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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR COMMISSION FILE
ENDED MARCH 31, 1998 NUMBER 0-21510
SANCTUARY WOODS MULTIMEDIA CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2444109
(State of incorporation) (I.R.S. Employer Identification Number)
1250 45TH STREET, SUITE 350
EMERYVILLE, CALIFORNIA 94608-2924
(510) 594-3200
(Address of principal executive offices and zip code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001
par value
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 No X
--- ---
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is 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-K
or any amendment to this Form 10-K. / /
Registrant's revenues for its most recent fiscal year: $2,010,000.
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the average bid and asked prices of such stock, was
$208,662 as of September 21, 1998.
The number of shares outstanding of each of issuer's classes of common
equity, as of September 21, 1998, was 5,193,303 shares of Common Stock, $0.001
par value.
Documents Incorporated by Reference: None
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
THIS FORM 10-K OF SANCTUARY WOODS MULTIMEDIA CORPORATION ("SANCTUARY
WOODS" OR THE "COMPANY") CONTAINS FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO
RISKS AND UNCERTAINTIES. STATEMENTS INDICATING THAT THE COMPANY "BELIEVES,"
"EXPECTS," "ANTICIPATES" OR "ESTIMATES" ARE FORWARD-LOOKING AS ARE ALL OTHER
STATEMENTS REGARDING FUTURE FINANCIAL RESULTS, MARKET CONDITIONS, PRODUCT
OFFERINGS OR OTHER EVENTS THAT HAVE NOT YET OCCURRED. THERE ARE MANY IMPORTANT
FACTORS THAT COULD CAUSE ACTUAL RESULTS OR EVENTS TO DIFFER MATERIALLY AND/OR
ADVERSELY FROM THOSE ANTICIPATED BY THE FORWARD-LOOKING STATEMENTS CONTAINED IN
THIS FORM 10-K. SUCH FACTORS INCLUDE BUT ARE NOT LIMITED TO, THE RATE OF GROWTH
OF THE CONSUMER MARKET FOR EDUCATIONAL SOFTWARE, MARKET ACCEPTANCE OF THE
COMPANY'S PRODUCTS OR THOSE OF ITS COMPETITORS, THE TIMING OF NEW PRODUCT
INTRODUCTIONS, EXPENSES RELATING TO THE DEVELOPMENT AND PROMOTION OF NEW PRODUCT
INTRODUCTIONS, CHANGES IN PRICING POLICIES BY THE COMPANY OR ITS COMPETITORS,
PROJECTED AND ACTUAL CHANGES IN PLATFORMS AND TECHNOLOGIES, TIMELY AND
SUCCESSFUL ADAPTATION TO SUCH PLATFORMS OR TECHNOLOGIES, THE ACCURACY OF
FORECASTS OF CONSUMER DEMAND, PRODUCT RETURNS, MARKET SEASONALITY, THE TIMING OF
ORDERS FROM MAJOR CUSTOMERS AND ORDER CANCELLATIONS, CHANGES OR DISRUPTIONS IN
THE CONSUMER SOFTWARE DISTRIBUTION CHANNELS, LIMITATIONS ON THE ABILITY OF THE
COMPANY TO ACHIEVE PROFITABILITY OR OBTAIN FINANCING SUFFICIENT TO ALLOW THE
COMPANY TO REMAIN IN BUSINESS, AS WELL AS THOSE FACTORS LISTED UNDER RISK
FACTORS ELSEWHERE HEREIN. ACTUAL EVENTS OR THE ACTUAL FUTURE RESULTS OF THE
COMPANY MAY DIFFER MATERIALLY FROM ANY FORWARD-LOOKING STATEMENT DUE TO SUCH
RISKS AND UNCERTAINTIES. OTHER FACTORS, UNCERTAINTIES AND ASSUMPTIONS NOT
SPECIFICALLY IDENTIFIED OR DISCLOSED BY THE COMPANY WERE ALSO INVOLVED IN THE
DERIVATION OF THESE FORWARD LOOKING STATEMENTS AND THE FAILURE OF SUCH OTHER
ASSUMPTIONS TO BE REALIZED MAY ALSO CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE PROJECTED. THE COMPANY ASSUMES NO OBLIGATION TO UPDATE THESE
FORWARD-LOOKING STATEMENTS TO REFLECT ACTUAL RESULTS OR CHANGES IN FACTORS OR
ASSUMPTIONS AFFECTING SUCH FORWARD-LOOKING STATEMENTS.
INTRODUCTION
During the last few years the Company has been through a period of
dramatic restructuring and repositioning. The Company has had operating
losses and net losses in each of its last five fiscal years and has suffered
operating losses in each of its last nine quarters. In the three years ended
March 31, 1998, March 31, 1997 and December 31, 1995, the Company reported
operating losses of $15.8 million, $4.1 million and $18.7 million,
respectively, and net losses in each of these years of $16.6 million, $3.7
million and $18.7 million, respectively. There can be no assurances that the
Company will cease to incur losses in the foreseeable future, if ever.
Continued losses have and will continue to result in liquidity and cash flow
problems which have and will inhibit the Company's ability to develop new
products. The Company funded its working capital requirements and capital
expenditures during fiscal 1998 through the issuance of senior secured
convertible promissory notes to a significant stockholder. Further sustained
losses will necessitate the infusion of additional capital. The Company may
seek to raise additional capital through future additional financings that if
raised through the issuance of equity securities, will reduce the percentage
ownership of the stockholders of the Company. Existing stockholders may
experience additional dilution, and securities issued in conjunction with new
financings may have rights, preferences and privileges senior to those of
holders of the Company's Common Stock. There can be no assurance, however,
that additional financing will be available when needed, if at all, or on
favorable terms. The failure to obtain additional financing would have a
material adverse affect on the Company and may force the Company to seek
protection of a
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bankruptcy court. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
The primary business of the Company is to develop, publish and market
interactive multimedia educational software content (programs) on CD-ROM for the
K-12 school and home consumer markets. The Company's products integrate digital
graphics, text, sound, animation and video and take advantage of the major
advances in PC technology. The Company's products are primarily developed for
the personal computer with sound capabilities and a CD-ROM drive. The Company
believes that, as more powerful personal computers become less costly and more
widely available to consumers and classrooms, demand for multimedia CD-ROM
products and content will grow.
More importantly, the Company is making the transition to delivering
innovative and educationally sound content over the Internet for children,
parents and teachers. The Company is providing a "kid safe" environment online
for children's activities. These environments focus on communication, creativity
and developing specific skill sets. For example, leveraging its long term
relationship with the National Football League, the Company has developed the
NFL's successful Internet site for kids, "Play Football!" which achieves
millions of page views per month and targets the demographic of 8 to 14 year old
boys engaged in football activities. As a result, the Company is positioning
itself to take advantage of the growth in the teenage population going online
over the next five years by providing content and activities that are conducive
to this growing demographic.
The Internet provides another key platform for distribution of its
products. Accordingly, the Company has begun to develop specific content for the
Internet leveraging its considerable skill set in developing award winning
nonviolent, fun and educational media content. In addition, the Company is
partnering with online distributors to provide the foundation for broad based
online distribution to over 900 outlets for the Company's existing CD-ROM
product line. The Company is also exploring other technologies to enable it to
sell its products directly through download and encryption technologies as the
bandwidth capabilities expand making the process more commercially viable. The
Company furthermore believes that broadband platforms will become increasingly
attractive to the marketplace. Broadband, which can generally be described as a
digital communications medium that allows for high bandwidth throughput, may
take form in a number of delivery systems including cable, fiber optics, and
satellite. In anticipation of this, the Company has formed and continues to form
alliances with partners involved in developing and distributing content
appropriate for broadband systems.
The Company's products are available for Macintosh, Windows and Windows
95 platforms and all major Internet browsers.
CD-ROM PRODUCTS
The Company's CD-ROM products are organized into three families:
sports learning, animated learning and early learning. Sports learning uses
sports themes to help kids develop their reading and math skills. These
products are sold under the Company's "Head Coach" brand name use
professional team logos, statistics, and player likenesses through licenses
obtained from NFL Properties, NFL Players and Major League Baseball. In the
future, the Company intends to offer additional products under the Head Coach
brand through other sports franchise affiliations.
The products acquired in the merger with Theatrix Interactive comprise
the Company's animated learning line. This line is lead by award winning titles,
including the "Hollywood" series and the "Head" series, among many other titles
that have been developed with leading educators in specific curriculum areas.
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Finally, the Company's early learning line of products use animation
and a curriculum-based approach to help develop important learning skills.
The Sanctuary Woods brand of products also contains some of the
Company's older titles including those purchased from Magic Quest in 1994.
SPORTS LEARNING PRODUCTS
NFL MATH. This product allows kids ages 8 to 12 to guide their favorite
NFL-TM- team down the field by answering math questions that cover 24 different
math skills including basic computation, fractions and decimals, charts and word
problems. It features 3D photo-realistic animation, real teams, real players,
statistics, and workshops.
NFL-TM- READING. This product allows kids ages 8 to 12 to practice
reading comprehension, spelling and vocabulary skills by teaming up with the
pros. Kid's read more than 1,800 articles packed with interesting facts about
NFL teams and players. With multi-player, multi-level capabilities, kids of
different ages can compete against one another on a level playing field.
