products; and (iii) all modifications to, and derivative works based
upon, the Wasatch Products.
(b) TRO will not delete or in any manner alter the
Intellectual Property Rights notices of Wasatch and its suppliers, if any,
appearing on the Wasatch Products as delivered to TRO. As a condition of the
license rights granted to TRO in this Agreement, TRO shall reproduce all
copyright and proprietary rights notices which appear on the Wasatch Products.
10.2 TRO's Duties. TRO will use its best efforts to protect
Wasatch's Intellectual Property Rights in the Wasatch Products and to prevent
foreign piracy, and will promptly report to Wasatch any infringement or piracy
of which TRO becomes aware.
10.3 Third Party Infringement. Wasatch reserves the sole and
exclusive right at its discretion to assert claims against third parties for
infringement or misappropriation of its Intellectual Property Rights in the
Wasatch Products.
10.4 Trademarks.
(a) If any advertisement or other marketing material used by
TRO makes any statement as to the technical features or capabilities of the
Wasatch Products beyond the written information provided to TRO by Wasatch, TRO
will first obtain the written approval of Wasatch prior to publishing such
advertisement or material.
<PAGE>
(b) Subject to the terms and conditions of this Agreement,
Wasatch grants to TRO a non-exclusive, non-transferable license for the term of
this Agreement to use Wasatch's trademarks, trade names and service marks (the
"Trademarks") in TRO's marketing of the Bundled Products, provided that such use
is in accordance with Wasatch's trademark usage guidelines then in effect. Such
use must attribute ownership of the Trademarks to Wasatch and all use of the
Trademarks by TRO shall inure to the benefit of Wasatch. Nothing in this
Agreement grants TRO ownership or any other rights in or to use the Trademarks,
except in accordance with this license. The rights granted to TRO in this
license will automatically terminate upon any termination or expiration of this
Agreement. Upon such termination or expiration, TRO will no longer make use of
any of the Trademarks. Wasatch will have the exclusive right to own, use, hold,
apply for registration for, and register the Trademarks during the term of, and
after the expiration or termination of, this Agreement; TRO will neither take
nor authorize any activity inconsistent with Wasatch's exclusive rights to the
Trademarks.
11. WARRANTY.
11.1 Limited Warranty. Wasatch warrants to TRO that during the
ninety (90) days following delivery of the Wasatch Products to TRO the storage
media containing the Wasatch Products will be free from defects in materials and
workmanship. In the event the storage media fail to conform to such warranty, as
TRO's sole and exclusive remedy for such failure Wasatch will, at its option and
without charge to TRO, repair or replace the storage media, provided that the
nonconforming item is returned to Wasatch within the 90-day warranty period.
11.2 Disclaimer of Other Warranties. THE WARRANTY CONTAINED IN THIS
SECTION 11 IS IN LIEU OF ALL OTHER WARRANTIES. WASATCH HEREBY DISCLAIMS ALL
OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO ANY IMPLIED
WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND
NONINFRINGEMENT.
12. INDEMNIFICATION.
12.1 By TRO. TRO agrees to indemnify Wasatch for any third party
claims against Wasatch for loss, damage, liability, or expense (including but
not limited to reasonable attorneys' fees) arising out of any acts or omissions
of TRO or any of its End Users in connection with their activities under this
Agreement, including, without limitation, any claims of infringement or
misappropriation of the Intellectual Property Rights or other proprietary rights
of any third party arising out of or related to the Bundled Products to the
extent that such claims are not covered under Section 12.2 below.
12.2 By Wasatch.
(a) Infringement Indemnity.
(i) Wasatch will indemnify TRO against, and will defend or settle at
Wasatch's own expense, any action or other proceeding brought against TRO to the
extent that it is based on a claim that the use of the Wasatch Products as
licensed in this Agreement infringes any U.S. copyright, or that the Wasatch
Products incorporate any misappropriated trade secrets.
<PAGE>
(ii) Wasatch will pay any and all costs, damages, and expenses (including
but not limited to reasonable attorneys' fees) awarded against TRO in any such
action or proceeding attributable to any such claim.
(iii) Wasatch will have no obligation under this section as to any action,
proceeding, or claim unless: (A) Wasatch is notified within ten (10) days after
TRO becomes aware of it; (B) Wasatch has sole control of its defense and
settlement; and (C) TRO provides Wasatch with reasonable assistance in its
defense and settlement.
(b) Injunctions. If TRO's use of any Wasatch Products under
the terms of this Agreement is, or in Wasatch's opinion is likely to be,
enjoined due to the type of infringement or misappropriation specified in
subsection (a) above, then Wasatch may, at its sole option and expense, either:
(A) procure for TRO the right to continue using the Wasatch Products under the
terms of this Agreement; or (B) replace or modify such Wasatch Product so that
it is noninfringing and substantially equivalent in function to the enjoined
Wasatch Products; or (C) if options (A) and (B) above cannot be accomplished
despite the reasonable efforts of Wasatch, then Wasatch may both: (1) terminate
TRO's rights and Wasatch's obligations under this Agreement with respect to the
Wasatch Products, and (2) refund to TRO the License Fee less a reasonable
royalty for TRO's use and distribution prior to such termination.
(c) Sole Remedy. THE FOREGOING ARE WASATCH'S SOLE AND EXCLUSIVE
OBLIGATIONS, AND TRO'S SOLE AND EXCLUSIVE REMEDIES, WITH RESPECT TO INFRINGEMENT
OR MISAPPROPRIATION OF INTELLECTUAL PROPERTY RIGHTS.
(d) Exclusions. Notwithstanding the foregoing, Wasatch will
have no obligation under this Section 12.2 with respect to infringement or
misappropriation arising from (i) modifications to the Wasatch Products that
were not authorized by Wasatch, or (ii) the use of the Wasatch Products in
combination with products not provided by Wasatch, to the extent that such
infringement or misappropriation would not have resulted but for such
modification or combination.
13. LIMITATIONS OF LIABILITY.
13.1 Total Liability. WASATCH'S TOTAL LIABILITY TO TRO UNDER THIS
AGREEMENT WILL BE LIMITED TO THE LICENSE FEE SPECIFIED ON EXHIBIT B AND RECEIVED
FROM TRO HEREUNDER.
13.2 Exclusion of Damages. IN NO EVENT SHALL EITHER PARTY BE LIABLE
TO THE OTHER FOR ANY SPECIAL, INDIRECT, INCIDENTAL, EXEMPLARY OR CONSEQUENTIAL
DAMAGES, WHETHER BASED ON BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE),
PRODUCT LIABILITY, OR OTHERWISE, WHETHER OR NOT WASATCH HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES AND WHETHER OR NOT ANY REMEDY PROVIDED HEREUNDER
FAILS OF ITS ESSENTIAL PURPOSE.
<PAGE>
14. TERM AND TERMINATION.
14.1 Term. The term of this Agreement will begin on the Effective
Date and will continue until October 31, 1997 unless it is terminated earlier in
accordance with the provisions hereof. This Agreement may be renewed for
additional periods upon the mutual written agreement of the parties, although
each party acknowledges that the other is not under any obligation to do so.
14.2 Events of Termination. Either party will have the right to terminate
this Agreement if:
(a) the other party breaches any material term or condition of
this Agreement and fails to cure such breach within thirty (30) days after
written notice from the non-breaching party;
(b) the other party becomes the subject of a voluntary
petition in bankruptcy or any voluntary proceeding relating to insolvency,
receivership, liquidation, or composition for the benefit of creditors; or
(c) the other party becomes the subject of an involuntary
petition in bankruptcy or any involuntary proceeding relating to insolvency,
receivership, liquidation, or composition for the benefit of creditors, if such
petition or proceeding is not dismissed within sixty (60) days of filing.
14.3 Effect of Termination.
(a) Except as specified in subsection (b) below, upon any
termination or expiration of this Agreement, the licenses granted hereunder
shall automatically terminate, and TRO will: (i) immediately cease all
marketing, licensing and distribution of the Bundled Products containing the
Wasatch Products, and ( ii) immediately return to Wasatch or (at Wasatch's
request) destroy all copies of the Wasatch Products and other Confidential
Information in its possession or control, and an officer of TRO will certify to
Wasatch in writing that TRO has done so.
(b) Except in the event of a termination under Section 14.2(a)
for TRO's breach, upon termination or expiration of this Agreement, TRO may fill
valid purchase orders received prior to the date of such termination or
expiration, provided that such orders are filled within ninety (90) days
following such termination or expiration.
14.4 No Damages for Termination. NEITHER PARTY WILL BE LIABLE TO THE
OTHER FOR DAMAGES OF ANY KIND, INCLUDING INCIDENTAL OR CONSEQUENTIAL DAMAGES, ON
ACCOUNT OF ANY TERMINATION OR EXPIRATION OF THIS AGREEMENT. TRO WAIVES ANY RIGHT
IT MAY HAVE TO RECEIVE ANY COMPENSATION OR REPARATIONS ON TERMINATION OR
EXPIRATION OF THIS AGREEMENT UNDER THE LAW OF ANY JURISDICTION OR OTHERWISE,
OTHER THAN AS EXPRESSLY PROVIDED IN THIS AGREEMENT. Neither party will be liable
to the other on account of termination or expiration of this Agreement for
reimbursement or damages for the loss of goodwill, prospective profits or
anticipated income, or on account of any expenditures, investments, leases or
commitments made by either party or for any other reason whatsoever based upon
or growing out of any such termination or expiration.
<PAGE>
14.5 Non-Exclusive Remedy. The exercise by either party of any
remedy under this Agreement will be without prejudice to any other remedies it
may have under this Agreement or otherwise.
14.6 Survival. The following sections shall survive any termination
or expiration of this Agreement: Section 1 (Definitions), Section 6.5
(Acceleration on Termination), Section 9 (Confidentiality), Section 10
(Proprietary Rights), Section 12 (Indemnification), Section 13 (Limitations of
Liability), Section 14.3 (Effect of Termination), Section 14.4 (No Damages for
Termination), Section 14.6 (Survival), and Section 16 (General).
15. COMPLIANCE WITH LAW.
15.1 Applicable Law. TRO agrees to comply with all applicable laws, rules,
and regulations in connection with its activities under this Agreement.
15.2 Export Controls. This Agreement is subject to and conditioned
upon compliance with the U.S. Export Administration Act and the applicable
regulations thereunder (collectively, the "U.S. Export Laws"), as well as any
other laws of the U.S. affecting the export of technology. TRO agrees to comply
fully with the U.S. Export Laws and to provide Wasatch with such documentation,
assurances and access to records as may be required to obtain licenses under the
U.S. Export Laws. TRO certifies that neither the Bundled Products, the technical
data relating to the Bundled Products, nor any direct product of the Bundled
Products: (a) are intended to be used for any purposes prohibited by the U.S.
Export Laws, including but not limited to nuclear proliferation; nor (b) are
intended to be shipped or exported either directly or indirectly into any
country prohibited by the U.S. Export Laws.
16. GENERAL.
16.1 Assignment. This Agreement will bind and inure to the benefit
of each party's successors and permitted assigns. TRO may not assign its rights
or delegate its duties under this Agreement without Wasatch's prior written
consent. Wasatch may assign its rights and delegate its duties under this
Agreement to any third party without TRO's consent and in its sole discretion.
Any assignment or delegation in violation of this section will be null and void.
16.2 Governing Law. This Agreement will be governed by and construed
in accordance with the laws of the State of California without regard to, or
application of, conflict of law principles.
16.3 Severability. If any provision of this Agreement is found to be
invalid or unenforceable, that provision will be enforced to the maximum extent
permissible, and the other provisions of this Agreement will remain in full
force and effect.
16.4 Force Majeure. Except for payments due under this Agreement,
neither party will be responsible for any failure to perform due to causes
beyond its reasonable control (each a "Force Majeure"), including, but not
limited to, acts of God, war, riot, embargoes, acts of civil or military
authorities, denial of or delays in processing of export license applications,
fire, floods, earthquakes, accidents, strikes, or fuel crises, provided that
such party gives prompt written notice thereof to the other party. The time for
performance will be extended for a period equal to the duration of the Force
Majeure, but in no event longer than sixty (60) days.
<PAGE>
16.5 Notices. All notices under this Agreement will be deemed given
when (i) delivered personally, (ii) sent by confirmed facsimile transmission,
(iii) sent by certified or registered U.S. mail, or (iv) sent by
nationally-recognized express courier, to the address shown below or as may
otherwise be specified by either party to the other in accordance with this
section.
16.6 Independent Contractors. The parties to this Agreement are
independent contractors. There is no relationship of partnership, joint venture,
employment, franchise, or agency between the parties. Neither party will have
the power to bind the other party or incur obligations on the other party's
behalf without such party's prior written consent.
16.7 Waiver. No failure of either party to exercise or enforce any
of its rights under this Agreement will act as a waiver of such rights. To be
enforceable, a waiver must be in writing and signed by the waiving party.
16.8 Entire Agreement. This Agreement, together with the exhibits
hereto, is the complete and exclusive agreement between the parties with respect
to the subject matter hereof, and supersedes and replaces any and all prior
agreements, negotiations, communications, and understandings (both written and
oral) regarding such subject matter including, specifically, that certain letter
of intent between the parties dated October 9, 1995. This Agreement may only be
modified or amended by a written document executed by both parties.
16.9 Publicity. Neither party may disclose the terms of this
Agreement or issue any press release without the prior written consent of the
other party.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized representatives as of the Effective Date.
THE ROACH ORGANIZATION, INC. d.b.a.
WASATCH EDUCATION SYSTEMS TRO LEARNING, INC.
By: /s/Barbara Morris By: /s/Sharon Fierro
Name: Barbara Morris Name: Sharon Fierro
Title: CEO Title: Sr. VP & CFO
Date: 4/10/96 Date: 3/8/96
Address: Address:
5250 South 300 West 4660 West 77th Street
Salt Lake City, UT 84107 Edina, MN 55435
Fax: (801) 269-1509 Fax: (847) 781-7828
EXHIBITS
A - Description of Wasatch Products
B - Fee Schedule
C - End User License Agreement
<PAGE>
EXHIBIT A
DESCRIPTION OF WASATCH PRODUCTS
1. Projects for the Real World, Levels E-I, 20 units.
2. Basic Skills for the Real World, 8 units.
3. Job Skills, 3 units.
4. Wasatch management system associated with the above, until
TRO has provided replacement management system.
<PAGE>
EXHIBIT B
FEE SCHEDULE
1. Accounting Periods. For accounting purposes, the term of this Agreement
will be separated into two periods; the first will commence on September 30,
1995 and end on October 31, 1996 (the "First Accounting Period"), and the second
will commence on November 1, 1996 and end on October 31, 1997 (the "Second
Accounting Period").
2. License Fee. During the First Accounting Period, TRO shall pay to
Wasatch a one-time licensing fee (the "License Fee") in the amount of Five
Hundred and Fifty Thousand Dollars ($550,000) as follows:
(a)___One Hundred Thousand Dollars ($100,000) shall be due and payable on
or before November 1, 1995.
(b)___Nine (9) payments of Fifty Thousand Dollars ($50,000) each
shall be due and payable on the fifteenth of each month beginning on November
15, 1995 and ending July 15, 1996.
3. First Accounting Period Royalties.
(a)___The License Fee shall entitle TRO to distribute the retail
equivalent (using the imputed pricing structure attached hereto as Schedule B-1)
of One Million Five Hundred Thousand Dollars ($1,500,000) of the Bundled
Products during the First Accounting Period without payment of Royalties to
Wasatch.
(b)___Sales during the First Accounting Period over and above the
$1,500,000 limit will be subject to a Royalty in the amount of fifty percent
(50%) of the imputed retail price (as set forth on Schedule B-1) of all Bundled
Products distributed by TRO.
(c)___If during the final month of the First Accounting Period, TRO
is unable to ship all of the valid purchase orders it has received from its
customers, TRO may carryover these orders and these orders only into the Second
Accounting Period and still credit such backlog orders to the First Accounting
Period.
4. Second Accounting Period Royalties. For the Second Accounting Period,
TRO shall pay Royalties to Wasatch in the amount of fifty percent (50%) of the
imputed retail price (as set forth on Schedule B-1) of all Bundled Products
distributed by TRO. Such Royalties shall be payable whether or not TRO has
distributed the retail equivalent of $1,500,000 of the Bundled Products during
the First Accounting Period, except as provided in Paragraph 3(c) above.
5. Minimum Royalty Revenue.
(a)___TRO guarantees a minimum royalty revenue to Wasatch in the
amount of Eight Hundred Thousand Dollars ($800,000) for the period beginning
November 1, 1996 through June 30, 1997 (the "Minimum Royalty"). The Minimum
Royalty is the equivalent of the imputed retail price (as set forth on Schedule
B-1) of One Million Six Hundred Thousand Dollars ($1,6000,000) of the Bundled
Products.
(b)___If on June 30, 1997, TRO has not sold sufficient Bundled
Products to pay Wasatch the Minimum Royalty, TRO will owe to Wasatch the
difference between the royalties paid and the Minimum Royalty. The balance
required to make up the Minimum Royalty shall be due and payable by July 15,
1997.
(c)___TRO will have until the end of the Second Accounting Period to
sell Bundled Products and credit Royalties from such sales to any balance paid
by TRO pursuant to Paragraph 5(b) above.
(d)___If, during the final month of this Agreement, TRO is unable to
ship all of the valid purchase orders received from its customers, TRO may
carryover these orders, and these orders only, into TRO's next fiscal year and
still credit these backlog orders to the Minimum Royalty. TRO shall promptly
provide Wasatch with a detailed written report of all such backlog orders.
<PAGE>
SCHEDULE B-1
Volume Pricing, 100+ Workstations, Multi Building License
A Multi Building License is a single purchase volume discount for single and
multi building licenses. It only applies for purchases of 100 workstations or
larger, in increments of 50 workstations over 100, and only for a single school
district purchase. For purposes of calculating Royalties due to Wasatch, the
imputed retail price for each Wasatch Product licensed pursuant to the Multi
Building License model is equal to the imputed retail price calculated under the
Agreement for the applicable number of workstations (in increments of 50) plus
an additional 33% of the total imputed retail price (the "MBL Imputed Price").
TRO and Wasatch agree that this pricing is for a single school district purchase
and does not apply to other purchasing entities such as a state entity
purchasing for multiple sites across the state or a national organization
purchasing for multiple sites across the country. The parties also agree that
for quotes over 500 workstations either TRO must use the agreed to MBL Imputed
Price or Wasatch must approve a non-standard imputed retail price quote.
No credits are allowed for previous purchases.
Pricing is as depicted for quantity breaks, no incremental breaks are permitted.
# of workstations MBL Imputed Price = Imputed retail
price per product per # of workstations (as set
forth below) + 33% premium
100 # of workstations - 100
101-150 # of workstations - 150
151-200 # of workstations - 200
201-250 # of workstations - 250
251-300 # of workstations - 300
301-350 # of workstations - 350
351-400 # of workstations - 400
401-450 # of workstations - 450
451-500 # of workstations - 500
<PAGE>
EXHIBIT C
END USER LICENSE AGREEMENT
<PAGE>
Software User License
End User Warranty and License Agreement for Wasatch Education Systems Software
BY OPENING THIS PACKAGE YOU ACCEPT ALL THE TERMS AND CONDITIONS OF THIS
AGREEMENT. IF YOU DO NOT AGREE WITH THESE TERMS AND CONDITIONS, RETURN THE
UNUSED SOFTWARE AND ALL ACCOMPANYING ITEMS TO THE PLACE WHERE YOU OBTAINED THEM.
1. License. In this Agreement "Licensed Software" means the demonstration
software programmed and any other software program contained on this disc for
which you have paid the applicable fee. You may use the Licensed Software on a
single central processing unit. You may not use the Licensed Software on a
system accessible to multiple users unless your disc has "Network Version"
clearly labeled on it and you have paid the Networked license fee. Wasatch
Education Systems retains all rights, title, and ownership to the Licensed
Software.
2. Restrictions. You may not distribute, or transfer the Licensed Software or
the Documentation to others. You may not reverse engineer, decompile,
disassemble, modify, adapt, translate, or create derivative works based on the
Licensed Software or documentation without the prior written consent of Wasatch
Education Systems. You may not copy the Licensed Software or documentation
except to make a single copy of the Licensed Software for backup or archival
purposes only.
3. No Other Rights. Except as stated above, this Agreement does not grant
you any rights to patent, copyrights, trade secrets, trademarks, or any other
rights in respect to the Licensed Software.
4. Termination. The license is effective until terminated. Wasatch
Education Systems has the right to terminate your licensee immediately if you
fail to comply with any terms of this Agreement. Upon such termination you must
destroy the original and any copies of the Licensed Software.
5. Limited Warranty. Wasatch Education Systems guarantees any of its products
free from defect or damage for thirty calendar days from date of shipment.
Wasatch Education Systems will replace any CDs, diskettes, books, or manuals
within thirty calendar days of shipment at no cost, as long as the defective or
damaged materials are sent by to Wasatch Education Systems by regristrared mail.
After thirty calendar days from original shipment, Wasatch Education Systems
will replace lost, stolen, defective, or damaged CDs for $100 per CD title,
diskettes for $20 per diskette.
6. Warranty Disclaimer. THE LICENSED SOFTWARE IS PROVIDED "AS IS". THE COMPANY
DOES NOT WARRANT THAT THE LICENSED SOFTWARE WILL MEET YOUR REQUIREMENTS OR THAT
THE OPERATION OF THE LICENSED SOFTWARE WILL BE UNINTERRUPTED OR ERROR-FREE. THE
COMPANY DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, WITHOUT
LIMITATION, THE IMPLIED WARRANTIES OR MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE. THE COMPANY DOES NOT WARRANT, GUARANTEE OR MAKE ANY
REPRESENTATION REGARDING THE USE OR THE RESULTS OF THE USE OF THE SOFTWARE IN
TERMS OF ITS CORRECTNESS, ACCURACY, RELIABILITY, CURRENTNESS, OR OTHERWISE. IN
NO EVENT SHALL WASATCH EDUCATION SYSTEMS OR ITS EMPLOYEES, AGENTS, SUPPLIERS OR
CONTRACTORS BE LIABLE FOR ANY INCIDENTAL, INDIRECT, SPECIAL OR CONSEQUENTIAL
DAMAGES ARISING OUT OF OR IN CONNECTION WITH THE LICENSE GRANTED UNDER THIS
AGREEMENT, INCLUDING WITHOUT LIMITATION, LOSS OF USE, LOSS OF DATA, LOSS OF
INCOME OR PROFIT, OR OTHER LOSSES SUSTAINED AS A RESULT OF INJURY TO ANY PERSON,
OR LOSS OF OR DAMAGE TO THE PROPERTY, OR CLAIMS OF THIRD PARTIES, EVEN IF THE
COMPANY OR AN AUTHORIZED REPRESENTATIVE HAS BEEN ADVISED OF THE POSSIBILITY OF
SUCH DAMAGES. WASATCH EDUCATION SYSTEMS DOES NOT GUARANTEE THAT OUR SOFTWARE
WILL OPERATE ON YOUR PARTICULAR HARDWARE PLATFORM OR NETWORKED SYSTEM. WASATCH
EDUCATION SYSTEMS WILL NOT REIMBURSE YOU FOR SOFTWARE PURCHASED FOR THE WRONG
TYPE OF HARDWARE CONFIGURATION. MAKE SURE YOUR PARTICULAR SYSTEM MEETS OUR
MINIMUM HARDWARE REQUIREMENTS. THE WARRANTIES IN THIS AGREEMENT GIVE YOU
SPECIFIC LEGAL RIGHTS, AND YOU MAY ALSO HAVE OTHER RIGHTS WHICH VARY IN
ACCORDANCE WITH LOCAL LAW.
7. General. You acknowledge that you have read this agreement, understand it and
agree to be bound by its terms and conditions. You also agree that this
agreement is the complete and exclusive statement of the agreement between you
and Wasatch Education Systems and supersedes all proposals or prior agreements,
oral or written, and any other communications between you and Wasatch Education
Systems or any representative of Wasatch Education Systems relating to the
subject matter of this agreement.
BUILDING LEASE
THIS BUILDING LEASE (this "Lease") is entered into as of the 1st day of
April, 1996, between Lew Costley and his successors, as trustee of the Dr. W.C.
Swanson Foundation ("Landlord"), whose address is 1104 Country Hills Dr. #411,
Ogden, Utah 84403, and Wasatch Education Systems, Inc. ("Tenant"), with an
address of 5250 South 300 West, Suite 101, Salt Lake City, Utah 84107.
FOR THE SUM OF TEN DOLLARS and other valuable consideration, the receipt
and sufficiency of which are acknowledged, Landlord and Tenant agree as follows:
1. Definitions. Each of the following words and phrases shall have the
meaning set forth:
"Basic Monthly Rent" means the amount set forth below opposite the
period of this Lease to which such amount applies:
Period Basic Monthly Rent
4/1/96 to 3/31/97 $ 9,603.22
4/1/97 to 3/31/98 $ 9,875.61
4/1/98 to 3/31/99 $10,154.97
"Operating Expenses" means all operating expenses, costs and
disbursements of the building in which the Premises are located, computed on the
accrual basis and consisting of all expenditures by Landlord to maintain all
facilities in operation as may be reasonably determined by Landlord to be
necessary. Such expenses shall include but shall not be limited to costs for
snow removal, wages and salaries for operating and maintenance personnel,
supplies and materials used in operating and maintaining such building, costs
for all utilities for such building, costs for janitorial, window cleaning and
other services required to maintain such building, the cost of insurance of all
kinds carried by Landlord on such building, all taxes and assessments
attributable to such building (except Landlord's income taxes), costs of repairs
and general maintenance, legal fees and management costs. Such terms shall not
include costs for capital improvements made to such building, principal and
interest payments on loans secured by such building, depreciation attributable
to such building, brokerage commissions paid with respect to leasing such
building, and legal expenses incurred in enforcing the terms of this Lease or
any other lease for space within such building.
"Building" means the building known as the "Atrium Building" with
the street address of 5250 South 300 West, in Salt Lake City, Utah. (The
Building consists of rentable commercial office space, and includes, without
limitation, all heating, air conditioning, mechanical, electrical, elevator and
plumbing systems, the roof and all walls, foundations and fixtures constituting
a part of the Building.)
"Commencement Date" means April 1, 1996.
"Expiration Date" means March 31, 1999.
"Occupants" means, collectively, any assignee, subtenant, employee,
agent, licensee or invitee of Tenant.
"Permitted Use" means general business and office use.
"Premises" means, approximately 8,381 rentable square feet of
commercial office space located in the Building and identified as 5250 South 300
West, Suite 101, Salt Lake City, Utah 84107.
<PAGE>
"Tax, Utility and Maintenance Costs" means, collectively, those
expenses incurred by Landlord pursuant to paragraphs 5, 7.2 and 8.3 of this
Lease.
"Term" means the period commencing on 12:01 a.m. at the Commencement
Date and expiring on midnight of the Expiration Date, together with the period
of extension of this Lease that occurs by reason of Tenant's exercise of its
option to extend this Lease pursuant to paragraph 16.4 of this Lease.
2. Agreement of Lease; Modification.
2.1 Lease. Landlord leases the Premises to Tenant and Tenant leases
the Premises from Landlord for the term, in accordance with the provisions set
forth in this Lease.
2.2 Modification. Landlord will modify the Premises in accordance
with the attached bids for painting, carpet and window coverings, in the amount
of $19,044.09. Tenant acknoledges that any expense incurred by Tenant over these
bids will be at the Tenant s sole expense.
3. Lease Payment Obligation. Tenant's obligation to pay rent under this
Lease shall commence on the Commencement Date and shall be for the Term.
4. Basic Monthly Rent.
4.1 Amount and Penalty. Tenant covenants to pay to Landlord without
abatement, deduction, offset, prior notice or demand the Basic Monthly Rent in
lawful money of the United States in consecutive monthly installments at such
place as Landlord may designate, in advance on or before the first day of each
calendar month during the Term, commencing on the Commencement Date. If the
Termination Date occurs on a day other than the last day of a calendar month,
the Basic Monthly Rent for that fractional month shall be prorated on a daily
basis.
4.2 Additional Rent. Beginning on the first anniversary date of this
Lease (April 1, 1997), and on each subsequent anniversary date thereafter,
Tenant shall pay to Landlord, on a monthly basis, in addition to the Basic
Monthly Rent, additional rent equal to the excess of Landlord's total Operating
Expenses for the calendar year ending within the twelve month Lease period
immediately preceding the twelve month Lease term for which additional rent is
calculated, over Landlord's total Operating Expenses for such building for the
calendar year of 1996, multiplied by a fraction, the numerator of which is 8539
(the total rentable square feet of the Premises), and the denominator of which
is 61,299 (the total rentable square feet of the Building) ("Additional Rent").