MAJOR LEAGUE-TM- MATH. This product allows kids ages 8 to 12 to guide
their favorite Major League Baseball-TM- team around the bases by answering math
questions that cover 22 different math skills such as basic computation,
percentages, prime numbers, geometric shapes and structures, powers and square
roots, volume and area. It features 3D photo-realistic animation, real teams,
statistics, and workshops.
MAJOR LEAGUE-TM- READING. Kids can read more than 1,500 articles packed
with interesting facts about Major League teams and players and field 2,500
reading, spelling and vocabulary questions. With multi-player, multi-level
capabilities, kids of different ages can compete against one another on a level
playing field with 3D photo-realistic animation.
ANIMATED LEARNING PRODUCTS
HOLLYWOOD. Using innovative text-to-speech synthesis technology,
children ages 9 and up write movies using a cast of characters, backgrounds,
actions, and sound effects contained in the program. The characters literally
speak the written script out loud as they follow the stage directions that the
young writers give them. Kids can stretch their imaginations to the limit as
they practice creative writing, organizational, and cooperative learning skills.
HOLLYWOOD HIGH. In the second program in the series, children have
access to all of the information from Hollywood in addition to a new set of
characters, settings, sound effects, and actions. Advanced features include the
ability to "teach" characters how to say complex or foreign words using a custom
pronunciation dictionary, as well as the capability to switch between several
scenes within a single show.
MATH HEADS. This fast-paced math games challenges children ages 10 to
14 to sharpen their mathematical estimation skills. Kids navigate using a remote
control; each channel contains a different game show with wacky characters
acting as hosts. Skills covered include decimals, percentages, mental
calculation, estimation, rounding, number patterns, geometry, multiplication,
and division.
WORD HEADS. This program uses the same type of highly interactive
game-show setting to teach children the ins and outs of the English language.
Kids ages 10 to 14 build their own Heads characters and
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surf the channels on Heads TV to practice idioms, metaphors, parts of speech,
roots, creative writing, and effective word choice skills.
STRATEGY HEADS. Designed to improve strategic and analytical thinking
skills for 10 to 14 year olds, this program is filled with thousands of
brainteasers, puzzles, and mazes. Different channels provide different
challenges. Innovative problems involve geometric transformations, spatial
relationships, deductive reasoning, strategy planning and implementation,
logical analysis, and navigation.
BIG SCIENCE COMICS. This program is a more advanced science adventure
for 8 to 12 year-olds. It teaches important scientific principles such as
density, work, force, elasticity, projectile motion, and mass, using common
household items. Kids keep notes as they solve the various puzzles, thus
becoming familiar with the Scientific Method.
JUILLIARD-TM- MUSIC ADVENTURE. Juilliard developed the content for this
program for children ages 9 and up. Non-traditional musical notation is combined
with a musical encyclopedia to help children solve a variety of puzzles in an
animated medieval castle setting. Three levels allow kids to practice the
concepts with the puzzles and engage in free musical composition. Juilliard
Music Adventure is one of a few music theory programs that do not require the
use of a MIDI Keyboard.
EARLY LEARNING PRODUCTS
FRANKLIN LEARNS MATH. This pre-school program for kids ages 4 to 7
combines education and entertainment with the popular book character "Franklin"
developed by Kids Can Press Ltd. The program uses endearing characters and
animation, and a curriculum-based approach to teach important learning skills,
including pattern and number recognition, telling time, counting, addition, and
subtraction.
FRANKLIN'S ACTIVITY CENTER. This fun-filled program for kids ages 4 to
9 finds Franklin the Turtle in his room on a rainy day. There are 11 fun things
to do including jigsaw puzzles, matching games, card playing, and coloring.
There are even costumes in which to dress Franklin and greeting cards to create
and print out.
FRANKLIN'S READING WORLD. This pre-reading program for kids ages 4 to
7, combines education and entertainment. This program uses endearing characters,
animation and a curriculum-based approach to teach important language skills
including reading comprehension, vocabulary and spelling. Words are always
spoken aloud and shown on the screen simultaneously, so children not only hear
but see words and their parts.
BUILD-A-BOOK WITH ROBERTO. Developed in connection with C-TREC (the
Children's Television Resource and Education Center), this ground-breaking
program for children ages 3 to 7 focuses on social development issues. Children
create an interactive storybook about Roberto the Hippo trying to join in a game
with his friends. Other activities include an offline coloring book, emotion
masks and puppets, dance-alongs and sing-alongs, and a sizable Parent Module
that covers the different approaches to social learning.
BACK LIST CD-ROM PRODUCTS
The Company also continues to sell many of its older award winning
titles. These titles are no longer sold into the consumer retail channel, but
are distributed as teacher's editions and "site-licenses" to schools
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and teachers throughout the United States and Canada. These titles include
SITTING ON THE FARM, THE CAT CAME BACK, ADDISON-WESLEY'S REAL WORLD MATH, BIT
BOT'S MATH VOYAGE and HOW DO YOU SPELL ADVENTURE.
SNOOTZ MATH TREK. Children ages 7 to 10 join the Snootz from outer
space on a math discovery adventure. Activities are designed to teach important
concepts basic to math, such as navigation, order of operations, patterns, data
collection, process of elimination, and other similar concepts. The program
includes suggestions for a large number of offline activities that build on
topics covered in the program.
BUMPTZ SCIENCE CARNIVAL. Children ages 6 to 10 explore the world of
science as they navigate the Great Galaxies amusement park to help the Bumptz
family repair their spaceship. Creative tools including the Bubblearium,
Magnet-O-Whirl, and Photon-O-Tron, contain hundreds of puzzles that address
buoyancy, light properties, and magnetic forces.
MATH ACE GRAND PRIX. Eight levels of game play allow kids ages 8 to 16
practice math concepts essential to their grade level. Topics covered range from
basic addition and subtraction up through basic calculus. Arcade-style graphics
provide set the stage for over 8,000 mathematical word and number problems. A
tutorial section provides extra information when kids are learning new concepts.
WORD CITY GRAND PRIX. This program covers 7 essential language arts
skills, from alphabetization to parts of speech and allows kids, ages 7 to 14,
to enter and practice their own spelling words or create a custom dictionary.
With fast-paced arcade-style games and 3D-style graphics, learning becomes fun,
especially when kids get to drive in a Grand Prix race.
PRODUCT DEVELOPMENT
The Company has an internal product development team of producers,
artists, programmers and engineers. Depending on the complexity of the CD-ROM
software program and the particular platform, the development time per software
program is typically 4 to 9 months.The development of Website enabling
technologies require approximately 4 to 6 months with a testing cycle. The
actual development of Websites requires a much shorter timeline given the
existence of core enabling game engines and other related Web technologies.
During fiscal 1998, fiscal 1997 and fiscal 1996, respectively, the
Company spent $1,270,000, excluding the immediate charge for in-process R&D from
the Theatrix merger of $2,036,000,$1,395,000 and $4,496,000, respectively, on
product development.
The Company's strategy is to develop curriculum-based educational
software using professional sports themes and popular cartoon characters. The
Company licenses the use of names, logos and other property of professional
sports teams, including football and baseball, from the NFL, Major League
Baseball and other sports associations. The Company also licenses the use of
popular cartoon characters, such as Franklin the Turtle, or develops them
jointly with others. The Company has an arrangement with the Juilliard
Conservatory to develop and publish products that teach children how to play and
understand music. In addition, the Company has an arrangement with the C-TREC,
The Children's Television Resource and Education Center to develop early
learning products based on cartoon characters of C-TREC; the first of which is
"Build a Book by Roberto" a socialization tool for young children.
The Company's license agreements require it to pay advances and
royalties to the licensor. Royalty obligations for products licensed under these
agreements are primarily based on (i) a percentage of the Company's net revenues
for the product, (ii) a fixed amount per unit of sales, or (iii) a percentage of
net
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revenue less the licensor's contribution to the finished product. The Company
is required to pay royalties within certain time periods and comply with
various other requirements in its license agreements.
The Company is currently in default under many of these license
agreements for the failure to pay royalties required. Kids Can Press LTD. has
terminated the license agreement relating to Franklin the Turtle due to the
Company's failure to pay royalties due under that license agreement. As a result
of the termination of the Kids Can Press LTD license agreement the Company will
lose the right to distribute its Franklin the Turtle products as of December 31,
1998. Although the Company intends to try to renew this license, there can be no
assurance that the Company will have the funds necessary to continue to license
Franklin and the Company could be prohibited from distributing Franklin the
Turtle-related products in the future. Moreover, the Company's failure to pay
royalties in connection with its other license agreements could result in the
termination of such license agreements, and potentially the loss of the right to
distribute certain of the Company's products. Termination of such license
agreements would materially adversely affect the Company's ability to sell
certain of its products, which would materially adversely affect the Company's
financial results.
DISTRIBUTION AND MARKETING
The Company sells its products through educational dealers and
distributors. In addition, the Company also sells its products directly to
schools and consumers using its own in-house sales force. International sales
are derived from licensing agreements with foreign distributors.
The Company targets its efforts in the following channels:
(i) EDUCATION. The Company sells its products directly to schools
and teachers and indirectly through educational product dealers.
(ii) INTERNATIONAL. The Company has both exclusive and non-exclusive
republishing and distribution relationships in foreign territories.
(iii) OEM. The Company has relationships with original equipment
manufacturers and software bundlers who bundle the Company's products with their
own hardware or third party software or other products.
(iv) DIRECT. The Company has developed and continues to develop its
own direct mail-order distribution system. Product sales are made direct to the
consumer via catalog, targeted mailings, telephone, fax, and through the
Internet.