4.3 Net Rent. It is the intent of Landlord and Tenant that the Basic
Monthly Rent and Additional Rent be, except for Tenant's telephone installation
and usage charges, as provided in paragraph 7.2 of this Lease, and subject to
the Additional Rent required to be paid pursuant to paragraph 4.2 of this Lease,
net to Tenant.
<PAGE>
5. Property Taxes. Landlord shall pay all real property taxes applicable
to the Premises during the Term. As used herein the term "real property taxes"
shall include any form of general or special assessment, license fee, commercial
rental or gross receipts tax, levy, penalty, duty, charge or tax imposed by any
authority having the direct or indirect power to tax. Tenant shall be
responsible for, and shall pay in a timely manner, all taxes attributable to
trade fixtures and personal property belonging to Tenant and located at the
Premises.
6. Use. Tenant shall not use or occupy or permit the Premises to be used
or occupied for any purpose other than for the Permitted Use, and shall not do
or permit anything to be done by Tenant's Occupants that may (a) increase the
existing rate or violate the provisions of any insurance carried with respect to
the Premises; (b) create a public or private nuisance, commit waste or interfere
with, annoy or disturb any other tenant or occupant of the Building or Landlord
in the operation of the Building; (c) overload the floors or otherwise damage
the structure of the Building; (d) constitute an improper, immoral or
objectionable purpose; (e) violate any present or future governmental or
quasigovernmental laws, ordinances, regulations or requirements or any
covenants, conditions and restrictions existing with respect to the Premises;
(f) subject Landlord or any other tenant to any liability to any third party; or
(g) lower the first-class character of the Building. Tenant shall, at Tenant's
sole cost, (h) use the Premises in a careful, safe and proper manner; (i) use
the Premises in a manner that complies with all ordinances, regulations and
requirements and any covenants, conditions and restrictions existing with
respect to the Premises, including, without limitation, those relating to
hazardous substances, hazardous wastes, pollutants or contaminants; (j) comply
with the requirements of any board of fire underwriters or other similar body
relating to the Premises; (k) keep the Premises free of objectionable noises and
odors; (l) not store, use or dispose of any hazardous substances, hazardous
wastes, pollutants or contaminants on the Premises; and (m) not place any sign
on the Premises, unless Landlord consents to such sign in advance in writing.
Except as set forth in this Lease, no representation or warranty has been made
to, or relied on by, Tenant concerning the Premises, including, without
limitation, the fitness or suitability of the Premises for the conduct of
Tenant's business, nor has Landlord agreed to undertake any modification,
alteration or improvement of the Premises.
7. Utilities and Maintenance Costs. As of the Commencement Date:
7.1 Telephone and Janitorial Costs. Tenant agrees that it will pay all
charges attributable to the installation and use of any telephone service
installed by Tenant at the Premises, and janitorial services to the Premises.
7.2 Utilities. Landlord shall pay all costs, expenses, charges and
amounts, of whatever kind or character, for all water, gas, electricity, sewer
service, trash disposal and other utilities and services supplied to the
Premises, together with any taxes on such utilities and services.
8. Maintenance and Repairs; Alterations; Signage; and Access to Premises.
8.1 Maintenance of Premises by Tenant. Tenant, at Tenant's sole cost
and expense, shall maintain the Premises in good order, condition and repair
(reasonable wear and tear excepted), and shall keep the Premises in a clean and
sanitary condition.
<PAGE>
8.2 Access to Premises. Landlord and Landlord's agents, employees
and contractors may enter the Premises at reasonable times on reasonable notice
to Tenant for the purpose of inspecting the Premises and ascertaining compliance
with the provisions of this Lease by Tenant. Landlord shall have free access to
the Premises in an emergency. Landlord may also show the Premises to prospective
purchasers, tenants or mortgagees at reasonable times. Landlord shall use its
best efforts to minimize interference with Tenant or with Tenant's business.
Tenant waives any claim for any damages, injury or inconvenience to, or
interference with, Tenant's business, loss of occupancy or quiet enjoyment of
the Premises and other loss occasioned by such entry, unless caused by
Landlord's willful misconduct or gross negligence.
8.3 Maintenance and Repairs by Landlord. Landlord shall maintain the
common areas of the Building and the adjacent parking area in good order,
condition and repair, and in a clean and sanitary condition, including both
structural and nonstructural portions, including, without limitation, all
plumbing, heating, air conditioning, ventilating, electrical and lighting
facilities and equipment, fixtures, walls (interior and exterior), foundations,
ceilings, roofs (interior and exterior), columns, beams, floors, windows, window
sashes and frames, doors and door frames, glass, landscaping, driveways, parking
lots, fences, signs (except those installed by Tenant), and furnishings.
8.4 Alterations. Tenant shall not make any change, addition or
improvement to the Premises (including, without limitation, the attachment of
any fixture or equipment), without the prior written consent of Landlord, which
consent shall not be unreasonably withheld or delayed.
8.5 Signage. Tenant shall not install any signage on any part of the
Building without the prior written consent of Landlord, which consent shall not
be unreasonably withheld or delayed. All signage installed within the Premises
and on the entryways to the Premises shall be suitable for general business
space use and shall match the general decor of the Building both as to size and
style. Upon termination of this Lease, all of Tenant's signage shall be removed
and Tenant, at its cost, shall repair all damage that is caused by its
installation and removal of signs to the Building and patch and paint the
Building as may be required to put the area where each such sign was located in
the condition that such area was in before the installation of such sign.
9. Assignment.
9.1 Prohibition. Tenant shall not assign, transfer, mortgage,
encumber, pledge or hypothecate this Lease or Tenant's interest in this Lease,
in whole or in part, permit the use of the Premises or any part of the Premises
by any persons other than Tenant or Tenant's employees, or sublease the Premises
or any part of the Premises, without the prior written consent of Landlord,
which consent shall not be unreasonably withheld or delayed. Any transfer of
this Lease from Tenant by liquidation shall constitute an assignment for the
purposes of this Lease. Consent to any assignment or subleasing shall not
operate as a waiver of the necessity for consent to any subsequent assignment or
subleasing and the terms of such consent shall be binding on any person holding
by, under or through Tenant. At Landlord's option, any assignment or sublease
without Landlord's prior written consent shall be void ab initio.
<PAGE>
9.2 Termination. If Tenant requests Landlord's consent to an
assignment of this Lease or to a subleasing of the whole or any part of the
Premises, Tenant shall submit to Landlord the terms of such assignment or
subleasing, the name and address of the proposed assignee or subtenant, such
information relating to the nature of such assignee's or subtenant's business
and finances as Landlord may reasonably require and the proposed effective date
(the "Effective Date") of the proposed assignment or subleasing (which Effective
Date shall be neither less than thirty nor more than ninety days following the
date of Tenant's submission of such information). On receipt of such request and
all such information from Tenant, Landlord may, by notice within thirty days
after such receipt, terminate this Lease if the request is to assign this Lease
or to sublease all of the Premises or, if the request is to sublease a portion
of the Premises only, terminate this Lease with respect to such portion, in each
case as of the Effective Date, unless within five business days after notice
from Landlord to Tenant of such termination, Tenant withdraws such request. Such
right to terminate shall be for any reason, including, without limitation, the
right to retain all profits of such assignment or sublease. If Landlord shall
exercise such termination right, Tenant shall surrender possession of the entire
Premises or the portion which is the subject of the right, as the case may be,
on the Effective Date in accordance with the provisions of Paragraph 17. If this
Lease is terminated as to a portion of the Premises only, the rent payable by
Tenant under this Lease shall be abated proportionately commencing as of the
Effective Date, based on the percentage of the Premises as to which this Lease
has been terminated.
9.3 Landlord's Rights. If this Lease is assigned or if all or any
portion of the Premises is subleased by any person other than Tenant without
obtaining Landlord's consent, Landlord may collect rent and other charges from
such assignee or other party, and apply the amount collected to the rent and
other charges reserved under this Lease, but such collection shall not
constitute consent or waiver of the necessity of consent to such assignment or
subleasing, nor shall such collection constitute the recognition of such
assignee or subtenant as Tenant under this Lease or a release of Tenant from the
further performance of all of the covenants and obligations of Tenant contained
in this Lease. No consent by Landlord to any assignment or subleasing by Tenant
shall relieve Tenant of any obligation to be paid or performed by Tenant under
this Lease, whether occurring before or after such consent, assignment or
subleasing, but rather Tenant and Tenant's assignee or subtenant, as the case
may be, shall be jointly and severally primarily liable for such payment and
performance. Tenant shall reimburse Landlord for Landlord's attorneys' and other
fees and costs incurred in connection with both determining whether to give
consent and giving consent. No assignment or subleasing under this Lease shall
be effective unless and until Tenant provides to Landlord an executed
counterpart of the assignment or sublease agreement, which shall specifically
state that (a) such agreement is subject to all of the provisions of this Lease;
(b) in the case of an assignment, the assignee assumes and agrees to perform all
of Tenant's obligations under this Lease; (c) the assignee or subtenant, as the
case may be, may not further assign such agreement, or allow the Premises to be
used by others, without the prior written consent of Landlord in each instance;
(d) a consent by Landlord to such assignment or subleasing shall not be deemed
or construed to modify, amend or affect the provisions of this Lease or Tenant's
obligations under this Lease, which shall continue to apply to the Premises and
the occupants of the Premises as if the assignment or sublease had not been
made; (e) if Tenant defaults in the payment of any amounts due under this Lease,
Landlord is authorized to collect any rents or other amounts due from any
assignee, subtenant or other occupant of the Premises and to apply the net
amounts collected to the sums reserved in this Lease; and (f) the receipt by
Landlord of any amounts from an assignee, subtenant or other occupant of any
part of the Premises shall not be deemed or construed as releasing Tenant from
Tenant's obligations under this Lease or the acceptance of that party as a
direct tenant. If all or any portion of the Premises is assigned or subleased
and compensation to be received by Tenant exceeds the Basic Monthly Rent (or pro
rata portion of the Basic Monthly Rent, as the case may be) applicable to the
portion being assigned or subleased, Tenant shall pay such excess to Landlord on
the first day of each calendar month.
<PAGE>
10. Indemnity; Waiver and Release.
10.1 Indemnity. Tenant shall indemnify, defend and hold harmless
Landlord and Landlord's employees and agents from and against all demands,
claims, causes of action, judgments, losses, damages, liabilities, fines,
penalties, costs and expenses, including attorney's fees, arising from the
occupancy or use of the Premises by Tenant or Tenant's Occupants, any hazardous
substances, hazardous wastes, pollutants or contaminants deposited, released or
stored by Tenant or Tenant's Occupants on the Premises, the conduct of Tenant's
business on the Premises, any act or omission done, permitted or suffered by
Tenant or any of Tenant's Occupants, any default or nonperformance by Tenant
under this Lease, any injury or damage to the person, property or business of
Tenant or Tenant's Occupants or any litigation commenced by or against Tenant to
which Landlord is made a party without fault on the part of Landlord, except to
the extent that such claim is due to the negligence or willful misconduct of
Landlord or Landlord's employees or agents. If any action or proceeding is
brought against Landlord, Landlord's employees or Landlord's agents by reason of
any such claim, Tenant, on notice from Landlord, shall defend the claim at
Tenant's expense with counsel reasonably satisfactory to Landlord. The
provisions of this Paragraph 10.1 shall survive the expiration of the Term or
sooner termination of this Lease.
10.2 Waiver and Release. Tenant waives and releases all claims
against Landlord and Landlord's employees and agents with respect to all matters
for which Landlord has disclaimed liability pursuant to the provisions of this
Lease. In addition, Landlord and Landlord's employees and agents shall not be
liable for any loss, injury, death or damage (including any consequential
damage) to persons, property or Tenant's business resulting from any theft, act
of God, public enemy, injunction, riot, strike, insurrection, war, court order,
requisition, order of governmental body or authority, fire, explosion, falling
object, steam, water, rain, snow, breakage, leakage, obstruction or other
defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or
lighting fixtures, construction, repair or alteration of the Premises or other
cause beyond Landlord's control.
11. Insurance. Tenant shall, at Tenant's sole cost, be responsible for
maintaining and continuing in force insurance coverage for any personal property
that is maintained by Tenant at the Premises, for personal liability of Tenant
with respect to causes of action that arise at the Premises or in or around the
Building, and workman's compensation insurance satisfying Tenant's obligations
under the workmen's compensation laws of the State of Utah. Tenant shall name
Landlord as an additional insured on any liability insurance obtained by Tenant
pursuant to this paragraph 11.
<PAGE>
12. Damage or Destruction. If the Premises are partially damaged or
destroyed by any casualty insured against under any insurance policy maintained
by Landlord, it shall, on receipt of the insurance proceeds, repair the Premises
to substantially the condition in which the Premises were immediately prior to
such destruction. Landlord's obligation of repair shall not exceed the lesser of
the cost of the standard improvements installed by Landlord in the Premises, or
the proceeds received by Landlord from any insurance policy maintained by
Landlord. Until such repair is complete, the Basic Monthly Rent and Additional
Rent shall be abated proportionately commencing on the date of such damage or
destruction as to that portion of the Premises rendered untenantable, if any. If
(a) by reason of such occurrence the Premises are rendered wholly untenantable;
(b) the Premises are damaged as a result of a risk not covered by insurance; (c)
the Premises are damaged in whole or in part during the last twelve months of
the Term; (d) the Premises or the Building (whether or not the Premises are
damaged) is damaged to the extent of ten percent or more of the then-replacement
value of either or to the extent that it would take, in Landlord's opinion, in
excess of ninety days to complete the requisite repairs; or (e) insurance
proceeds adequate to repair the Premises are not available to Landlord for any
reason, Landlord may either elect to repair the damage or cancel this Lease by
notice of cancellation within sixty days after such event, and on such notice
Tenant shall vacate and surrender the Premises to Landlord. If Landlord elects
to repair any such damage, any abatement of Basic Monthly Rent shall end on
notice given by Landlord to Tenant that the Premises have been repaired. If the
damage is caused by the negligence of Tenant or Tenant's Occupants, neither
Basic Monthly Rent nor Additional Rent shall abate. Except for abatement of
Basic Monthly Rent and Additional Rent, if any, Tenant shall have no claim
against Landlord for any loss suffered by reason of any such damage,
destruction, repair or restoration, nor may tenant terminate this Lease as the
result of any statutory provision in effect on or after the date of this Lease
pertaining to the damage and destruction of the Premises or the Building. The
proceeds of all insurance carried by Tenant on Tenant's furnishings, trade
fixtures, leasehold improvements, equipment, merchandise and other personal
property shall be held in trust by Tenant for the purpose of the repair and
replacement of the same. Landlord shall not be required to repair any damage or
to make any restoration or replacement of any furnishings, trade fixtures,
leasehold improvements, equipment, merchandise and other personal property
installed in the Premises by Tenant or at the direct or indirect expense of
Tenant. Unless this Lease is terminated by Landlord pursuant to this Paragraph,
Tenant shall be required to restore or replace such furnishings, trade fixtures,
leasehold improvements, equipment, merchandise and other personal property on
damage or destruction in at least a condition equal to that existing prior to
such event.