(v) INTERNET. The Company has developed an infrastructure to sell
existing CD-ROM products through a commerce enabled capability and strategic
alliance with an Internet distributor direct to over 900 online stores.
The Company continued to sell products through this fiscal year into
the consumer retail channel, curtailing such activities toward the end of the
1997 calendar year because of the cost and, moreover, the increased risk of
doing business in this channel. The Company continues to sell a limited amount
of product into the consumer retail channel. However, the Company attempts to
monitor and manage the volume of its sales to distributors and retailers in
order to avoid their overstocking of the Company's products and to limit product
returns and other concessions to distributors.
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The rate of product returns or price protection could increase if
general mass merchant retailers become an increasing percentage of the
Company's business or other changes occur in the Company's distribution
channels. Recent trends in the distribution of software to mass merchandisers
may put pressure on the Company's margins and adversely affect the Company's
financial results. In addition, the Company is still negotiating with several
major consumer retail distributors regarding the return of the Company's
products from the consumer retail channel. Subsequently, going forward, the
Company has decided to focus its efforts on sales directly to educational
dealers and distributors with tighter controls on return policies. Industry
standards in the education channel allow for moderation in this area. Because
of the changes in return policies for the majority of the educational dealers
and distributors, the Company has reduced its reserves for returns. The
Company is investigating partnerships for retail sales with the larger
players in the marketplace that can afford the aggressive return policies and
standards. Such a partnership will result in a smaller percentage of sales
revenue reserved for returns with a significant reduction in risk.
The Company uses reasonable efforts to assess the creditworthiness of
its customers before orders are fulfilled or shipped. If the Company's
assessment of the creditworthiness of its customers receiving products on credit
proves incorrect, the Company could be required to significantly increase bad
debt reserves. There can be no assurance that such write-offs will not occur in
the future or that the amounts written off will not have a material adverse
effect on the Company's business, results of operations and financial condition.
The Company has experienced in the past, and continues to experience,
significant delays in the collection of certain of its accounts receivable. The
existence of overstock circumstances at distributor and retailer warehouses, or
the lack of significant new product releases, may cause delays in collecting
amounts otherwise owed to the Company by distributors or retailers.
The Company generates brand awareness and demand for its products
through public relations activities, advertising, product reviews, in-store
promotions and national and local trade shows. In addition, the Company devotes
resources and attention to the packaging of its products, which it considers a
major marketing tool. The Company also employs certain full-time technical and
customer support personnel to assist customers in the use of the Company's
products. The Company has substantially cut-back on all of these efforts
recently due to its cash shortfall.
COMPETITION IN THE EDUCATIONAL SOFTWARE MARKET
The educational software industry is competitive. Among many key
factors affecting the competitiveness of educational software are product design
and content, ease of operation, brand name recognition, access to distribution
channels and retail shelf space, quality and reliability, price and quality of
support service. The Company competes against a large number of other companies
of varying sizes and resources including, Cendant, Inc., The Learning Company,
Inc., the Disney Co., and Headbone, Interactive. In the last several years there
has been a significant consolidation of software publishers. While the Company
believes that its products compete favorably in terms of design and content,
ease of operation, and quality, many of the Company's competitors have
substantially greater financial, technical and marketing resources than the
Company. These companies may also have greater access to established
distribution channels and a larger development budget. The Company lowered its
price levels in 1997 to compete more effectively in a marketplace where prices
have reduced rapidly over the past year. While the Company has made an effort to
improve its competitive position, there can be no assurance that it will be
successful in this regard. The Company may take further price reductions in the
future, as may be warranted by market conditions, product life cycle and sales
levels.
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MANUFACTURING
The Company contracts with third party vendors for mass production,
packaging and order fulfillment services of its CD-ROM products.
To the extent that data is supplied from distributors and retailers,
the Company monitors its inventory levels and channel sell-through information
to avoid accumulating excess inventory. Product returns from distributors and
retailers can cause the Company to maintain excess inventory. The Company has
greatly reduced its inventory levels and continues to maintain them through
focused sales strategies, liquidation, and destruction of certain unsalable
inventories.
PROPRIETARY RIGHTS
The Company regards software that it develops or licenses as
proprietary and relies on a combination of trade secret, trademark and copyright
laws, license agreements and confidentiality agreements to protect its rights in
its products. The Company has one patent application for the scripting language
embedded within the "Hollywood" series. While the Company has developed core
enabling technologies and engines to build much of their existing product line,
including an intelligent 3-D language and scripting engine for development of
new and innovative children's products, much of the technology the Company
currently uses to develop products and websites is not proprietary. There can be
no assurance that the Company's competitors will not independently utilize
commercially available technologies to develop products that are substantially
equivalent or superior to the Company's.
The Company has registered the trademarks "Sanctuary Woods,"
"Theatrix," "Theatrix Interactive," and the stylized "Theatrix" logo in the
United States for the promotion of goods and services, computer programming, and
the designing of computer programs. The Company has registered trademarks of
several of its front line titles and applications, including HOLLYWOOD HIGH, BIG
SCIENCE COMICS, MATH HEADS, and BUILD-A-BOOK WITH ROBERTO for use in the United
States for the promotion of goods and services, online activities, and for
educational purposes.
Applications are on file with the U.S. Patent and Trademark Office for
the "Head Coach" brand and the "Get A Head" brand, as the Company uses and
intends to continue to use these titles for promotional purposes. Furthermore,
the Company is in the process of registering trademarks that are currently in
use for specific valuable characters and applications from JUILLIARD MUSIC
ADVENTURE and BUMPTZ SCIENCE CARNIVAL. The other program titles that the Company
has produced are allowed, and the Company intends to register the marks once
they are in used in connection with specific commercial goods and services.
The Company owns registered trademarks for several of its titles and is
in the process of readying allowed marks of other titles and applications for
registration in the United States. However, existing trademark laws afford only
limited protection, and the laws of certain countries in which the Company's
products are or may be distributed do not protect applicable intellectual
property rights to the same extent as the laws of the United States or Canada.
The Company believes that its products do not infringe on the
proprietary rights of any third party. However, as the number of software
products increases and their functionality overlaps, software developers may
become subject to infringement claims. In addition, the Company's products in
certain cases make use of the likenesses of individuals, which are licensed
where believed necessary by the Company. There can be no assurance that third
parties will not assert infringement claims against the Company with respect to
current or future products. In the event an infringement claim is asserted, the
Company may be faced with
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costly litigation which it cannot currently afford to defend or it may enter
into license arrangements with the party alleging infringement. There can be
no assurance that any such licenses will be available to the Company on
commercially reasonable terms.
EMPLOYEES
As of September 21, 1998, the Company had 16 full-time employees, one
part-time employee and 2 independent contractors.
The Company's future success depends in large part on the continued
service of its key technical and senior management personnel and on its ability
to attract, motivate and retain highly qualified employees. Competition for such
employees is intense, and the loss of key personnel could have a material
adverse effect upon the Company's current operations and on new product
development efforts. None of the Company's employees are represented by a
collective bargaining agreement nor has the Company experienced a work stoppage.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company leases approximately 7,863 square feet of office space in
Emeryville, California where the Company maintains its principal executive
offices. The Emeryville facility is subject to a lease that expires December 16,
1999. The Company believes that its facilities provide suitable and adequate
production capacity.
ITEM 3. LEGAL PROCEEDINGS
In September 1997, after the acquisition of Theatrix Interactive, the
Company engaged counsel to develop a program to restructure the Company's debt
and develop a program of voluntary liquidation of debt.
At the same time, a significant stockholder (the "Stockholder") of
the Company provided interim financing in the form of a promissory
convertible debt instrument to facilitate in the restructuring of the Company
going forward and allow it to continue operations. A debt reconciliation
program was devised and a creditor's meeting held on November 4, 1997 to
inform the creditors' of the Company's financial status and intent to settle
outstanding liabilities.
Because of the interim financing supplied, the Stockholder secured a
senior position for the assets of the Company and the program was developed to
protect not only the Stockholder's senior position but also that of another
first priority lien holder, Silicon Valley Bank ("SVB"). The Company is
obligated to SVB for its secured revolving line of credit. SVB asserts that it
is due approximately $392,000 under the line of credit, and the last partial
payment made to SVB by the Company was in January 1998.
In December 1997, approximately 61 of the Company's trade creditors
with claims for an aggregate of $491,000 entered into a settlement with the
Company pursuant to which the Company agreed to pay $0.15 for every dollar it
owed to the trade creditors in full and complete satisfaction of the
Company's obligations to them. This resulted in a net gain for forgiveness of
debt of $356,000 in fiscal 1998. Subject to available capital, the Company
expects to continue its program of debt restructuring and voluntary
liquidation of debt for many of the current liabilities which were
outstanding at March 31, 1998 in the aggregate of $5,074,000.
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The Company was only able to reconcile a portion of the debt under this
program and as a result, is a party to various claims, threatened litigation and
judgements, as outlined below. It is possible that any of these claims could
cause the Company to become insolvent and seek bankruptcy protection. However,
for the most part, counsel and the Company have been able to continue to work
with the majority of the creditors as the Company continues to rebuild its
operations.
PENDING LITIGATION.
The Company is a party to a legal claim for alleged failure to pay
invoices of Bowne of Los Angeles, Inc. Bowne filed a complaint in the Alameda
County Court on February 18, 1998 seeking approximately $75,000 from the Company
in this matter. A trial for this suit has been set for December 1998.
The Company is a party to a legal claim for distribution, inventory in
the channel and marketing expenses brought by Navarre Corporation in the State
of Minnesota, County of Hennepin. Navarre is seeking damages in excess of
$450,000. The Company and Navarre reached a settlement and release agreement
that required the Company to pay the sum of $37,500 by August 15, 1998, which it
failed to do because of lack of funds. The Company believes that Navarre is
likely to go back to Minnesota Court to seek a judgement of up to $460,000.
THREATENED LITIGATION AND/OR ADVERSE judgementS.
Threatened litigation and/or judgements against the Company fall
broadly into the following categories. All of the below described judgement
amounts have been accrued for in the Company's financial statements as of
March 31, 1998.
DISTRIBUTORS. Certain companies have been involved in the distribution
of the Company's products into the retail consumer channel. Because of economic
challenges, the Company no longer distributes into this channel and the
distributors listed below may bring claims against the Company for outstanding
inventory, marketing and promotional funds resulting from these activities in
prior years:
The Company was a party to a legal claim for an amount owed to
a software distributor. The plaintiff obtained a judgement against the
Company in July 1998 for a total of $59,200.33 in principal, interest
and fees plus 10% interest per annum. Discussions are ongoing for
settlement by counsel.
The Company has received notice of an action filed against it
in June 1998 regarding distribution of the Company's products. The
plaintiff is seeking approximately $56,648.23 plus 10% interest per
annum, and obtained a default judgement in September 1998, but no
damages were specified or awarded at that timed
The Company was a party to a legal claim for trade debt
associated with the distribution of the Company's products. The
plaintiff in the matter obtained a judgement in April 1998 for the
amount of $51,833.94.
EQUIPMENT LEASING COMPANIES. The Company had several major equipment
leases. Legal action has been taken by one company as follows:
The Company was a party to a legal claim of an alleged breach
of an equipment lease. The lessor of the equipment obtained a judgement
against the Company for approximately $26,294.19 in February 1998.
-11-
<PAGE>
SERVICE PROVIDERS. A variety of service providers that did not receive
settlement by the Company in December 1997 have taken action as follows:
The Company was a party to a legal claim for breach of
contract with an employment placement agency. The plaintiff obtained a
judgement against the Company for approximately $25,540 plus interest
and attorneys' fees. The plaintiff has attempted to collect payment by
levying on certain of the Company's bank accounts. Most, if not all, of
the judgement remains outstanding.
The Company was a party to a legal claim for services
provided. The plaintiff in the matter obtained judgement for $74,469.66
plus interest 1997. The plaintiff has tried to levy various assets of
the Company without success.
The Company was a party to a legal claim based on an alleged
breach of a consulting agreement in 1997. The plaintiff in the matter
obtained a default judgement in this matter for approximately $6,935
plus interest of $1.89 per annum and subsequently levied against
certain bank accounts of the Company in 1998. It is believed that a
substantial portion of the default judgement may have been satisfied
through such levies.
PERSONNEL. The Company has a personnel dispute with the prior CEO and
CFO of Theatrix Interactive, Incorporated.
The Company has been a party to a legal claim for severance payment and
vacation accrued. The plaintiffs have obtained judgements for a total of
$138,469.62 in January 1998. It is believed that attempts to levy the Company's
assets have been unsuccessful to date.
In addition, there are a number of matters in which litigation has
been threatened against the Company. The matters involve approximately 47
parties for claims ranging from $258.84 to $600,000 and have been accrued for
in the Company's financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth fiscal quarter of the fiscal year ended March 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock was traded in the United States on the
Nasdaq National Market system until July 2, 1996 when it was delisted for
failing to maintain the minimum criteria for inclusion on such exchange. Since
that date, the Company's Common Stock has traded over-the-counter under the
symbol "SWMC." The following information was obtained in part from Nasdaq and in
part from Stocksite and reflects inter-dealer prices, without mark-up, mark-down
or commission and may not represent actual transactions.
-12-
<PAGE>
OTC ELECTRONIC BULLETIN BOARD
<TABLE>
<CAPTION>
QUARTER ENDED
---------------- ---------------- ---------------- -------------
June 30 September 30 December 31 March 31
---------------- ---------------- ---------------- -------------
<S> <C> <C> <C> <C>
FISCAL YEAR ENDED MARCH 31, 1998
High 3.12500 2.12500 0.37500 0.32000
Low 0.03125 0.18750 0.03125 0.0400
FISCAL YEAR ENDED MARCH 31,1997
High 1.56250 0.68000 0.55000 0.25000
Low 0.56250 .12500 0.14000 0.03125
</TABLE>
DIVIDEND POLICY
The Company has not paid cash dividends and has no present plans to do
so. The Company has a negative covenant prohibiting dividends under the terms of
one of the Company's current loan agreements. There were approximately 444
shareholders of record on September 21, 1998, excluding stockholders whose stock
is held in nominee or street name by brokers.
RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Transition
Period
Year Ended Year Ended Ended Year Ended Year Ended Year Ended
3/31/98(3) 3/31/97 3/31/96 12/31/95(1) 12/31/94(2) 12/31/93
<S> <C> <C> <C> <C> <C> <C>
Revenues, net $2,010,000 $4,749,000 $937,000 $10,981,000 $ 6,261,000 $1,425,000
Cost of sales 1,487,000 1,513,000 924,000 12,576,000 3,057,000 994,000
Gross margin
(deficit) 523,000 3,236,000 13,000 (1,595,000) 3,204,000 431,000
Operating loss (15,765,000) (4,071,000) (4,445,000) (18,685,000) (8,028,000) (4,436,000)
Net loss (16,579,000) (3,677,000) (4,514,000) (18,698,000) (7,404,000) (4,222,000)
Basic and diluted
loss per share (4.15) (3.30) (4.97) (22.16) (10.58) (9.15)
Number of shares
used in computation 3,995,471 1,113,145 907,904 843,687 699,684 461,571
Working capital
(deficit) $(4,604,000) $(966,000) $(6,299,000) $(2,315,000) $ 6,364,000 $649,000
Total Assets 691,000 2,286,000 4,594,000 6,599,000 12,849,000 4,239,000
Current liabilities 5,074,000 2,532,000 8,914,000 6,355,000 2,096,000 670,000
Long-term obligations 869,000 5,302,000 548,000 601,000 770,000 970,000
Shareholders' equity
(deficit) (5,252,000) (5,548,000) (4,868,000) (357,000) 9,984,000 2,599,000
</TABLE>
(1) See "Management Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of significant and material
1995 charges.
-13-
<PAGE>
(2) Reflects acquisition of Magic Quest, Inc., effective June 30, 1994,
and resultant write-off of $1,035,000 of purchased in-process research
and development.
(3) Reflects acquisition of Theatrix, effective August 12, 1997, and
resultant write-off of $2,036,000 of purchased in-process research
and development.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is engaged in the development, publication and sale of
interactive multimedia educational software products for the home and education
markets.
The Company sells its products in North America through educational
dealers and distributors as well as directly to schools. In addition, the
Company distributes products on a limited basis in the consumer retail channel.
International product sales occur through license agreements with foreign
distributors and re-publishers.
During the last few years the Company has been through a period of
dramatic restructuring and repositioning. In fiscal 1997, management
discontinued the development of home entertainment products and narrowed the
Company's focus to the development of children's educational software products
and of youth oriented Web sites for the NFL and Major League Baseball on a
contract basis.
In fiscal 1996 and 1997, the Company took various steps to restructure
its operations, including changing the Company's year-end from December 31 to
March 31. Personnel changes included the installation of new senior management
and a substantial reduction of headcount from 148 employees as of December 31,
1995 to 32 employees at March 31, 1997. Operational changes included the closing
of the Publisher Services division, the sale of the majority of the fixed assets
of the Entertainment division, and elimination of the Company's outstanding debt
at that time, and the cancellation of the performance shares in March 1997 (see
note 17 to the financial statements).
During fiscal 1998, the Company changed its jurisdiction of
incorporation from British Columbia, Canada to Delaware, U.S.A., effected a
one-for-twenty share consolidation of its outstanding Common Stock, exchanged
$5,302,000 in outstanding convertible debentures for Series A Preferred Stock
and warrants and raised $2,157,000 in a rights offering.
In August 1997, in an attempt to increase market share for its
products, the Company acquired Theatrix Interactive, Inc., in exchange for
3,089,203 shares of its Common Stock. The aggregate purchase price of
Theatrix was $9,271,000. This included recognition of goodwill of $8,142,000
and in-process research and development of $2,036,000 as well as the assets
and liabilities of Theatrix, net of the transaction costs for the merger. The
in-process research and development expenses were charged to income
immediately in accordance with generally accepted accounting principles.
In addition, the reliance on the retail distribution channel by both
companies resulted in major financial problems for the newly-formed entity. Many
of the Company's large distributors and consumer-channel retailers of both the
Company's and Theatrix' products returned excess inventory for credit. However,
in order to gain shelf space in the popular consumer retail channels the Company
had to continue to issue promotional credits based on the original orders placed
by its distributors, and some customer balances remain outstanding.
-14-
<PAGE>
By September 1997, the Company was under extreme financial and
operational constraints. Extensive employee changes and the complicated
merger of Sanctuary Woods' and Theatrix operating systems, as well as
limited capital resources, prohibited the Company from paying its debts and
operating expenses. During this period, Michelle Kraus, a software industry
expert, became the Company's Chief Executive Officer.