13. Condemnation. As used in this Paragraph the term "Condemnation
Proceedings" means any actions or proceedings in which any interest in the
Premises is taken for any public or quasi-public purpose by any lawful authority
through exercise of the power of eminent domain or by purchase or otherwise in
lieu of such exercise. If the whole of the Premises is taken through
Condemnation Proceedings, this Lease shall automatically terminate as of the
date of the taking. The phrase "as of the date of the taking" means the date of
taking actual physical possession by the condemning authority or such earlier
date as the condemning authority gives notice that it is deemed to have taken
possession. Landlord or Tenant may terminate this Lease if more than twenty-five
percent (25%) of the Premises is taken or any portion of the Premises is taken
which substantially interferes with Tenant's ability to operate or use the
Premises for the purposes for which the Premises were intended. Any such
termination must be accomplished through written notice given no later than
thirty (30) days after, and shall be effective as of, the date of such taking.
In all other cases, or if neither Landlord nor Tenant exercises its right to
terminate, this Lease shall remain in effect. If a portion of the Premises is
taken and this Lease is not terminated, the Basic Monthly Rent shall be reduced
in the proportion that the floor area taken bears to the total floor area of the
Premises immediately prior to the taking. Whether or not this Lease is
terminated as a consequence of Condemnation Proceedings, all damages of
compensation awarded for a partial or total taking, including any award for
severance damage and any sums compensating for diminution in the value of or
deprivation of the leasehold estate under this Lease, shall be the sole and
exclusive property of Landlord, provided that Tenant shall be entitled to any
award for the loss of, or damage to, Tenant's trade fixtures or loss of
business, provided that a separate award is actually made to Tenant and that the
same will not reduce Landlord's award. Tenant shall have no claim against
Landlord for the occurrence of any Condemnation Proceedings, or for the
termination of this Lease or a reduction in the Premises as a result of any
Condemnation Proceedings.
<PAGE>
14. Landlord's Financing. This Lease shall be subordinate to any existing
or future first mortgage, first deed of trust, ground lease, declaration of
covenants, conditions, easements and restrictions and all renewals,
modifications, amendments, consolidations, replacements and extensions of any
such instruments. No documentation other than this Lease shall be required to
evidence such subordination. If the holder of any mortgage or deed of trust
elects to have this Lease superior to the lien of its mortgage or deed of trust
and gives written notice of such election to Tenant, this Lease shall be deemed
prior to such mortgage or deed of trust. Tenant shall execute such documents
which may be required by Landlord to confirm such subordination or priority
within ten days after request. Tenant shall from time to time if so requested by
Landlord and if doing so will not materially and adversely affect Tenant's
economic interests under this Lease, join with Landlord in amending this Lease
so as to meet the needs or requirements of any lender that is considering making
or that has made a loan secured by all or any portion of the Premises. Any sale,
assignment or transfer of Landlord's interest under this Lease or in the
Premises, including any such disposition resulting from Landlord's default under
a debt obligation, shall be subject to this Lease and Tenant shall attorn to
Landlord's successors and assigns and shall recognize such successors or assigns
as Landlord under this Lease, regardless of any rule of law to the contrary or
absence of privity of contract.
15. Default.
15.1 Default by Tenant. The occurrence of any of the following
events shall constitute a default by Tenant under this Lease; (a) Tenant fails
to timely pay any installment of Basic Monthly Rent or any other sum due under
this Lease within three business days after written notice is given to Tenant
that the same is past due; (b) Tenant fails to timely observe or perform any
other term, covenant or condition to be observed or performed by Tenant under
this Lease within three business days after written notice is given to Tenant of
such failure; provided, however, that if more than three business days is
reasonably required to cure such failure, Tenant shall not be in default if
Tenant commences such cure within such three business day period and diligently
prosecutes such cure to completion; (c) Tenant files a petition in bankruptcy,
becomes insolvent, has taken against such party in any court, pursuant to state
or federal statute, a petition in bankruptcy or insolvency or for reorganization
or appointment of a receiver or trustee, petitions for or enters into an
arrangement for the benefit of creditors or suffers this Lease to become subject
to a writ of execution; (d) Tenant vacates or abandons the Premises; or (e) any
guarantor of this Lease attempts to rescind or terminate its guaranty.
15.2 Remedies. On any default by Tenant under this Lease, Landlord
may at any time, without waiving or limiting any other right or remedy available
to Landlord, (a) perform in Tenant's stead any obligation that Tenant has failed
to perform, and Landlord shall be reimbursed promptly for any cost incurred by
Landlord with interest from the date of such expenditure until paid in full at
the lesser of the prime rate then charged by First Security Bank of Utah, N.A.
(or any other bank or savings and loan association designated by Landlord), plus
four percent, or eighteen percent per annum (the "Interest Rate"); (b) terminate
Tenant's rights under this Lease by written notice; (c) reenter and take
possession of the Premises by any lawful means (with or without terminating this
Lease); or (d) pursue any other remedy allowed by law. Tenant shall pay to
Landlord the cost of recovering possession of the Premises, all costs of
reletting, including reasonable renovation, remodeling and alternation of the
Premises, the amount of any commissions paid by Landlord in connection with such
reletting, and all other costs and damages arising out of Tenant's default,
including attorneys' fees and costs. Notwithstanding any termination or reentry,
the liability of Tenant for the rent reserved in this Lease shall not be
extinguished for the balance of the Term, and Tenant agrees to compensate
Landlord on demand for any deficiency arising from reletting the Premises at a
lesser rent than applies under this Lease.
<PAGE>
15.3 Past Due Amounts; Obligations Independent. If Tenant fails to
pay when due any amount required to be paid by Tenant under this Lease, such
unpaid amount shall bear interest at the Interest Rate from the due date of such
amount to the date of payment in full, with interest. In addition, Landlord may
also charge a sum of five percent of such unpaid amount as a service fee. This
late payment charge is intended to compensate Landlord for Landlord's additional
administrative costs resulting from Tenant's failure to timely perform Tenant's
obligations under this Lease, and has been agreed on by Landlord and Tenant
after negotiation as a reasonable estimate of the additional administrative
costs which will be incurred by Landlord as a result of such failure. The actual
cost in each instance is extremely difficult, if not impossible, to determine.
This late payment charge shall constitute liquidated damages and shall be paid
to Landlord together with such unpaid amount. The payment of this late payment
charge shall not constitute a waiver by Landlord of any default by Tenant under
this Lease. All amounts due under this Lease are and shall be deemed to be rent
or additional rent, and shall be paid without abatement, deduction, offset,
prior notice or demand (unless provided by the terms of this Lease). Landlord
shall have the same remedies for a default in the payment of any amount due
under this Lease as Landlord has for a default in the payment of Basic Monthly
Rent. The obligations of Tenant to pay Basic Monthly Rent and all other amounts
due and to perform all of Tenant's obligations under this Lease are severable
from and independent of any obligation of Landlord under this Lease.
15.4 Default by Landlord. Landlord shall not be in default under
this Lease unless Landlord or the holder of any mortgage or deed of trust
covering the Premises whose name and address have been furnished to Tenant in
writing fails to perform an obligation required of Landlord under this Lease
within thirty days after written notice by Tenant to Landlord and to such
holder, specifying the respects in which Landlord has failed to perform such
obligation. If the nature of Landlord's obligation is such that more than thirty
days are reasonably required for performance or cure, Landlord shall not be in
default if Landlord or such holder commences performance within such thirty day
period and after such commencement diligently prosecutes the same to completion.
In no event may Tenant terminate this Lease or withhold the payment of rent or
other charges provided for in this Lease as a result of Landlord's default.
16. Expiration or Termination; Option to Extend Term.
16.1 Surrender of Premises. On the expiration of the Term or sooner
termination of this Lease, Tenant shall, at Tenant's own cost, (a) promptly and
peaceably surrender the Premises to Landlord "broom clean," in good order and
condition; (b) repair any damage to the Premises caused by or in connection with
the removal of any property from the Premises by or at the direction of Tenant;
(c) repair, patch and paint in a good and workmanlike manner satisfactory to
Landlord all holes and other marks in the floors, walls and ceilings of the
Premises; and (d) deliver all keys to the Premises to Landlord. Before
surrendering the Premises, Tenant shall, at Tenant's sole cost, remove Tenant's
movable personal property and trade fixtures (including signage) only, and all
other property shall, unless otherwise directed by Landlord, remain in the
Premises as the Property of Landlord without compensation; however, Tenant shall
not remove any personal property or trade fixtures from the Premises without
Landlord's prior written consent if such removal will impair the structure of
the Building or Tenant is in default under this Lease. Landlord may require
Tenant to remove any personal property, trade fixtures, other property,
alterations, additions and improvements made to the Premises by Tenant or by
Landlord for Tenant, and to restore the Premises to their condition on the date
of this Lease. All personal property, trade fixtures and other property of
Tenant not removed from the Premises on the abandonment of the Premises or on
the expiration of the Term or sooner termination of this Lease for any cause
shall conclusively be deemed to have been abandoned and may be appropriated,
sold, stored, destroyed or otherwise disposed of by Landlord without notice to,
and without any obligation to account to, Tenant or any other person. Tenant
shall pay to Landlord all expenses incurred in connection with the disposition
of such property in excess of any amount received by Landlord from such
disposition. No surrender of the Premises shall be effected by Landlord's
acceptance of the keys or of the rent or by any other means without Landlord's
written acknowledgement of such acceptance as a surrender. Tenant shall not be
released from Tenant's obligations under this Lease in connection with surrender
of the Premises until Landlord has inspected the Premises and delivered to
Tenant a written release.
<PAGE>
16.2 Holding Over. Tenant shall indemnify, defend and hold harmless
Landlord from and against all claims, liabilities and expenses, including
attorneys' fees, resulting from delay by Tenant in surrendering the Premises in
accordance with the provisions of this Lease. If Tenant remains in possession of
the Premises or any part of the Premises after the expiration of the Term or
sooner termination of this Lease with the written consent of Landlord, such
occupancy shall be a tenancy from month to month at a rental (and not as a
penalty) in the amount of one hundred and twenty-five percent of the last
monthly rental, plus all other charges payable under this Lease, and on all of
the terms of this Lease applicable to a month to month tenancy.
16.3 Survival. The provisions of this Paragraph 16 shall survive the
expiration of the Term or sooner termination of this Lease.
16.4 Option to Extend. Tenant shall have the right, upon written
notice to Landlord within 90 days before the Expiration Date, to extend the
period of this Lease for one additional thirty-six month period. In the event of
such extension, all of the provisions of this Lease shall apply for the
additional period, except that the Basic Monthly Rent shall be adjusted for each
twelve month period of the thirty-six month extension to the market rate for
commercial business space comparable to the Premises.
17. Security Deposit. Tenant has deposited with Landlord the Security
Deposit as security for the faithful performance by Tenant under this Lease. The
Security Deposit shall be returned (without interest) to Tenant (or, at
Landlord's option, to the last assignee of Tenant's interest under this Lease)
after the expiration of the Term, or sooner termination of this Lease and
delivery of possession of the Premises to Landlord in accordance with Paragraph
16 if, at such time, Tenant is not in default under this Lease. If Landlord's
interest in this Lease is conveyed, transferred or assigned, Landlord shall
transfer or credit the Security Deposit to Landlord's successor in interest and
Landlord shall be released from any liability for the return of the Security
Deposit. Landlord may intermingle the Security Deposit with Landlord's own
funds, and shall not be deemed to be a trustee of the Security Deposit. If
Tenant fails to timely pay or perform any obligation under this Lease, Landlord
may, prior to, concurrently with, or subsequent to, exercise any other right or
remedy, use, apply or retain all or any part of the Security Deposit for the
payment of any monetary obligation due under this Lease, or to compensate
Landlord for any other expense, loss or damage that Landlord may incur by reason
of Tenant's failure, including any damage or deficiency in the reletting of the
Premises. If all or any portion of the Security Deposit is so used, applied or
retained, Tenant shall immediately deposit with Landlord cash in an amount
sufficient to restore the Security Deposit to the original amount. The Security
Deposit is not a limitation on Landlord's damages or other rights under this
Lease, a payment of liquidated damages or prepaid rent, and shall not be applied
by Tenant to the rent for the last (or any) month of the Term, or to any other
amount due under this Lease. If this Lease is terminated due to any default of
Tenant, any portion of the Security Deposit remaining at the time of such
termination shall immediately inure to the benefit of Landlord as partial
compensation for the costs and expenses incurred by Landlord in connection with
this Lease, and shall be in addition to any other damages to which Landlord is
otherwise entitled.
<PAGE>
18. Estoppel Certificate. Tenant shall, within five days after Landlord's
request, execute and deliver to Landlord an estoppel certificate in favor of
Landlord and such other persons as Landlord shall request setting forth the
following: (a) a ratification of this Lease; (b) the Commencement Date and
Expiration Date; (c) that this Lease is in full force and effect and has not
been assigned, modified, supplemented or amended (except by such writing as
shall be stated); (d) that all conditions under this Lease to be performed by
Landlord have been satisfied, or, in the alternative, those claimed by Tenant to
be unsatisfied; (e) that no defenses or offsets exist against the enforcement of
this Lease by Landlord, or, in the alternative, those claimed by Tenant; (f) the
amount of advance rent, if any (or none if such is the case), paid by Tenant;
(g) the date to which rent has been paid; (h) the amount of the Security
Deposit; and (i) such other information as Landlord may request. Landlord's
mortgage lenders and purchasers shall be entitled to rely on any estoppel
certificate executed by Tenant. If Tenant fails to execute such estoppel
certificate within such five business day period, Landlord may execute the same
on behalf of Tenant as Tenant's duly authorized attorney-in-fact. For such
purpose, Tenant makes, constitutes and appoints Landlord as Tenant's true and
lawful attorney to act for Tenant and in Tenant's name, place and stead and for
Tenant's use and benefit. Such power of attorney shall be irrevocable and shall
be deemed to be coupled with an interest.
19. General Provisions.
19.1 No Partnership. Landlord does not by this Lease, in any way or for any
purpose, become a partner or joint venturer of Tenant in the conduct of Tenant's
business or otherwise.