In September 1997, the Company retained counsel and adopted a formal
plan of voluntary liquidation of debt. Under this plan, approximately 61 of
the Company's trade creditors with claims for an aggregate of $491,000
entered into a settlement with the Company pursuant to which the Company
agreed to pay $0.15 for every dollar it owed to the trade creditors in full
and complete satisfaction of the Company's obligations to them. This resulted
in a net gain for forgiveness of debt of $356,000 in fiscal 1998. Subject to
available capital, the Company expects to continue its program of debt
restructuring and voluntary liquidation of debt for many of the current
liabilities which were outstanding at March 31, 1998 in the aggregate of
$5,074,000 (see Litigation section), but it is possible that the creditors
could force the Company to initiate insolvency proceedings.
As a result of the impairment to the capital of the business, goodwill
of $8,142,000 which was initially capitalized as a part of the purchase price of
Theatrix, was written off in fiscal 1998 and accounts for a significant portion
of the fiscal 1998 loss.
In the third quarter of fiscal 1998, the Company continued to
restructure its operations, and was able to secure $869,000 in debt financing
from Dawson-Samberg Capital Management, Inc. ("DSCM"), a significant
stockholder of the Company, in convertible promissory notes which include
warrants to purchase 869,000 shares at an exercise price of $0.15 per share.
Notwithstanding this one-time financing, the Company's capital situation
remains unstable, and the Company has not paid its creditors on a timely
basis.
As a result of the Company's financial situation, the Company failed to
comply with its periodic reporting obligations under the Exchange Act. In July
1998 the Securities and Exchange Commission notified the Company that it must
correct its non-compliance with the periodic reporting obligations under the
Securities Exchange Act of 1934, as amended. Because of the Company's financial
condition, the Company had been unable to hire auditors and other professionals
necessary to prepare and file the requisite reports. The Company is currently
working to file the delinquent reports by mid October 1998. In order to
facilitate this reporting process, DCSM has agreed to lend to the Company, on a
secured note, certain amounts necessary to pay the costs of professionals and
other service organizations necessary to complete the reporting process.
During this period the Company's accounting controls were adversely
affected by the Company's difficult financial position, staff turnover and
reductions, and the significant volume of returns and promotional credits
from the retail distribution channel and related events. As a result, during
the audit of the Company's financial statements for the fiscal year ended
March 31, 1998, the Company's independent accountants, PricewaterhouseCoopers
LLP, determined that the Company's existing accounting systems have certain
material weaknesses, including deficiencies in its internal controls.
PricewaterhouseCoopers LLP has informed management that a letter of material
weakness in accounting internal controls will be issued to the Company.
Management is aware of the accounting control issues and believes that with
proper staffing the Company will be able to address this issue in the near
future. However, there can be no assurance that the Company will be able to
obtain additional financing and will be able to address its accounting
control issues in the future.
-15-
<PAGE>
RESULTS OF OPERATIONS
Effective April 1, 1996, the Company changed its fiscal year from
December 31 to March 31. For comparison purposes, results for the year ended
March 31, 1997 are being compared with results for the year ended December 31,
1995. The Company has not recast the prior year's information presented herein
to conform to the new fiscal year end.
NET LOSS
For the fiscal year ended March 31, 1998, the Company incurred a net
loss of $16,579,000 and an operating loss of $15,765,000. For the fiscal year
ended March 31, 1997, the Company incurred a net loss of $3,677,000 and an
operating loss of $4,071,000. The increases in net operating loss of $11,694,000
is primarily due to the following items:
<TABLE>
<S> <C>
Write-off of Goodwill $ 8,142,000
Charge for Theatrix In-Process Research and Development 2,036,000
Lower Gross Margin due to lower Revenues 1,866,000
Increase in Provision for Unsalable Inventory 397,000
Gain on Forgiveness of debt, net (356,000)
-----------
Total $12,085,000
-----------
-----------
</TABLE>
For the fiscal year ended March 31, 1997, the Company incurred a net
loss of $3,677,000 and an operating loss of $4,071,000, which was an
improvement over the twelve months ended December 31, 1995 of $15,021,000 and
$14,614,000, respectively.
The net loss for fiscal year 1997 included the following:
- bad debt losses of $329,000 partly related to bankruptcy filings by
two of the Company's significant customers.
- interest expense totaling $225,000 related to the September 1996
issuance of convertible debentures. Pursuant to the conversion of the debentures
into Series A Preferred Stock in April 1997 and the issuance of additional
warrants to purchase common stock, the debenture holders have forgiven the
accrued interest.
- expenses of approximately $390,000 related to the Company's
domestication into the State of Delaware from British Columbia, Canada, a
reverse stock split, conversion of subordinated debentures and related SEC
filings (see recent developments) in April 1997.
- expenses of approximately $420,000 related to facility consolidation
including operating expenses form the Victoria studio up to its sale in May 1996
and costs related to the closure of the Toronto studio.
In the fourth quarter of 1995, the Company's management increased
reserves for inventory and wrote off prepaid and deferred royalties and
licenses and other intangibles for an aggregate of $11,004,000 (see note 18
of the financial statements). This increase did not reoccur in 1997 and was
the primary reason for the variance in operating and net income between
fiscal years 1995 and 1997.
NET REVENUES
Net Revenues in 1998 were $2,010,000, a decrease of 57.7% from the
prior fiscal year's net revenues of $4,749,000. The reduction in revenues was
primarily due to lower sales in connection with the Company's decision to
focus on sales of educational software programs and shift out of the retail
market as well as the volume of returns from retail distributors and
promotional credits given by the Company resulting from, and which was
exacerbated by, the collapse of the software market during this period. Sales
to Company's customer Scholastic represented 10.3% of net revenues. Revenue
from website
-16-
<PAGE>
development and maintenance was not material in fiscal 1998 or 1997.
Net revenues in fiscal 1997 included approximately $950,000 from the
sale of publication rights to certain entertainment titles. Sales to two of
the Company's customers, Eidos Interactive and Navarre Corporation,
represented 18% and 16% of net revenues, respectively. Net revenues in fiscal
1997 decreased substantially from net revenues of $10,981,000 in 1995 in part
due to the fact that in fiscal 1997 the Company discontinued its
entertainment product line, which accounted for 60% of net revenues in 1995.
The Company intends to develop its internet Web site, WWW.THEATRIX.COM,
as an alternative distribution channel to increase sales. There is no assurance,
however, that the Company will be successful in developing its Web site as a
distribution channel, or that the Web site will generate significant sales. In
addition, retailers of the Company's products typically have a limited amount of
shelf space and promotional resources, and there is intense competition for high
quality and adequate levels of shelf space and promotional support from
retailers. Industry practice and competitive pressures generally require the
Company to accept returns of unsold product from wholesale distributors and
retailers. Alternatively, the Company may choose to reduce the price of
previously shipped products to encourage retailers to maintain the products on
the retailers' shelves. This competition has caused a downward pressure on the
prices of the Company's products and an adverse effect on the Company's gross
margins. The Company believes that competition for shelf space will become more
intense in the future and that the downward pressure on the Company's prices
will continue.
COST OF SALES
Cost of sales in fiscal 1998 was $1,487,000 or 74.0% of net revenues
as compared to $1,513,000 or 31.9% of net revenues in fiscal 1997. Actual
cost of sales decreased in fiscal 1998 by $26,000 or 1.7% due primarily to
lower revenues as a result of the Company's focus on its educational product
lines and the retail channel returns and promotional credits.
Gross margin in fiscal 1998 was $523,000 or 26.0% of net revenues as
compared to $3,236,000 or 68.1% of net revenues in fiscal 1997, which was a
decrease of $2,713,000. As a result of the lower revenues, the gross margin
was negatively impacted by $1,866,000. Gross margin was also negatively
affected by the increase in the provision for unsalable inventory as a result
of the excessive units received from the retail channel returns and their
related costs of freight and processing.
Cost of sales in 1995 were $12,576,000. Cost of sales decreased in
fiscal 1997 due in part to lower sales as a result of the Company's focus on
its educational product lines. In addition, cost of sales were unusually high
in 1995. In the fourth quarter of 1995 the Company experienced an unusually
high rate of return for products sold primarily in the third quarter of 1995.
As a result, the Company reserved $5.5 million for returns and price
protection, took a charge of $4.3 million for unrecoverable royalty advances,
and a charge of $1.0 million for obsolete, slow-moving, and non-salable
inventory.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses,
exclusive of a one time charge in fiscal 1998 for the acquired Theatrix
in-process research and development of $2,036,000, were $1,270,000 in fiscal
1998 or 63.2% of net revenues as compared to $1,395,000 or 29.4% of net
revenues in fiscal 1997. Although
-17-
<PAGE>
research and development expenses in fiscal 1998 decreased in dollars by
$125,000, research and development expenses increased as a percentage of
revenues in fiscal 1998 as compared to fiscal 1997 primarily as a result of
the significant decrease in net revenues in fiscal 1998 as compared to fiscal
1997. In the last quarter of fiscal 1998, the Company ceased its development
efforts on new products, which resulted in lower research and development
expenses in fiscal 1998. As of fiscal year-end the Company had 7 people in
its development staff working primarily on Web site activities and developing
derivative products.
Research and development expenses were $4,496,000, or 40.9% of net
revenues in 1995. Research and development expenses decreased in fiscal 1997
primarily due to a reduction in headcount and the sale of the Company's
Victoria, British Columbia studio associated with the narrowing of the
Company's focus solely on education products.
MARKETING & SALES. Marketing and sales expenses were $2,863,000 in
fiscal 1998 or 142.4% of net revenues as compared to $3,061,000 in fiscal
1997, or 64.5% of revenues. The Company's sales and marketing expenses
increased as a percentage of revenue primarily as a result of the increase in
promotional and product credits that the Company was required to pay to its
distributors in the retail channel. The Company took action to substantially
reduce its marketing and sales expenses in fiscal 1998, and the majority of
these reductions took effect during the latter half of fiscal 1998.
Marketing and sales expenses were $8,264,000, or 75.2% of net
revenues, in 1995. The reduction in marketing and sales expenses in
fiscal 1997 both in actual expense and as a percentage of revenue was
primarily due to the Company's lack of resources to fund advertising and
promotional activities and reduced headcount associated with the narrowing of
the Company's focus solely on educational products.
ADMINISTRATION. Administrative expenses were $1,977,000, or 98.4% of
net revenues, in fiscal 1998 as compared to $2,851,000, or 60.0% of net
revenues in fiscal 1997, representing a decline in these expenses of $874,000
or 30.7% due primarily to reduction of operating expenses related to the
downsizing of the Company's operating structure.
Administrative expenses were $4,330,000, or 39.4% of net revenues in
1995. Although actual administrative expenses decreased in fiscal 1997
primarily as a result of the Company's reduced headcount, administrative
expenses as a percentage of net revenue increased primarily due to
nonrecurring expenses incurred by the Company in connection with the
Company's domestication into the State of Delaware and in connection with the
bankruptcy of two of the Company's distributors.
OTHER INCOME. Total Other Income was a loss in fiscal 1998 of
$814,000 versus a gain of $394,000 in fiscal 1997. The principal change in
these accounts was the gain in fiscal 1997 on the sale and disposal of assets
of $800,000 as opposed to the loss in fiscal 1998 of $1,080,000, which was
due principally to the cancellation of equipment leases and reductions of
fixed assets in accordance with the headcount reductions within the period.
Net Interest expense was lower by $311,000 between fiscal 1998 and 1997 due
the conversion of the subordinate debentures into common stock.
In addition, the Company realized a net gain from the forgiveness of
debt from its aggressive program of debt restructuring of $356,000 in fiscal
1998.
Total Other Income was a gain in fiscal 1997 of $394,000 as opposed
to a loss of $13,000 in 1995. The issuance in fiscal 1997 of debentures and
their related interest expense of $401,000, offset by the net gain on the
1997 sale of the Company's studio in Victoria, British Columbia, Canada, of
$897,000, accounts for the primary difference between these periods.
LIQUIDITY AND CAPITAL RESOURCES
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<PAGE>
The Company has had operating losses in each fiscal year since its
inception and as of March 31, 1998, had an accumulated deficit of $56,130,000
and total stockholders deficit of $5,252,000.
Operating activities in fiscal 1998 used $3,438,000 in cash. The
Company financed its operating activities through the issuance of $869,000 in
debt and through the Rights Offering in April, 1997 in which the Company
raised $2,157,000. At March 31, 1998, cash was $21,000.
The Company has deferred development of new products and is
undercapitalized for its current operations. The Company believes it must
continue spending on the development and acquisition of new products, the
maintenance of adequate personnel, and on distribution, sales and marketing
efforts in order to operate its business. It appears that the Company's current
revenues are not sufficient to cover these expenditures and the Company will
likely experience ongoing losses and require additional capital infusions. The
Company is currently investigating its alternatives for its financial resources
as discussed below.
YEAR 2000 COMPLIANCE
The Company believes that if the Company were to experience any Year
2000 problems, they would occur as a result of problems associated with the
Company's software products, problems arising with its internal information
technology systems or problems experienced by its third party distributors'
reporting systems. The Company's products consist of educational software
programs that typically do not rely upon dates for their operation.
Accordingly, the Company believes that its products are Year 2000 compliant.
Finally, with respect to the Company's internal information technology
systems, the Company relies primarily upon prepackaged shrinkwrap software
products that the Company believes are either currently Year 2000 compliant
or will be Year 2000 compliant in the near future. With respect to the
Company's third-party distributors, the Company has not undertaken any
assessment of whether these third-party distributors may be adversely
affected by any Year 2000 problems. The Company currently does not believe
that the distributors of its products will be materially adversely affected
by the Year 2000.
The Company could in the event of a Year 2000 problem with its
vendors, suppliers or distributors utilize alternative sources of
manufacturing, supply and/or distribution. The Company believes there are
adequate alternative sources available within the software and other related
industries.
Should Year 2000 issues arise with the Company's internal
information technology systems, the Company should be able to rely on the
provision of third party software upgrades for accounting, operations and
other related internal operational procedures. If such third party software
upgrades are not available for the current internal systems, then the Company
may incur the cost of switching vendors and replacing internal software
systems with Year 2000 compliant vendors.
Although the Company has not undertaken a comprehensive assessment
of the potential risks and exposures of the Company which may occur as a
result of the Year 2000 problem, the Company plans to begin more thoroughly
and systematically assessing its exposure. As a result, the potential costs
to address the Company's Year 2000 issues are unknown. However, the Company
believes that such costs will not be material. There can be no assurance that
the Company will have the resources to complete a satisfactory review of
potential Year 2000 risks in the near future or at all in light of the
Company's financial condition and level of staffing. Any Year 2000 compliance
problem experienced by the Company, its strategic partners, its customers or
the Internet infrastructure could result in a material adverse effect on the
Company's future operating performance. See "Risk factors--Year 2000
Compliance."
CURRENT STATUS AND MANAGEMENT'S PLANS; GOING CONCERN UNCERTAINTY
CALENDAR 1996 OPERATIONS
Beginning in 1996, the Company commenced the reorganization of its
operations. A major part of that reorganization involved ceasing publication of
new entertainment titles and eliminating the Publisher Services Division. Costs
incurred from reorganization, including severance, site closure and
consolidation, significantly contributed to the net loss in the three months
ended March 31, 1996. Additionally, there were charges taken against accounts
receivable and inventories. These charges (mostly for entertainment titles)
resulted from a review of product inventories in the distribution channel and
the price relief required to sell them through to the consumer and an evaluation
of the salability of inventories on hand. The amount of these expenses included
the following:
<TABLE>
<CAPTION>
<S> <C>
Closure of Publisher Services Division $ 437,000
Severance expenses 210,000
Consolidation of facilities and related items 358,000
Estimated sales returns and price protection 426,000
Provision for inventory obsolescence 250,000
----------
Total $1,681,000
----------
----------
</TABLE>
Revenues and expenses for the fiscal year ended March 31, 1997 included
the following items related to entertainment operations and products:
<TABLE>
<CAPTION>
<S> <C>
Revenues -
Sale of rights to certain entertainment products $580,000
--------
--------
Expenses -
Victoria studio operating expenses (studio sold in May 1996) $250,000
Consolidation of facilities and related items 48,000
Estimated sales returns and price protection 150,000
Provision for inventory obsolescence 100,000
--------
Total 548,000
--------
--------
Other income - net gain on sale and disposal of assets $875,000
--------
--------
</TABLE>
1996 - 1997 MANAGEMENT ACTIONS
During 1996 and early fiscal 1997, the Company instituted measures to improve
operations and cash flows.
-19-
<PAGE>
Specific items accomplished through June 20, 1997 included the following:
- - Appointment of a new Chairperson, President and Chief Executive Officer, Vice
President of Marketing and Controller.
- - Reduction of head count by approximately 70% from December 31, 1995 levels and
elimination of many part-time, temporary and contract positions.
- - Ceasing publication of new entertainment titles.
- - Closure of the Publisher Services Division.
- - Sale of substantially all of the fixed assets of the Entertainment Division.
This included the sale of the studio in Victoria, British Columbia during May
1996 for $1,900,000, of which $500,000 was used to reduce bank borrowings. The
gain on the sale of the studio, included in other income in the fiscal year
ended March 31, 1997 totaled $897,000.
- - Repayment of the Company's bank borrowings which reached a peak of $2,572,000
in January 1996.
- - Termination of all software development projects through outside developers.
- - Sale in June 1996 of certain entertainment product rights to one of its
licensors in consideration for a $430,000 reduction in royalty obligations. Such
sale was included as licensing revenue in the fiscal year ended March 31, 1997.
The transaction also encompassed the issuance of 8,750 shares of the Company's
common stock in consideration of an additional $120,000 reduction in royalty
obligations.
- - Sale of other entertainment product rights (included in licensing revenue) for
$150,000 in the fiscal year ended March 31, 1997.
1997 - 1998 MANAGEMENT ACTIONS
During fiscal 1997 and early fiscal 1998, the Company instituted measures to
improve operations and cash flows. Specific items accomplished through
September 30, 1998, included the following:
- - Acquisition of Theatrix Interactive in August, 1997 to increase the quality
and volume of products in the Company's revenue pipeline.
- - Integration and consolidation of companies for better efficiencies and
economies of scale with an overall reduction in operational expenditures,
including the consolidation of facilities at the Company headquarters in
Emeryville, CA; consolidation of manufacturing and warehouse facilities;
reduction of marketing commitments and promotional expenditures; and the
termination of lease agreements for the Company for other than its
headquarters facility.