19.2 Force Majeure. If either Landlord or Tenant is delayed or
hindered in or prevented from the performance of any act required under this
Lease by reason of acts of God, strikes, lockouts, other labor troubles,
inability to procure labor or materials, fire, accident, failure of power,
restrictive governmental laws, ordinances, regulations or requirements of
general applicability, riots, civil commotion, insurrection, war or other reason
not the fault of the party delayed, hindered or prevented and beyond the control
of such party (financial inability excepted), performance of the action in
question shall be excused for the period of delay and the period for the
performance of such act shall be extended for a period equivalent to the period
of such delay. The provisions of this Paragraph shall not, however, operate to
excuse Tenant from the prompt payment of rent or any other amounts required to
be paid under this Lease.
19.3 Notices. Any notice or demand to be given by Landlord or Tenant
to the other shall be given in writing by personal service, telegram, express
mail, Federal Express, DHL or any other similar form of courier or delivery
service, or mailing in the United States mail, postage prepaid, certified,
return receipt requested and addressed to such party as follows:
If to Landlord:
The Dr. W.C. Swanson Foundation
c/o Property Management Company, Inc.
1104 Country Hills Drive, #411
Ogden, Utah 84403
If to Tenant:
Wasatch Education Systems, Inc.
a Utah corporation
5250 South 300 West, Suite 101
Salt Lake City, Utah 84107
<PAGE>
Either Landlord or Tenant may change the address at which such party desires to
receive written notice of such change to the other party. Any such notice shall
be deemed to have been given, and shall be effective, on delivery to the notice
address then applicable for the party to which the notice is directed; provided,
however, that refusal to accept delivery of a notice or the inability to deliver
a notice because of an address change which was not properly communicated shall
not defeat or delay the giving of a notice.
19.4 Severability. If any provision of this Lease or the application
of any provision of this Lease to any person or circumstance shall to any extent
be invalid, the remainder of this Lease or the application of such provision to
persons or circumstances other than those as to which such provision is held
invalid shall not be affected by such invalidity. Each provision of this Lease
shall be valid and enforceable to the fullest extent permitted by law.
19.5 Use of Pronouns. The use of the neuter singular pronoun to
refer to Landlord or Tenant shall be deemed a proper reference even though
Landlord or Tenant may be an individual, partnership, association, corporation
or a group of two or more individuals, partnerships, association, corporation or
a group of two or more individuals, partnerships, associations or corporations.
The necessary grammatical changes required to make the provisions of this Lease
apply in the plural sense where more than one Landlord or Tenant exists and to
corporations, associations, partnerships, individuals, males or females, shall
in all instances be assumed as though in each case fully expressed.
19.6 Successors. Except as otherwise provided in this Lease, all
provisions contained in this Lease shall be binding on respective heirs,
devisees, successors, assigns and legal representatives. On any sale or
assignment (except for purposes of security or collateral) by Landlord of the
Premises or this Lease, Landlord shall, on and after such sale or assignment, be
relieved entirely of all of Landlord's obligations under this Lease and such
obligations shall, as of the time of such sale or assignment, automatically pass
to Landlord's successor in interest.
19.7 Recourse by Tenant. Anything in this Lease to the contrary
notwithstanding, Tenant shall look solely to the equity of Landlord in the
Premises, subject to prior rights of the holder of any mortgage or deed of
trust, for the collection of any judgment (or other judicial process) requiring
the payment of money by Landlord on any default or breach by Landlord with
respect to any of the terms, covenants and conditions of this Lease to be
observed or performed by Landlord, and no other assets of Landlord or any other
person shall be subject to levy, execution or other procedures for the
satisfaction of Tenant's remedies.
19.8 Quiet Enjoyment. On Tenant paying the rent reserved under this
Lease and observing and performing all of the terms, covenants and conditions on
Tenant's part to be observed and performed under this Lease, Tenant shall have
quiet enjoyment of the Premises for the Term without interference from Landlord,
or anyone claiming by, through or under Landlord, subject to all of the
provisions of this Lease.
19.9 Waiver. No failure by any party to insist on the strict
performance of any covenant, duty or condition of this Lease or to exercise any
right or remedy consequent on a breach of this Lease shall constitute a waiver
of any such breach or of such or any other covenant, duty or condition. Any
party may, by notice delivered in the manner provided in this Lease, but shall
be under no obligation to, waive any of its rights or any conditions to its
obligations under this Lease, or any covenant or duty of any other party. No
waiver shall affect or alter the remainder of this Lease but each other
covenant, duty and condition of this Lease shall continue in full force and
effect with respect to any other then existing or subsequently occurring breach.
<PAGE>
19.10 Rights and Remedies. The rights and remedies of Landlord and
Tenant shall not be mutually exclusive and the exercise of one or more of the
provisions of this Lease shall not preclude the exercise of any other
provisions. The parties confirm that damages at law may be an inadequate remedy
for a breach or threatened breach by any party of any of the provisions of this
Lease. The parties' respective rights and obligations under this Lease shall be
enforceable by specific performance, injunction or any other equitable remedy.
19.11 Authorization. Each individual executing this Lease does
represent and warrant to each other so signing (and each other entity for which
another person may be signing) that he has been duly authorized to deliver this
Lease in the capacity and for the entity set forth where he signs.
19.12 Attorneys' Fees. If any action is brought to recover any rent
or other amount under this Lease because of any default under this Lease, to
enforce or interpret any of the provisions of this Lease, or for recovery of
possession of the Premises, the party prevailing in such action shall be
entitled to recover from the other reasonable attorney's fees (including those
incurred in connection with any appeal), the amount of which shall be fixed by
the court and made a part of any judgment rendered. Tenant shall be responsible
for all expenses incurred by Landlord, including, without limitation, attorneys'
fees, that Landlord incurs in any case or proceeding involving Tenant under or
related to any bankruptcy or insolvency law. The foregoing provisions of this
Paragraph 18.12 shall survive the expiration of the Term or sooner termination
of this Lease.
19.13 Merger. The surrender of this Lease by Tenant, the
cancellation of this Lease by agreement of Landlord and Tenant or the
termination of this Lease on account of Tenant's default shall not work a
merger, and shall, at Landlord's option, either terminate any subleases of part
or all of the Premises or operate as an assignment to Landlord of any of those
subleases. Landlord's option under this Paragraph 19.14 may be exercised by
notice to Tenant and all known subtenants in the Premises.
<PAGE>
19.14 Miscellaneous. The captions to the Paragraphs of this Lease
are for convenience of reference only and shall not be deemed relevant in
resolving questions of construction or interpretation under this Lease. Exhibits
referred to in this Lease and any addenda, riders and schedules attached to this
Lease shall be deemed to be incorporated in this Lease as though a part of this
Lease. Tenant shall not record this Lease or a memorandum or notice of this
Lease without the prior written consent of Landlord. This Lease and the
exhibits, riders and addenda, if any, attached, constitute the entire agreement
between the parties. Any guaranty delivered in connection with this Lease is an
integral part of this Lease and constitutes consideration given to Landlord to
enter into this Lease. No amendment to this Lease shall be binding on Landlord
or Tenant unless reduced to writing and signed. Unless otherwise set forth in
this Lease, all references to Paragraphs are to Paragraphs in this Lease. Each
provision to be performed by Tenant shall be construed to be both a covenant and
a condition. This Lease shall be governed by and construed and interpreted in
accordance with the laws of the State of Utah. Venue on any action arising out
of this Lease shall be proper only in the District Court of the county in which
the Premises are located, in the State of Utah. Time is of the essence of each
provision of this Lease. The submission of this Lease to Tenant is not an offer
to lease the Premises or an agreement by Landlord to reserve the Premises for
Tenant. Landlord shall not be bound to Tenant until Tenant has duly executed and
delivered duplicate original copies of this Lease to Landlord, and Landlord had
duly executed and delivered one of those duplicate original copies to Tenant.
LANDLORD AND TENANT have executed this Lease on the respective dates set
forth below, to be effective as of the date first set forth above.
LANDLORD:
LEW COSTLEY AND HIS SUCCESSORS, as trustee of THE DR. W.C.
SWANSON FOUNDATION
Date: By:/s/Lew Costley
Lew Costley, Trustee
TENANT:
WASATCH EDUCATION SYSTEMS, INC., a Utah corporation
Date: By:/s/Barbara Morris
Barbara Morris, President
OFFICE LEASE
[1755 Prospector Avenue, Park City, Utah]
(Suite 101)
THIS OFFICE LEASE (this "Lease") is entered into as of the 21st day of
October, 1995 , between WILLIAM M. WIRTHLIN, JR., an individual ("Landlord"),
whose address is 560 South 300 East, Salt Lake City, Utah 84111, and WASATCH
EDUCATION SYSTEMS CORPORATION, a Utah corporation ("Tenant"), whose address is
5250 South 300 West, Suite 101; Salt Lake City, Utah 84107.
IN CONSIDERATION of the mutual agreements set forth in this Lease,
Landlord and Tenant agree as follows:
1. Definitions. Each of the following terms shall have the indicated
meaning:
"Adjustment Date" means the first day of the third Lease Year
and the first day of each succeeding Lease Year.
"Base Rent" means $5,918.00 (3,228 rentable square feet x $22.00 / 12) per
calendar month, subject to adjustment pursuant to Paragraph 4.2.
"Building" means the office building located at 1755
Prospector Avenue, Park City, Utah.
"Commencement Date" means the date thirty (30) days after the
occurrence of each of 1) the agreement by Tenant and Landlord on the plans and
specifications for the improvements to the Premises; and, 2) the issuance of all
necessary permits for construction of the agreed upon improvements to the
Premises provided, however, that if Landlord's construction obligations with
respect to the Premises (if any) have not been fulfilled on or before such date,
the "Commencement Date" shall be the date on which such obligations are
fulfilled, subject only to the completion by Landlord of any "punch list" items
which do not materially interfere with Tenant's use and enjoyment of the
Premises. Notwithstanding the foregoing, if Tenant sooner opens the Premises for
business to the public, the "Commencement Date" shall be the date on which
Tenant opens for business.
"Common Areas" means all driveway, parking, sidewalk,
delivery, landscape, lobby, elevators, corridors, hallways and other areas or
improvements that are provided by Landlord for the common use of tenants in the
Building.
"CPI" means "Consumer Price Index--U.S. City Average For All
Items For All Urban Consumers (1982-84=100)" (the "CPI-U") published monthly in
the "Monthly Labor Review" or other publication by the Bureau of Labor
Statistics, United States Department of Labor (the "Labor Bureau"); provided,
however, that:
(I) if the CPI-U is discontinued, "CPI" shall mean
"Consumer Price Index--U.S.
City Average For All Items For Urban Wage Earners and Clerical Workers
(1982-84=100)" (the "CPI-W") published monthly in the "Monthly Labor Review" or
other publication by the Labor Bureau;
(ii) if the CPI-W is discontinued, "CPI" shall
refer to comparable statistics on the purchasing power of the consumer dollar
published by the Labor Bureau or by another agency of the United States
reasonably selected by Landlord;
<PAGE>
(iii) if the Labor Bureau or another agency of the United States
no longer publishes comparable statistics on the purchasing power of the
consumer dollar, "CPI" shall refer to comparable statistics published by a
responsible financial periodical or recognized authority reasonably selected by
Landlord, and adjustments shall be made in the computation set forth in
Paragraph 4.2 as the circumstances may require; and
(iv) if the base year "(1982-84=100)" or other base year used in computing
the CPI-U or the CPI-W is changed, the figures used in making the adjustments in
Paragraph 4.2 shall be changed accordingly so that all increases in the CPI-U
and CPI-W are taken into account notwithstanding any such change in the base
year.
"Expense Stop" means $12,912.00. The Expense Stop is computed
by multiplying the number of net rentable square feet of the Premises by $4.00
per square foot.
"Expiration Date" means the date which is sixty (60) months
after the Commencement Date, plus any partial calendar month occurring between
the Commencement Date and the first day of the first full calendar month
following the Commencement Date, if the Commencement Date does not occur on the
first day of a calendar month.
"Lease Year" means a period of twelve consecutive calendar
months. The first Lease Year shall be the period commencing on the Commencement
Date and expiring on the last day of the twelfth full calendar month on or after
the Commencement Date. Each subsequent Lease Year shall commence on the first
day of the first calendar month following the expiration of the immediately
preceding Lease Year.
"Occupants" means any assignee, subtenant, employee, agent, licensee or
invitee of Tenant.
"Outside Date" means the date sixty (60) days after the occurrence of each
of 1) the agreement by Tenant and Landlord on the plans and specifications for
the improvements to the Premises; and, 2) the issuance of all necessary permits
for construction of the agreed upon improvements to the Premises.
"Permitted Use" means general office use as executive offices
for computer software development company only, and no other purpose.
"Premises" means Suite 101 on the first floor, consisting of approximately
3,228 net rentable square feet, shown as the crosshatched area on the attached
Exhibit A, located in the Building. The Premises do not include the foundation,
roof and structural portions of the Building.
"Security Deposit" means $5,918.00.
"Tenant's Parking Allocation" means 12 parking stalls.
"Tenant's Percentage" means 17.9 (3228 / 18,040) percent,
which is the result obtained by dividing the approximate net rentable square
feet of the Premises by the approximate net rentable square feet of all premises
within the Building.
"Term" means the period commencing on the Commencement Date and expiring on
the Expiration Date.
<PAGE>
2. Agreement of Lease. Landlord leases the Premises to Tenant and
Tenant leases the Premises from Landlord for the Term, together with such rights
of pedestrian and vehicular ingress and egress on, over and across the Common
Areas as are reasonably necessary for the use of the Premises, in accordance
with the provisions set forth in this Lease. In addition, Tenant shall have the
non-exclusive right to use a number of parking stalls located in the Common
Areas equal to Tenant's Parking Allocation. On Landlord's or Tenant's request,
Landlord and Tenant shall execute a written acknowledgment of the Commencement
Date in the form of the attached Exhibit B, which acknowledgment shall be deemed
to be a part of this Lease. If for any reason not due to Tenant's fault,
Landlord fails to deliver possession of the Premises to Tenant on or before the
Outside Date, Landlord shall waive Tenant's obligation to pay Base Rent for a
period of time equal to one day for each day after the Outside Date that
Landlord is unable to deliver possession of the Premises to Tenant. If for any
reason not due to Tenant's fault, Landlord fails to deliver possession of the
Premises to Tenant on or before thirty (30) days following the Outside Date,
Tenant may terminate this Lease, but only by written notice given to Landlord
within fifteen (15) days after the Outside Date, and all advance rent and
security, if any, paid by Tenant to Landlord shall promptly be returned to
Tenant.