- - Development of Internet work with the National Football League (NFL) to
begin the Company's work on the Internet for children and sports.
- - Restructuring of sales operations from more than 50% concentration on
consumer retail sales to less than 20%, with more than 80% redirected
toward the educational channel through catalogue sales.
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<PAGE>
- - Appointment of a new experienced software industry expert as the Chief
Executive Officer and President in September 1997.
- - Establishment of a new management and operations team.
- - Development of a debt reduction program for the existing liabilities under
the advice of counsel. Completion of this program requires additional
capital or debt financing.
- - Settlement of a portion of the Company debt through a Creditor's Meeting
held in November 21, 1997 paying vendors under this program $.15 on the
dollar for their trade settlements, for an aggregate settlement of $491,000
in prior trade debt.
- - Reduction of headcount from the combined entities of the Company and
Theatrix by approximately 75% from the previous fiscal year.
- - Reduction of R & D expenditures, excluding the $2,036,000 write-down of R&D
in process from the Theatrix merger, by $125,000 with a shift to more
profitable Website development.
- - Termination of all software development projects through outside developers
by December 31, 1997.
The Company will need to raise significant additional working
capital through debt or equity financing to sustain its operations and fund
its fiscal March 31, 1999 operating plan and form strategic relationships
that may enhance the Company's ability to develop, publish and distribute its
products. No assurance can be given that additional financing will be
available or that, if available, such financing will be obtainable on terms
favorable to the Company.
The accompanying consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The matters
discussed above, among others, may indicate that the Company will be unable to
continue as a going concern for a reasonable period of time.
The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern. The Company's continuation as
a going concern is dependent upon its ability to generate sufficient cash flow
to meet its obligations on a timely basis, to obtain additional financing or
refinancing, and ultimately to attain successful operations. Management is
continuing its efforts to obtain additional funds so that the Company can meet
its obligations and sustain its operations. There can be no assurance that the
Company will be able to raise additional financing in this time frame on
commercially reasonable terms, or at all. If the Company is unsuccessful in
raising this capital, the Company may be required to cease operations and
declare bankruptcy. Under such circumstances, the Company's secured creditors
would have a first claim on all, or substantially all, of the Company's assets.
MARCH 1996 FINANCING
In February and March 1996, the Company privately placed for cash
$1,500,000 principal amount of 10% convertible notes. These notes included
$100,000 principal amount of notes sold to two of the
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Company's officers. In June 1996, all of the notes, plus accrued interest,
were converted into 156,379 shares of common stock, the holders of which have
certain registration rights. In connection with the issuance of the notes,
warrants were issued to purchase 93,750 shares of common stock at an exercise
price of $10.00 per share. In June 1996, certain of the convertible note
holders exercised, for $750,000 in cash, warrants to purchase 75,000 shares
of stock. The holders of these shares have certain registration rights.
8% CONVERTIBLE DEBENTURES
In September 1996, the Company privately placed for cash $5,302,000 in
8% convertible subordinated debentures due July 31, 1999. The debentures were
convertible into shares of the Company's common stock at the rate of one share
for each $11.00 of principal (482,000 shares) plus accrued interest. In
addition, the Company issued to each purchaser of the debentures a warrant to
purchase one share of common stock for each $40.00 invested or 132,550 shares.
Each warrant was exercisable at a price of $13.75 per share until September 1999
(see note 12 of the financial statements).
CONVERTIBLE PROMISSORY NOTE FINANCING
From October through December 1997, the Company engaged in a
convertible promissory financing from its largest shareholder, Dawson-Samberg
Capital Management. The monies were allocated to fund operations and repay debt
settlements under the Creditor's program of November 1997. For this series of
notes, the Company issued 868,858 warrants priced at 15 cents. A permit was
filed with the California Department of Corporations on October 29, 1997 for the
November notes forward allowing for the usage of a higher interest rate. The
subsequent notes were granted at 15% interest.
In addition, DSCM has filed UCC-1s and has the senior position for
repayment of debt in the Company.
See note 11 of the financial statements for related party disclosure.
RISK FACTORS:
RISKS RELATED TO BUSINESS AND OPERATIONS OF SANCTUARY WOODS
CONTINUED LOSSES; LIQUIDITY. In the three years ended March 31,
1998, March 31, 1997 and December 31, 1995, the Company reported operating
losses of $15.8 million, $4.1 million and $18.7 million, respectively, and
net losses in each of these years of $16.6 million, $3.7 million and $18.7
million, respectively. There can be no assurances that the Company will cease
to incur losses in the foreseeable future, if ever. Continued losses have and
will continue to result in liquidity and cash flow problems which have
inhibited and will continue to inhibit the Company's ability to develop new
products. The Company funded its working capital requirements and capital
expenditures during fiscal 1998 through the issuance of senior secured
convertible promissory notes to a significant stockholder. See Legal
Proceedings and Certain Relationships and Related Transactions. Further
sustained losses will necessitate the infusion of additional capital. The
Company may seek to raise additional capital through future additional
financings that if raised through the issuance of equity securities, will
reduce the percentage ownership of the stockholders of the Company. Existing
stockholders may experience additional dilution, and securities issued in
conjunction with new financings may have rights, preferences and privileges
senior to those of holders of the Company's Common Stock. There can be no
assurance, however, that additional financing will be available when needed,
if at all, or on favorable terms. The failure to obtain additional financing
would have a material adverse affect on the Company and may force the Company
to seek bankruptcy
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<PAGE>
protection. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources."
FLUCTUATIONS IN OPERATING RESULTS; SEASONALITY. The Company has
experienced, and expects to continue to experience, significant fluctuations
in operating results due to a variety of factors, including the size and rate
of growth of the consumer and educational software market, market acceptance
of the Company's products and those of its competitors, development and
promotional expenses relating to the introduction of new products or new
versions of existing products, projected and actual changes in computing
platforms, budgetary constraints of school districts and other education
providers, the timing and success of product introductions, product returns,
changes in pricing policies by the Company and its competitors, difficulty in
securing retail shelf space for the Company's products, the accuracy of
retailers' forecasts of consumer demand, the timing of orders from major
customers, order cancellations, and delays in shipment. In addition, the
Company's business has been in the past and is expected to continue to be
subject to seasonal fluctuations as a result of the purchasing cycle of
consumers, school districts, and dealers in educational products. In response
to competitive pressures, the Company may take certain pricing or marketing
actions that could materially adversely affect the Company's business,
operating results and financial condition. The Company may be required to pay
fees in advance to obtain licenses to intellectual properties from third
parties. A significant portion of the Company's operating expenses are
relatively fixed, and planned expenditures are based in part on sales
forecasts. If net sales do not meet the Company's forecasts, the Company's
business, operating results and financial condition could be materially
adversely affected.
POSSIBLE WRITE-OFFS FROM PRODUCT RETURNS, PRICE PROTECTION; BAD
DEBTS; COLLECTIONS. The Company recognizes revenue from the sale of its
products upon shipment to its distributors, retailers, and end users (net of
an allowance for product returns and price protection), which is in
accordance with industry practice. There can be no assurance that the
Company's reserves will be adequate and if the Company's assessment of the
creditworthiness of its customers receiving products on credit proves
incorrect, the Company could be required to significantly increase the
reserves previously established. In addition, the Company has experienced in
the past, and continues to experience, significant delays in the collection
of certain of its accounts receivable. Product returns or price protection
concessions that exceed the Company's reserves, or the failure to collect
accounts receivable in a timely manner could materially adversely affect the
Company's business operating results and financial condition and could
increase the magnitude of quarterly fluctuations in the Company's operating
and financial results.
IMPACT OF REORGANIZATION OF OPERATIONS. The Company recently
experienced a period of reorganization -- including moving its jurisdiction of
incorporation from British Columbia, Canada to Delaware, USA, effecting a
one-for-twenty share consolidation, exchanging outstanding convertible
debentures for equity and the cancelling of outstanding Performance Shares
in consideration for Common Stock of the Company -- that has placed, and
could continue to place a significant strain on the Company's financial,
management, personnel, and other resources. These changes or other future
steps to reorganize and reduce expenses could result in the delayed
introduction of new products, which could have a material adverse effect on
the Company's financial condition and results of operations.
COMPETITION. The entertainment software industry is intensely
competitive and market acceptance for any of the Company's products may be
adversely affected by competitors introducing similar products with greater
consumer demand. The Company competes against a large number of other
companies of varying sizes and resources. Most of the Company's competitors
have substantially greater financial, technical, and marketing resources, as
well as greater name recognition and better access to consumers. Existing
competitors and potential competitors, including large computer
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or software manufacturers, entertainment companies, diversified media
companies, and book publishers may continue to broaden their product lines,
and may enter or increase their focus on the CD-ROM school and home education
markets, resulting in increased competition for the Company. Retailers of the
Company's products typically have a limited amount of shelf space and
promotional resources; consequently there is intense competition among
consumer software producers for high quality and adequate levels of shelf
space and promotional support from retailers. To the extent that the number
of consumer software products and computer platforms increases, this
competition for shelf space may intensify. Due to increased competition for
limited shelf space, retailers and distributors are increasingly in a better
position to negotiate favorable terms of sale, including price discounts and
product return policies. Retailers often require software publishers to pay
fees in exchange for preferred shelf space. There can be no assurance that
retailers will continue to purchase the Company's products or provide them
with adequate shelf space. Increased competition could result in loss of
shelf space for, and reduction in sell-through of, the Company's products at
retail stores and significant price competition, any of which could adversely
affect the Company's business, operating results and financial condition. In
addition, other types of retail outlets and methods of product distribution,
such as on-line services, may become important in the future, and it may be
important for the Company to gain access to these channels of distribution.