3. Work of Improvement. The respective obligations (if any) of Landlord
and Tenant to prepare the Premises for occupancy are described on the attached
Exhibit C. Landlord and Tenant (as applicable) shall perform such work
diligently, in a first-class and workmanlike manner and in compliance with all
applicable laws, ordinances, rules and regulations. With respect to any work
performed by Landlord, Landlord and Tenant shall, at a mutually convenient time,
conduct a walk-through of the Premises prior to or within fifteen (15) days
after the Commencement Date, and prepare a "punch list" of items to be promptly
completed by Landlord.
4. Rent.
4.1 Base Rent. Tenant covenants to pay to Landlord the Base
Rent at the address for Landlord set forth at the outset of this Lease or at
such other place as Landlord may designate, in advance on or before the first
day of each calendar month during the Term, commencing on the Commencement Date.
If the Commencement Date is not the first day of a calendar month, on or before
the Commencement Date, the Base Rent shall be paid for the initial fractional
calendar month (prorated on a per diem basis) and for the first full calendar
month following the Commencement Date. If this Lease expires or terminates on a
day other than the last day of a calendar month, the Base Rent for such
fractional month shall be prorated on a per diem basis.
4.2 CPI Escalation. The Base Rent shall be increased as of
each Adjustment Date to the product obtained by multiplying the Base Rent by a
fraction, the numerator of which is the CPI for the third month preceding the
Adjustment Date concerned, and the denominator of which is the CPI for the third
month preceding the second Lease Year. The amount of such increase shall be
determined by Landlord as soon as reasonably possible after the CPI for the
third month preceding each such Adjustment Date becomes available. Tenant shall
pay such increased Base Rent until the later of the next Adjustment Date or the
date on which Landlord provides to Tenant the amount of the next increase in the
Base Rent. Landlord may invoice Tenant retroactively for the increased portion
of the Base Rent due for the period between any such Adjustment Date and the
date of such invoice. The delay or failure of Landlord to compute or to bill
Tenant for any adjustment to be made pursuant to this Paragraph 4.2 shall not
impair the continuing obligation of Tenant to pay the increased portion of the
Base Rent resulting from such adjustment. In no event shall the Base Rent be
decreased as a result of this Paragraph 4.2.
<PAGE>
5. Operating Expenses.
5.1 Definitions. Each of the following terms shall have the indicated
meaning:
"Estimated Expenses" means the amount of Operating Expenses reasonably
projected by Landlord for any Operating Year.
"Operating Expenses" means all reasonable costs, expenses and fees incurred
or payable by Landlord in connection with this Lease and the ownership,
operation, management, maintenance and repair of the Building and the Common
Areas, determined in accordance with cash basis accounting principles
customarily used for federal income tax purposes, including, without limitation,
the reasonable costs, expenses and fees of the following: real and personal
property taxes and assessments (and any tax levied in whole or in part in lieu
of or in addition to such taxes and assessments); removal of snow, ice, trash
and other refuse; landscaping, cleaning, janitorial, parking and security
services; fire protection; utilities; supplies and materials; insurance;
licenses, permits and inspections; management services; accounting services;
labor and personnel; and maintenance and repair. All Operating Expenses shall be
computed on an annual basis. Notwithstanding the foregoing, Operating Expenses
shall not include depreciation, mortgage financing costs or debt service, items
which should properly be capitalized in accordance with generally accepted
accounting principles, leasing commissions, legal fees, Landlord's office
overhead, taxes on Landlord's business (such as income, excess profits,
franchise, estate or inheritance taxes), the cost of improving an individual
tenant's space or any cost for which Landlord is otherwise reimbursed directly
by a particular tenant. Tenant shall have sole responsibility for and shall pay
when due all taxes, assessments, charges and fees levied by any governmental
authority on Tenant's use of the Premises or any personal property or fixtures
kept or installed by Tenant in the Premises.
"Operating Year" means each calendar year, all or a portion of which falls
within the Term.
"Tenant's Estimated Share" means the result obtained by multiplying
Tenant's Percentage by the Estimated Expenses, and then subtracting the Expense
Stop (prorated for any fractional Operating Year).
"Tenant's Share" means the result obtained by multiplying Tenant's
Percentage by the Operating Expenses actually incurred in any Operating Year,
and then subtracting the Expense Stop (prorated for any fractional Operating
Year).
<PAGE>
5.2 Payment of Operating Expenses. In addition to the Base
Rent, Tenant covenants to pay to Landlord Tenant's Share at the same address at
which Base Rent is payable, in advance on or before the first day of each
calendar month during the Term, commencing on the Commencement Date. On or prior
to the Commencement Date and prior to March 1 of each Operating Year after the
Commencement Date, Landlord shall furnish Tenant with a written estimate (the
"Estimate") showing in reasonable detail the computation of Tenant's Estimated
Share. On or prior to the Commencement Date, and on the first day of each month
following the Commencement Date, Tenant shall pay to Landlord one-twelfth
(1/12th) of Tenant's Estimated Share as specified in the Estimate for such
Operating Year. If Landlord fails to give Tenant an Estimate prior to any
Operating Year, Tenant shall continue to pay on the basis of the Estimate for
the prior Operating Year until the Estimate for the current Operating Year is
received. Within sixty (60) days after the expiration of any Operating Year,
Landlord shall furnish Tenant with a written statement (the "Actual Statement")
showing in reasonable detail the computation of Tenant's Share for such
Operating Year and the amount by which Tenant's Share exceeds or is less than
the amounts paid by Tenant during such Operating Year. If the Actual Statement
indicates that the amount actually paid by Tenant for the relevant Operating
Year is less than Tenant's Share for such Operating Year, Tenant shall pay to
Landlord such deficit within thirty (30) days after delivery of the Actual
Statement. Such payments by Tenant shall be made notwithstanding that the Actual
Statement is furnished to Tenant after the expiration of the Term or sooner
termination of this Lease. If the Actual Statement indicates that the amount
actually paid by Tenant for the relevant Operating Year exceeds Tenant's Share
for such Operating Year, such excess shall be promptly credited or refunded to
Tenant. If the Expense Stop exceeds Tenant's Share for any full or partial
Operating Year, Tenant shall not be entitled to any refund, credit or adjustment
of Base Rent. Notwithstanding the foregoing, in no event shall Tenant's Share
during the following Operating Years, beginning January 1 of each year, exceed
the indicated amounts:
Year Amounts
1996 $3,228.00
1997 $6,456.00
1998 and following years $9,684.00
6. Security Deposit. On the date of this Lease, Tenant shall deposit
with Landlord the Security Deposit. If Tenant fails to timely pay or perform any
obligation under this Lease, Landlord may, prior to, concurrently with or
subsequent to exercising any other right or remedy, use, apply or retain all or
any part of the Security Deposit for the payment of any monetary obligation due
under this Lease, or to compensate Landlord for any other reasonable expense,
loss or damage which Landlord may incur by reason of Tenant's failure, including
any deficiency in the reletting of the Premises. If all or any portion of the
Security Deposit is so used, applied or retained, Tenant shall on demand deposit
with Landlord cash in an amount sufficient to restore the Security Deposit to
its original amount. The Security Deposit is not a limitation on Landlord's
damages or other rights under this Lease, a payment of liquidated damages or
prepaid rent and shall not be applied by Tenant to the rent for the last (or
any) month of the Term, or to any other amount due under this Lease. Subject to
the foregoing, the Security Deposit shall be returned (without interest) to
Tenant after the expiration of the Term or sooner termination of this Lease and
delivery of possession of the Premises to Landlord in accordance with Paragraph
17 if, at such time, Tenant is not in default and has paid all amounts due under
this Lease.
<PAGE>
7. Use. Tenant shall not use or occupy or permit the Premises to be
used or occupied for any purpose other than for the Permitted Use, and shall not
do or permit anything to be done by Tenant's Occupants which may (a) increase
the existing rate or violate the provisions of any insurance carried with
respect to the Building, (b) create a public or private nuisance, unreasonably
interfere with or disturb any other tenant or occupant of the Building or
constitute an immoral purpose, (C) overload the floors or otherwise damage the
structure of the Building, (d) violate any applicable governmental laws,
ordinances, rules or regulations, or (e) lower the first-class character of the
Building. Tenant shall, at Tenant's sole cost, (w) use the Premises in a
careful, safe and proper manner, (x) in Tenant's use and occupancy of the
Premises, comply with all governmental laws, ordinances, rules and regulations,
including, without limitation, those relating to hazardous substances, hazardous
wastes, pollutants or contaminants, and all requirements of any board of fire
underwriters or other similar body relating to the Premises, (y) keep the
Premises free of reasonably objectionable noises and odors, including, without
limitation, cigar, pipe and similar smoke odors, and (z) not store, use or
dispose of any hazardous substances, hazardous wastes, pollutants or
contaminants on the Premises, except for normal and customary office or cleaning
supplies kept in normal and customary quantities in accordance with applicable
laws, ordinances, rules and regulations. Landlord may, in Landlord's sole
discretion, designate some or all of the Building (including the Premises) as a
non-smoking area.
8. Utilities and Services. Landlord shall cause to be furnished to the
Premises electricity for normal lighting and fractional horsepower office
machines, heat and air-conditioning, light janitorial services (emptying
wastebaskets, dusting and vacuuming) and window washing, snow removal,
landscaping, grounds keeping and elevator service. If Landlord provides electric
current to the Premises in excess of normal office usage levels to enable Tenant
to operate any data processing or other equipment requiring extra electric
current, or if Landlord provides any other utility or service which is in excess
of that typically required for routine office purposes, including additional
cooling necessitated by Tenant's equipment, Landlord shall reasonably determine
the cost of such additional electric current, utility or service, and Tenant
shall pay such cost on a monthly basis to Landlord. Landlord may cause an
electric or water meter to be installed in the Premises in order to measure the
amount of electricity or water consumed for any such additional use, and the
cost of such meter shall be paid promptly by Tenant. Tenant, at Tenant's sole
cost, shall provide telephone service to the Premises. Landlord shall not be
liable for and Tenant shall not be entitled to terminate this Lease, to
effectuate any abatement or reduction of rent or to collect any damages by
reason of Landlord's failure to provide or furnish any of such utilities or
services if such failure was occasioned by any strike or labor controversy, the
inability of Landlord to obtain services from the company supplying the same or
any other cause beyond the reasonable control of Landlord.
9. Maintenance and Repairs; Alterations; Access.
9.1 Maintenance and Repairs. Tenant, at Tenant's sole cost,
shall maintain the Premises in good order, condition and repair and in a clean
and sanitary condition. Landlord shall maintain in good order, condition and
repair the Common Areas and the foundation, roof and structural portions of the
Building, and the cost of doing so shall be part of the Operating Expenses,
subject to any applicable limitation in the definition of "Operating Expenses"
set forth in Paragraph 5.1.
<PAGE>
9.2 Alterations. Tenant shall not make any change, addition or
improvement to the Premises (including, without limitation, the attachment of
any fixture or equipment, other than pictures and similar decorations), unless
such change, addition or improvement (a) equals or exceeds the then-current
standard for the Building and utilizes only new and first-grade materials, (b)
is in conformity with all applicable governmental laws, ordinances, rules and
regulations, and is made after obtaining any required permits and licenses, (C)
is made pursuant to plans and specifications approved in writing in advance by
Landlord, such approval not to be unreasonably withheld, and (d) if required by
Landlord, is made after Tenant has provided to Landlord such indemnification or
bonds, including, without limitation, a performance and completion bond, in such
form and amount as may be reasonably satisfactory to Landlord, to protect
against claims and liens for labor performed and materials furnished, and to
insure the completion of any change, addition or improvement. Tenant shall
promptly pay the entire cost of any such change, addition or improvement, and
the same shall immediately become the property of Landlord.
9.3 Access. Landlord and Landlord's employees, contractors and
agents may enter the Premises during normal business hours on reasonable notice
to Tenant for the purpose of inspecting the Premises, performing Landlord's
obligations under this Lease and showing the Premises to prospective purchasers,
existing or prospective mortgagees and, during the last six (6) months of the
Term, prospective tenants, provided that Landlord shall not unreasonably
interfere with Tenant's use or occupancy of the Premises. Landlord shall have
free access to the Premises in an emergency.
10. Assignment. Tenant shall not assign, transfer, mortgage, encumber,
pledge or hypothecate this Lease or Tenant's interest in this Lease, in whole or
in part, permit the use of the Premises or any part of the Premises by any
persons other than Tenant or Tenant's employees, or sublease the Premises or any
part of the Premises, without the prior written consent of Landlord, such
consent not to be unreasonably withheld. No consent by Landlord to any
assignment or subleasing by Tenant shall relieve Tenant of any obligation to be
paid or performed by Tenant under this Lease, whether occurring before or after
such consent, assignment or subleasing, but rather Tenant and Tenant's assignee
or subtenant, as the case may be, shall be jointly and severally primarily
liable for such payment and performance. If this Lease is assigned or the
Premises are subleased and the compensation actually received by Tenant exceeds
the Base Rent and Tenant's Share applicable to the period concerned, Tenant
shall pay fifty percent (50%) of such excess to Landlord when and as received.
Landlord hereby consents to the assignment of this Lease by Tenant to a wholly
owned parent, subsidiary or affiliate.
11. Indemnity. Tenant shall indemnify, defend and hold harmless
Landlord and Landlord's employees and agents from and against all demands,
claims, causes of action, judgments, losses, damages, liabilities, fines,
penalties, costs and expenses, including, without limitation, reasonable
attorneys' fees, arising from the occupancy or use of the Building or the Common
Areas by Tenant or Tenant's Occupants, including, without limitation, any
hazardous substances, hazardous wastes, pollutants or contaminants deposited,
released or stored by Tenant or Tenant's Occupants, or any litigation commenced
by or against Tenant to which Landlord is made a party without fault on the part
of Landlord (excluding litigation based on hazardous substances, hazardous
wastes, pollutants or contaminants not deposited, released or stored by Tenant
or Tenant's occupants). If any action or proceeding is brought against Landlord
or Landlord's employees or agents by reason of any of the matters set forth in
the preceding sentence, Tenant, on written notice from Landlord, shall defend
Landlord at Tenant's expense with counsel reasonably satisfactory to Landlord.
This Paragraph 11 is subject to the waiver of subrogation provisions set forth
in Paragraph 12.
<PAGE>
12. Insurance. On or before the date of this Lease, Tenant shall, at
Tenant's sole cost, procure and continue in force commercial general liability
insurance with a combined single limit for bodily injury and property damage of
not less than $2,000,000 per occurrence, including, without limitation,
contractual liability coverage for the performance by Tenant of the indemnity
agreement set forth in Paragraph 11. Such minimum limits shall in no event limit
the liability of Tenant under this Lease. Such insurance shall be with companies
reasonably acceptable to Landlord, and Tenant shall furnish Landlord with
certificates of coverage. Such insurance shall not be cancelable or subject to
reduction of coverage or other material modification except after at least ten
(10) days' prior written notice to Landlord by the insurer. Such insurance shall
be written as a primary policy, not contributing with and not in excess of the
coverage which Landlord may carry, and shall name Landlord as an additional
insured. Tenant shall, at least ten (10) days prior to the expiration of such
insurance, furnish Landlord with a renewal certificate for such insurance.
Landlord and Tenant waive all rights to recover against each other for any loss
or damage arising from any cause covered by any insurance carried by the waiving
party, to the extent that such damage is actually covered, provided that, if
required, Landlord and Tenant shall exercise reasonable, good faith efforts to
obtain the consent of their respective insurance companies to such waiver.
Landlord shall procure and continue in force commercial general liability
insurance with a combined single limit for bodily injury and property damage of
not less than $2,000,000 per occurrence, and hazard insurance with special
causes of loss, insuring against fire, extended coverage risks, vandalism and
malicious mischief, in an amount equal to the full replacement cost of the
Building (but not any furnishings, equipment and other personal property
installed in the Premises by Tenant). The cost of Landlord's insurance shall be
part of the Operating Expenses.
13. Damage or Destruction. If the Premises are partially damaged or
destroyed, Landlord shall promptly commence and diligently pursue to completion
the repair of the Premises to substantially the condition the Premises were in
immediately prior to such damage or destruction. Landlord's obligation under the
preceding sentence shall not exceed the proceeds received by Landlord from the
hazard insurance maintained by Landlord in accordance with Paragraph 12. Until
such repair is complete, the Base Rent shall be abated proportionately
commencing on the date of such damage or destruction as to that portion of the
Premises rendered untenantable, if any. If (a) the Premises are damaged as a
result of a risk not covered by insurance, or the necessary insurance proceeds
are unavailable to Landlord for any reason, (b) the Premises are damaged in
whole or in part during the last twelve (12) months of the Term, or (C) the
Premises are damaged to the extent of twenty-five percent (25%) or more of
then-replacement value or to the extent that it would take in excess of ninety
(90) days to complete the requisite repairs, Landlord may elect to either repair
the damage or cancel this Lease by written notice of cancellation within thirty
(30) days after such event, and on such notice Tenant shall vacate and surrender
the Premises to Landlord. If the Premises are damaged to the extent that it
reasonably would take in excess of one hundred eighty (180) days to complete the
requisite repairs, Tenant may elect to cancel this Lease by written notice of
cancellation given within thirty (30) days after such event, and on such notice
Tenant shall vacate and surrender the Premises to Landlord. Landlord shall not
be required to repair any damage or to make any restoration or replacement of
any furnishings, equipment and other personal property installed in the Premises
by Tenant.
<PAGE>
14. Condemnation. If the whole of the Premises is taken through the
exercise of the power of eminent domain or by purchase or other means in lieu of
such exercise, this Lease shall automatically terminate as of the date of the
taking. If part, but not all, of the Premises is so taken, either Landlord or
Tenant may terminate this Lease by written notice given within thirty (30) days
after the date of such taking. If part of the Premises is taken and this Lease
is not terminated, the Base Rent shall be reduced in the proportion that the
floor area taken bears to the total floor area of the Premises immediately prior
to the taking, and Tenant's Percentage shall be appropriately adjusted. Whether
or not this Lease is terminated as a consequence of Condemnation Proceedings,
all damages or compensation awarded for a partial or total taking, including any
award for severance damage and any sums compensating for diminution in the value
of or deprivation of the leasehold estate under this Lease, shall be the sole
and exclusive property of Landlord, provided that Tenant shall be entitled to
any award for Tenant's loss of business or moving expenses, if a separate award
is actually made to Tenant and if the same will not reduce Landlord's award. If
this Lease is not terminated pursuant to this Paragraph 14, Landlord shall
promptly commence and diligently pursue to completion the restoration of the
Premises to substantially the condition the Premises were in immediately prior
to such condemnation to the extent of any award attributable to improvements
(but not to land) actually received by Landlord with respect to the Premises.
Landlord shall not be required to repair any damage or to make any restoration
or replacement of any furnishings, equipment and other personal property
installed in the Premises by Tenant.
15. Landlord's Financing. Tenant shall, within fifteen (15) days after
Landlord's written request, execute such documents as may reasonably be required
by Landlord to subordinate this Lease to any first mortgage or first deed of
trust, provided that the lender relying on such subordination agrees with Tenant
that Tenant shall not be disturbed in the event of foreclosure so long as Tenant
is not in default under this Lease and no event has occurred which with the
passage of time or the giving of notice or both would constitute such a default.
This Lease shall be deemed prior to any mortgage or deed of trust if the lender
concerned gives written notice of such election to Tenant. Any sale, assignment
or transfer of Landlord's interest under this Lease or in the Premises,
including any such disposition resulting from Landlord's default under a debt
obligation, shall be subject to this Lease, and Tenant shall attorn to
Landlord's successors and assigns and shall recognize such successors and
assigns as the landlord under this Lease regardless of any rule of law to the
contrary or the absence of privity of contract.
16. Default.
16.1 Default by Tenant. The occurrence of any of the following
events shall constitute a default by Tenant under this Lease: (a) Tenant fails
to timely pay any installment of Base Rent or Tenant's Share or any other sum
due under this Lease, and such failure is not cured within five (5) business
days after written notice is given to Tenant; (b) Tenant fails to timely perform
any other obligation to be performed by Tenant under this Lease, and such
failure is not cured within ten (10) business days after written notice is given
to Tenant; provided, however, that if more than ten (10) business days is
reasonably required to cure such failure, Tenant shall not be in default if
Tenant commences such cure within such ten (10) business day period and
diligently prosecutes such cure to completion; or (C) Tenant or any guarantor
files a petition in bankruptcy, becomes insolvent, has taken against such party
in any court, pursuant to state or federal statute, a petition in bankruptcy or
insolvency or for reorganization or appointment of a receiver or trustee, which
involuntary petition is not dismissed within sixty (60) days, petitions for or
enters into an arrangement for the benefit of creditors or suffers this Lease to
become subject to a writ of execution.
<PAGE>
16.2 Remedies. On any default by Tenant under this Lease,
Landlord may at any time, without waiving or limiting any other right or remedy
available to Landlord, (a) perform in Tenant's stead any obligation that Tenant
has failed to perform, and Landlord shall be reimbursed promptly for any
reasonable cost incurred by Landlord with interest from the date of such
expenditure until paid in full at the rate of eighteen percent (18%) per annum
(the "Interest Rate"), (b) terminate Tenant's rights under this Lease by written
notice, (C) reenter and take possession of the Premises by any lawful means
(with or without terminating this Lease), or (d) pursue any other remedy allowed
by law. Tenant shall pay to Landlord the reasonable cost of recovering
possession of the Premises, all reasonable costs of reletting, including
reasonable renovation, remodeling and alteration of the Premises, the amount of
any commissions paid by Landlord in connection with such reletting, and all
other reasonable costs and damages arising out of Tenant's default, including
reasonable attorneys' fees and costs. Notwithstanding any termination of
Tenant's rights under this Lease or reentry of the Premises, the liability of
Tenant for the rent payable under this Lease shall not be extinguished for the
balance of the Term, and Tenant agrees to compensate Landlord on demand for any
deficiency. No reentry or taking possession of the Premises or other action by
Landlord on or following the occurrence of any default by Tenant shall be
construed as an election by Landlord to terminate this Lease or as an acceptance
of any surrender of the Premises, unless Landlord provides Tenant written notice
of such termination or acceptance. Following a default by Tenant under this
Lease, Landlord shall exercise commercially reasonable, good faith efforts to
mitigate its damages as required by applicable Utah law.
16.3 Past Due Amounts. If Tenant fails to pay within five (5)
business days of the date due any amount required to be paid by Tenant under
this Lease, such unpaid amount shall bear interest at the Interest Rate from the
due date of such amount to the date of payment in full, with interest, and
Landlord may also charge a sum of five percent (5%) of such unpaid amount as a
service fee. All amounts due under this Lease are and shall be deemed to be rent
or additional rent, and shall be paid without abatement, deduction, offset or
prior notice or demand, unless specifically provided by the terms of this Lease.
Landlord shall have the same remedies for a default in the payment of any amount
due under this Lease as Landlord has for a default in the payment of Base Rent.
16.4 Default by Landlord. Landlord shall not be in default
under this Lease unless Landlord or the holder of any mortgage or deed of trust
covering the Building whose name and address have been furnished to Tenant in
writing fails to perform an obligation required of Landlord under this Lease
within thirty (30) days after written notice by Tenant to Landlord and to such
holder, specifying the respects in which Landlord has failed to perform such
obligation. If the nature of Landlord's obligation is such that more than thirty
(30) days are reasonably required for performance or cure, Landlord shall not be
in default if Landlord or such holder commences performance within such thirty
(30) day period and after such commencement diligently prosecutes the same to
completion. In no event may Tenant terminate this Lease or withhold the payment
of rent or other charges provided for in this Lease as a result of Landlord's
default.
<PAGE>
17. Expiration or Termination.
17.1 General. On the expiration of the Term or sooner
termination of this Lease, Tenant shall, at Tenant's sole cost, (a) promptly and
peaceably surrender the Premises to Landlord "broom clean" and, subject to
Paragraph 13, in the same condition as when delivered to Tenant, ordinary wear
and tear excepted, (b) repair any damage caused by or in connection with the
removal of any property from the Premises, and deliver all keys to the Premises
to Landlord. Before surrendering the Premises, Tenant shall, at Tenant's sole
cost, remove Tenant's movable personal property only, and all other property
shall, unless otherwise directed by Landlord, remain in the Premises as the
property of Landlord without compensation.
17.2 Early Termination. Tenant shall have the right to
terminate this Lease on the last day of the thirty-sixth full calendar month
following the Commencement Date, upon the express condition that Tenant shall,
on or before three full calendar months before the termination date (1) deliver
to Landlord written notice of Tenant's election to terminate the Lease; and, (2)
pay Landlord the sum computed by multiplying the total cost incurred by Landlord
to prepare the Premises for occupancy multiplied by the fraction 2/5 ( Tenant
Improvement Reimbursement ); provided that in no event shall the Tenant
Improvement Reimbursement exceed the sum of $30,000.00. Within 60 days after the
Commencement Date, Landlord shall furnish Tenant with a written statement (the
Actual Cost Statement ) showing in reasonable detail the computation of the
total cost incurred by the Landlord to prepare the Premises for occupancy. The
actual cost stated in the Actual Cost Statement shall be used to compute the
Tenant Improvement Reimbursement, unless Tenant shall deliver to Landlord within
30 days after receiving the Actual Cost Statement a written opinion signed by a
professional architect licensed in the state of Utah specifying in reasonable
detail the items of cost which he maintains are unreasonable. Landlord and
Tenant shall then have 30 days to reach agreement on the total cost incurred by
Landlord to prepare the Premises for occupancy. If agreement cannot be reached
within such 30 day period, the total cost stated in the Actual Cost Statement
shall be used to compute the Tenant Improvement Reimbursement unless Tenant
shall initiate and complete within 90 days after the end of such 30 day period
an arbitration proceeding , in accordance with the rules of the American
Arbitration Association, and at the sole expense of Tenant.
18. Estoppel Certificate; Financial Statements.
18.1 Estoppel Certificate. Tenant shall, within fifteen (15)
days after Landlord's written request, execute and deliver to Landlord an
estoppel certificate in favor of Landlord and such other persons as Landlord
shall request setting forth the following: (a) a ratification of this Lease; (b)
the Commencement Date and Expiration Date; (c) that this Lease is in full force
and effect and has not been assigned, modified, supplemented or amended (except
by such writing as shall be stated); (d) that all conditions under this Lease to
be performed by Landlord have been satisfied, or, in the alternative, those
claimed by Tenant to be unsatisfied; (e) that, to the best of Tenant's
knowledge, no defenses or offsets exist against the enforcement of this Lease by
Landlord, or, in the alternative, those claimed by Tenant to exist; (f) the date
to which rent has been paid; (g) the amount of the Security Deposit; and (h)
such other information as Landlord may reasonably request. Landlord's mortgage
lenders and purchasers shall be entitled to rely on any estoppel certificate
executed by Tenant.
18.2 Financial Statements. Tenant shall, within fifteen (15)
days after Landlord's request (but not more than twice in any calendar year),
furnish to Landlord the most recent publicly available annual financial
statements for Tenant, prepared in accordance with generally accepted accounting
principles consistently applied and certified by Tenant to be true and correct.
<PAGE>
19. Rules. Tenant and Tenant's Occupants shall faithfully observe and
comply with all of the rules set forth on the attached Exhibit D, and Landlord
may from time to time, on reasonable prior written notice to Tenant, modify such
rules, provided that such modifications do not materially alter any other
provision of this Lease and are reasonable and nondiscriminatory. On any breach
of such rules, Landlord may exercise any of the remedies provided in this Lease
on a default by Tenant under this Lease.
20. General Provisions.
20.1 Force Majeure. If either Landlord or Tenant is delayed in
or prevented from the performance of any act required under this Lease by reason
of acts of God, strikes, lockouts, other labor troubles, inability to procure
labor or materials, restrictive laws, ordinances, rules or regulations of
general applicability, riots, civil commotion, insurrection, war or other reason
not the fault of the party delayed or prevented and beyond the control of such
party (financial inability excepted), performance of the action in question
shall be excused for the period of delay and the period for the performance of
such act shall be extended for a period equivalent to the period of such delay.
The provisions of this Paragraph shall not, however, operate to excuse Tenant
from the prompt payment of rent or any other amounts required to be paid under
this Lease.
20.2 Notices. Any notice or demand to be given by Landlord or
Tenant to the other shall be given in writing by personal service, Federal
Express, DHL or any other similar form of courier or delivery service, or
mailing in the United States mail, postage prepaid, certified, return receipt
requested and addressed to such party as set forth at the outset of this Lease.
Either Landlord or Tenant may change the address at which such party desires to
receive notice on written notice of such change to the other party. Any such
notice shall be deemed to have been given, and shall be effective, on delivery
to the notice address then applicable for the party to which the notice is
directed; provided, however, that refusal to accept delivery of a notice or the
inability to deliver a notice because of an address change which was not
properly communicated shall not defeat or delay the giving of a notice.
20.3 Severability. If any provision of this Lease or the
application of any provision of this Lease to any person or circumstance shall
to any extent be invalid, the remainder of this Lease or the application of such
provision to persons or circumstances other than those as to which such
provision is held invalid shall not be affected by such invalidity. Each
provision of this Lease shall be valid and enforceable to the fullest extent
permitted by law.
20.4 Brokerage Commissions. Tenant shall indemnify, defend and
hold harmless Landlord from and against all claims, liabilities and expenses,
including reasonable attorneys' fees, relating to any brokerage commission or
finder's fee arising out of any agreement made by Tenant. Landlord shall
indemnify, defend and hold harmless Tenant from and against all claims,
liabilities and expenses, including reasonable attorneys' fees, relating to any
brokerage commission or finder's fee arising out of any agreement made by
Landlord.
20.5 Successors. This Lease shall be binding on and shall
inure to the benefit of Landlord and Tenant and their respective heirs, personal
representatives, successors and assigns. On any sale or assignment (except for
purposes of security or collateral) by Landlord of the Premises or this Lease,
Landlord shall, on and after such sale or assignment, be relieved entirely of
all of Landlord's obligations under this Lease accruing after the date of such
sale or assignment, and such obligations shall, as of the time of such sale or
assignment, pass to Landlord's successor in interest.
<PAGE>
20.6 Recourse by Tenant. Anything in this Lease to the
contrary notwithstanding, Tenant shall look solely to the equity of Landlord in
the Building and the land serving the Building, subject to the prior rights of
the holder of any mortgage or deed of trust, for the collection of any judgment
(or other judicial process) requiring the payment of money by Landlord on any
default or breach by Landlord with respect to any of the terms, covenants and
conditions of this Lease to be observed or performed by Landlord, and no other
asset of Landlord or any other person shall be subject to levy, execution or
other procedure for the satisfaction of Tenant's remedies.
20.7 Quiet Enjoyment. Provided that Tenant timely pays and
performs Tenant's obligations under this Lease, Tenant shall have quiet
enjoyment of the Premises for the Term, subject to all of the provisions of this
Lease.
20.8 Rights and Remedies. No failure by any party to insist on
the strict performance of any provision of this Lease or to exercise any right
or remedy consequent on a breach of this Lease shall constitute a waiver of any
such breach or of such provision. The rights and remedies of Landlord and Tenant
shall not be mutually exclusive and the exercise of one or more of the
provisions of this Lease shall not preclude the exercise of any other provision.
The parties confirm that damages at law may be an inadequate remedy for a breach
or threatened breach by any party of any of the provision of this Lease. The
parties' respective rights and obligations under this Lease shall be enforceable
by specific performance, injunction and any other equitable remedy.
20.9 Authorization. Each individual executing this Lease does
represent and warrant to each other so signing (and each other entity for which
another person may be signing) that he has been duly authorized to deliver this
Lease in the capacity and for the entity set forth where he signs.
20.10 Attorneys' Fees. If either Landlord or Tenant brings
suit to enforce or interpret this Lease, the prevailing party shall be entitled
to recover from the other party the prevailing party's reasonable attorneys'
fees and costs incurred in any such action or in any appeal from such action, in
addition to the other relief to which the prevailing party is entitled.
20.11 Miscellaneous. Exhibits referred to in this Lease and
any addendums, riders and schedules attached to this Lease shall be deemed to be
incorporated in this Lease as though a part of this Lease. Tenant shall not
record this Lease or a memorandum or notice of this Lease. This Lease and the
exhibits, riders and addenda, if any, attached, constitute the entire agreement
between the parties. Any guaranty delivered in connection with this Lease is an
integral part of this Lease and constitutes consideration given to Landlord to
enter into this Lease. No amendment to this Lease shall be binding on Landlord
or Tenant unless reduced to writing and signed by both parties. This Lease shall
be governed by and construed and interpreted in accordance with the laws of the
State of Utah. Venue on any action arising out of this Lease shall be proper
only in the District Court of Summit County, Utah. If more than one person is
set forth on the signature line as Tenant, their liability under this Lease
shall be joint and several. All applicable provisions of this Lease shall
survive the expiration of the Term or sooner termination of this Lease. Time is
of the essence of each provision of this Lease. LANDLORD AND TENANT WAIVE TRIAL
BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER OF THEM
AGAINST THE OTHER IN ANY MATTER ARISING OUT OF THIS LEASE OR THE USE AND
OCCUPANCY OF THE PREMISES.
<PAGE>
LANDLORD AND TENANT have executed this Lease on the respective dates
set forth below, to be effective as of the date first set forth above.
LANDLORD:
WILLIAM M. WIRTHLIN, JR.
By /s/William M. Wirthlin, Jr.
William M. Wirthlin, Jr.
Date 10-21-95
TENANT:
WASATCH EDUCATION SYSTEMS CORPORATION, a Utah corporation
By /s/Barbara Morris
Barbara Morris
Print or Type Name of Signatory:
Its President
Date 10-21-95
<PAGE>
EXHIBIT A
to
OFFICE LEASE
DESCRIPTION OF PREMISES
The Premises referred to in the foregoing instrument are located on the
crosshatched area shown on the attached diagram.
<PAGE>
EXHIBIT B
to
OFFICE LEASE
COMMENCEMENT DATE CERTIFICATE
THE UNDERSIGNED, Landlord and Tenant, respectively, under that certain
Office Lease (the "Lease"), dated , 19 , agree that the "Commencement Date," as
defined in Paragraph 1 of the Lease, is December 4, 1995 , and that the
"Expiration Date," as defined in Paragraph 1 of the Lease, is December 31, 1998.
LANDLORD AND TENANT have executed this Commencement Date Certificate on
the respective dates set forth below.
LANDLORD:
WILLIAM M. WIRTHLIN, JR.
By /s/William M. Wirthlin, Jr.
William M. Wirthlin, Jr.
Date 10-24-95
TENANT:
WASATCH EDUCATION CORPORATION, a Utah corporation
By /s/Barbara Morris
Barbara Morris
Print or Type Name of Signatory:
Its President
Date 10-24-95
<PAGE>
EXHIBIT C
to
OFFICE LEASE
PREPARATION OF PREMISES FOR OCCUPANCY
Landlord shall construct improvements to the Premises as shall be mutually
agreed upon with Tenant.
<PAGE>
EXHIBIT D
to
OFFICE LEASE
RULES
The rules set forth in this Exhibit are a part of the foregoing Office
Lease (the "Lease"). Whenever the term "Tenant" is used in these rules, such
term shall be deemed to include Tenant and Tenant's Occupants. The following
rules may from time to time be modified by Landlord in the manner set forth in
the Lease. The terms capitalized in this Exhibit shall have the same meaning as
set forth in the Lease.
1. Obstruction. Any sidewalks, entries, exits, passages, corridors,
halls, lobbies, stairways, elevators or other common facilities of the Building
shall not be obstructed by Tenant or used for any purpose other than ingress or
egress to and from the Premises. Tenant shall not place any item in any such
location, whether or not such item constitutes an obstruction, without the prior
written consent of Landlord. Tenant shall not go on the roof of the Building.
2. Deliveries. All deliveries and pickups of supplies, materials,
garbage and refuse to or from the Premises shall be made only through such
access as may be designated by Landlord for deliveries and only during the
ordinary business hours of the Building. Tenant shall be liable for the acts and
omissions of any persons making such deliveries to, or pickups from, Tenant.
3. Moving. Furniture and equipment shall be moved in and out of the
Building only through such access as may be designated by Landlord for
deliveries and then only during such hours and in such manner as may be
prescribed by Landlord. If Tenant's movers damage any part of the Building,
Tenant shall pay to Landlord on demand the amount required to repair such
damage.
4. Heavy Articles. No safe or article, the weight of which may
constitute a hazard of damage to the Building, shall be moved into the Premises.
Other safes and heavy articles shall be moved in or out of the Building only
during such hours and in such manner as shall be reasonably prescribed by
Landlord, and Landlord may reasonably designate the location of such safes and
articles.
5. Building Security. On Saturdays, Sundays and legal holidays, and on
other days between the hours of 6:00 p.m. that evening and 8:00 a.m. the
following day, access to the Building, the halls, corridors, elevators or
stairways in the Building or to the Premises may be refused unless the person
seeking access is known to the person or employee of the Building in charge or
has a pass and is properly identified. Landlord reserves the right to exclude or
expel from the Building any person who is intoxicated or under the influence of
liquor or drugs, or who shall in any manner do any act in violation of any of
the rules and regulations of the Building. Landlord shall in no case be liable
for damages for any error with regard to the admission to or exclusion from the
Building of any person. In the event of an invasion, mob, riot, public
excitement or other commotion, Landlord reserves the right to prevent access to
the Building by closing of the doors of the Building or any other reasonable
method, for the safety of the tenants and protection of the Building and
property in the Building. Landlord may from time to time adopt appropriate
systems and procedures for the security or safety of the Building.
6. Pass Key. The janitor of the Building may at all times keep a pass
key to the Premises, and such janitor and other agents of Landlord shall at all
reasonable times be allowed admittance to the Premises.
<PAGE>
7. Locks and Keys for Premises. No additional lock or locks shall be
placed by Tenant on any door in the Building and no existing lock shall be
changed unless written consent of Landlord shall first have been obtained, such
consent not to be unreasonably withheld. A reasonable number of keys to the
Premises and to the toilet rooms, if locked by Landlord, will be furnished by
Landlord, and Tenant shall not have any additional keys made. At the termination
of this tenancy, Tenant shall promptly return to Landlord all keys to offices
and toilet rooms and provide Landlord with all combinations and keys for any
locks, safes, cabinets and vaults remaining in the Premises. Tenant shall keep
the doors of the Premises closed and securely locked when Tenant is not at the
Premises.
8. Use of Water Fixtures. Water closets and other water fixtures shall
not be used for any purpose other than that for which the same are intended. No
foreign substances of any kind shall be placed in them, and any damage resulting
to the same from use on the part of Tenant shall be paid for by Tenant. No
persons shall waste water by tying back or wedging the faucets or in any other
manner. On leaving the Premises, Tenant shall shut off all water faucets and
major electrical apparatus located within the Premises.
9. No Animals; Excessive Noise. No animals shall be allowed in the
Building, other than guide dogs for hearing or vision impaired persons. No
persons shall disturb the occupants of the Building or adjoining buildings or
space by the use of any phonograph, radio, tape player or musical instrument or
by the making of loud or improper noises.
10. Bicycles. Bicycles and other vehicles shall not be permitted
anywhere inside or on the sidewalks outside of the Building, except in those
areas designated by Landlord for bicycle parking.
11. Trash. Tenant shall not allow anything to be placed on the outside
of the Building, nor shall anything be thrown by Tenant out of the windows or
doors, or down the corridors or ventilating ducts or shafts, of the Building.
All trash and refuse shall be placed in receptacles provided by Landlord for the
Building or by Tenant for the Premises.
12. Exterior Windows, Walls and Doors. No window shades, blinds,
curtains, shutters, screens or draperies shall be attached or detached by Tenant
and no awnings shall be placed over the windows without Landlord's prior written
consent.
13. Hazardous Operations and Items. Tenant shall not install or operate
any steam or gas engine or boiler, or carry on any mechanical business in the
Premises. Tenant shall not use or keep in the Premises or the Building any
kerosene, gasoline or other inflammable or combustible fluid or material, or use
any method of heating or air conditioning other than that supplied by Landlord.
Explosives or other articles deemed extra hazardous shall not be brought into
the Building.
14. Hours for Repairs, Maintenance and Alteration. Any repairs,
maintenance and alterations required or permitted to be done by Tenant under the
Lease shall be done only during the ordinary business hours of the Building
unless Landlord shall have first consented in writing to such work being done at
other times. If Tenant desires to have such work done by Landlord's employees on
Saturdays, Sundays, holidays or weekdays outside of ordinary business hours,
Tenant shall pay the extra cost for such labor.
<PAGE>
15. No Defacing of Premises. Except for typical wall paintings and
other similar decorations, Tenant shall not mark on, paint signs on, cut, drill
into, drive nails or screws into, or in any way deface the walls, ceilings,
partitions or floors of the Premises or of the Building, unless Tenant obtains
Landlord's prior written consent, such consent not to be unreasonably withheld.
Any defacement, damage or injury directly or indirectly caused by Tenant shall
be paid for by Tenant. Pictures or diplomas shall be hung on tacks or small
nails; Tenant shall not use adhesive hooks for such purposes.
16. Chair Pads. Tenant shall, at Tenant's sole cost, install and
maintain under all caster chairs a chair pad or carpet casters to protect the
carpeting.
17. Solicitation; Food and Beverages. Landlord reserves the right to
restrict, control or prohibit canvassing, soliciting and peddling within the
Building. Tenant shall not grant any concessions, licenses or permission for the
sale or taking of orders for food or services or merchandise in the Premises,
install or permit the installation or use of any machine or equipment for
dispensing food or beverage in the Building (other than coffee makers, microwave
ovens, refrigerators and other appliances solely for the use of Tenant's
employees within the Premises), nor permit the preparation, serving,
distribution or delivery of food or beverages in the Premises, without the prior
written approval of Landlord and only in compliance with arrangements prescribed
by Landlord. Only persons approved by Landlord shall be permitted to serve,
distribute or deliver food and beverage within the Building or to use the public
areas of the Building for that purpose.
18. Directory. Any bulletin board or directory of the Building shall be
provided exclusively for the display of the name and location of Tenant only and
Landlord reserves the right to exclude any other names. Tenant shall pay
Landlord's reasonable charges for changing any directory listing at Tenant's
request.
19. Building Name. Landlord may, without notice or liability to Tenant,
name the Building and change the name, number or designation by which the
Building is commonly known. Tenant shall not use the name of the Building for
any purpose other than the address of the Building.
20. Public Areas. Landlord may control and operate the public portions
of the Building, and the public facilities, and heating and air conditioning, as
well as facilities furnished for the common use of the tenants, in such manner
as Landlord deems best for the benefit of the tenants generally.
21. Signage. Tenant shall not place or suffer to be placed on any door,
wall or window of the Premises, on any part of the inside of the Premises which
is visible from outside of the Premises or elsewhere in the Building, any sign,
decoration, lettering, attachment or other advertising matter, without first
obtaining Landlord's written approval, which may be withheld in Landlord's sole
discretion.
22. Parking. Automobiles of Tenant and Tenant's Occupants shall be parked
only within parking areas not otherwise reserved by Landlord or specifically
designated for use by any other tenant or Occupants associated with any other
tenant.
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;
<PAGE>
(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);
<PAGE>
(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.
<PAGE>
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%
<PAGE>
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