There can be no assurance that the Company will gain such access or that the
Company's access will be on terms favorable to the Company.
DEPENDENCE ON KEY PERSONNEL; RETENTION OF EXISTING EMPLOYEES; HIRING
OF NEW EMPLOYEES. The Company's success depends in large part on the
continued service of its key creative, technical, marketing, sales and
management personnel and its ability to continue to attract, motivate and
retain highly qualified employees. Because of the multifaceted nature of
interactive media, key personnel often require a unique combination of
creative and technical talents. Such personnel are in short supply, and the
competition for their services is intense. The process of recruiting key
creative, technical and management personnel with the requisite combination
of skills and other attributes necessary to execute the Company's strategy is
often lengthy. The Company has entered into at-will employment agreements
with its management and other personnel, who may generally terminate their
employment at any time. The loss of the services of key personnel or the
Company's failure to attract additional qualified employees could have a
material adverse effect on the Company's results of operations and research
and development efforts. In particular, the Company has recently reorganized
its operations and has undergone a reduction in force among its employees.
Such reduction in force, combined with the Company's disappointing operating
performance, the price of the Company's stock, and the availability of
substantial alternative employment for talented employees of the Company, may
result in key employees and managers leaving the Company, which could
materially adversely impact the Company's ability to develop and sell its
products. The Company does not have key insurance covering any of its
personnel.
DEPENDENCE ON NEW PRODUCT DEVELOPMENT; PRODUCT DELAYS. The success
of the Company depends on the continuous and timely introduction of
successful new products. In general, consumer preferences for entertainment
software products are difficult to predict and are often short-lived. The
retail life of edutainment software programs has become shorter, and may now
last only 4 to 12 months (or even less for unsuccessful products), while the
Company typically requires 6 to 9 months or longer for the development of a
new edutainment CD-ROM title. In addition, some of the Company's edutainment
CD-ROM products are seasonal, especially the sports-based products. There can
be no assurance that new products introduced by the Company will achieve any
significant market acceptance or that, if such acceptance occurs, it will be
sustained for any significant period. If the Company does not timely
introduce new products, or if the Company does not correctly anticipate and
respond to demand for its products in a timely manner, the Company's
business, operating results and financial condition will be materially
adversely affected.
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<PAGE>
A significant delay in the introduction of, or the presence of a
defect in, one or more products could have a material adverse affect on the
Company's business, operating results and financial condition, particularly
in view of the seasonality of the Company's business and certain of its
products. Further, delays in a product introduction near the end of a fiscal
quarter may materially adversely affect operating results for that quarter,
as initial shipments of a product may move from one quarter to the next and
may represent a substantial percentage of annual shipments of a product. The
timing and success of software development is unpredictable due to the
technological complexity of software products, inherent uncertainty in
anticipating technological developments, the need for coordinated efforts of
numerous creative and technical personnel and difficulties in identifying and
eliminating errors prior to product release. In the past, the Company has
experienced delays in the introduction of certain new products. There can be
no assurance that new products will be introduced on schedule or at all or
that they will achieve market acceptance or generate significant revenues.
CHANGING PRODUCT PLATFORMS AND FORMATS. The Company's software
products are intended for use on machines built by other manufacturers. The
operating systems of machines currently being manufactured are characterized
by several competing and incompatible formats, or "platforms", and new
platforms will probably be introduced in the future. The Company must
continually anticipate the emergence of, and adapt its products to, popular
platforms for consumer software. When the Company chooses a platform for its
products, it must commit substantial development time and investment in
advance of shipments of such products. If the Company invests time developing
products for a platform that does not achieve significant market penetration,
the Company's planned revenues from those products will be adversely affected
and it may not recover its development investment. If the Company does not
choose to develop for a platform that achieves significant market success,
the Company's revenues may also be adversely affected. The Company is
currently developing products only for Windows and other PC-based
environments, and Macintosh computers. The Company has terminated virtually
all current development for other platforms, such as CDX, the Sony
PlayStation and Sega. There can be no assurance that the Company has chosen
to support platforms that will ultimately be successful.
CHANGES IN TECHNOLOGY AND INDUSTRY STANDARDS. The edutainment
software industry is continually undergoing rapid changes, including evolving
industry standards and the introduction of new technologies, including audio
and video enhancement technologies such as DVD, MMX and 3D graphic
accelerators, and operating system upgrades. These evolving industry
standards and new technologies can render the Company's existing products
obsolete or unmarketable and may require the Company to expend substantial
resources to develop products that incorporate technological changes and
evolving industry standards. There can be no assurance that the Company will
have the resources necessary to undertake such a development effort, or if
such development effort is undertaken, that the Company will be successful in
introducing new products that keep pace with technological changes or
evolving industry standards, or satisfy evolving consumer preferences.
Failure to do so would have a material adverse effect on the Company's
business, operating results and financial condition.
LIMITED PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS;
RISK OF LITIGATION. The Company regards its software as proprietary and
relies primarily on a combination of trademark, copyright and trade secret
laws, and employee and third-party nondisclosure agreements and other methods
to protect its proprietary rights. However, the Company does not have signed
license agreements with its end-users and does not include in its products
any mechanism to prevent or inhibit unauthorized copying. Unauthorized
parties may copy the Company's products or reverse engineer or otherwise
obtain and use information that the Company regards as proprietary. If a
significant amount of unauthorized copying of the Company's products were to
occur, the Company's business, operating results and financial condition
could be materially adversely affected. Further, the laws of certain
countries in which the Company's products are or may be
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<PAGE>
distributed do not protect applicable intellectual property rights to the
same extent as the laws of the United States. In addition, the Company holds
no patents, and although the Company has developed and continues to develop
certain proprietary software tools, the copyrights of which are owned by the
Company, most of the technology used to develop the Company's products is not
proprietary. There can be no assurance that the Company's competitors will
not independently utilize existing technologies to develop products that are
substantially equivalent or superior to the Company's. Also, as the number of
software products in the industry increases and the functionality of these
products further overlaps, software developers and publishers may
increasingly become subject to infringement claims. There can be no assurance
that third parties will not assert infringement claims against the Company in
the future with respect to current or future products.
As is common in the industry, from time to time the Company receives
notices from third parties claiming infringement of intellectual property or
other rights of such parties. The Company investigates these claims and responds
as it deems appropriate. There has been substantial litigation regarding
copyright, trademark and other intellectual property rights involving computer
software companies in general. The Company may also face suits as a result of
employment matters, publicity rights, governmental or regulatory investigations,
or due to claims of breach of the Company's obligations under various agreements
to publish or develop products, or for goods or services provided to the
Company. Adverse determinations in such claims or litigation could have a
material adverse effect on the Company's business, operating results and
financial condition. The Company may find it necessary or desirable in the
future to obtain licenses relating to one or more of its products or relating to
current or future technologies. There can be no assurance that the Company will
be able to obtain these licenses or other rights on commercially reasonable
terms or at all.
RELATIONSHIPS WITH VENDORS. In the past the Company has experienced
difficulty in paying its vendors. If the Company experiences such difficulty in
the future, it may result in the loss of the availability of the services of
such vendors, which could hamper the Company's ability to manufacture and ship
products, and may ultimately result in the Company being sued for collection of
such amounts as may be owed to such vendors. If the Company is unable to produce
its products to fill orders, the Company's operating results and financial
condition could be materially adversely affected. In the event that suits by
vendors are filed against the Company, the Company may be required to incur
unanticipated legal expenses.
MARKET FOR COMMON STOCK; STOCK PRICE VOLATILITY. The Company's Common
Stock has traded solely on the over-the-counter bulletin board since March 12,
1997, when the Company's shares were delisted from the Vancouver Stock Exchange
at the Company's request. Shares traded over-the-counter are subject to wide
fluctuations between bid and ask prices. In addition, the Company's Common Stock
is thinly traded. Based upon these factors and historical trends in the market
for other software company stocks, the Company anticipates that the trading
price of its Common Stock may be subject to wide fluctuations in response to
quarterly variations in operating results, changes in actual earnings or in
earnings estimates by analysts, announcements of technological developments by
the Company or its competitors, general market conditions or other events
largely outside the Company's control.
IMPORTANCE OF INTERNATIONAL SALES. The development of products for
foreign markets requires substantial additional time, effort and expense because
of the large differences among countries' education requirements and cultures.
The Company expects that international sales will continue to represent a
significant percentage of net sales. International sales may be adversely
affected by the imposition of governmental controls, restrictions on export
technology, political instability, trade restrictions, changes in tariffs and
the difficulties associated with staffing and managing international operations,
lack of acceptance of localized products in foreign countries, longer accounts
receivable payment cycles, difficulties in collecting payment, reduced
protection for the Company's intellectual property rights and the burdens of
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<PAGE>
complying with a wide variety of foreign laws. In addition, international sales
may be adversely affected by the economic conditions in each country. There can
be no assurance that the Company will be able to maintain or increase
international market demand for the Company's products or that such factors will
not have a material adverse effect on the Company's future international revenue
and, consequently, the Company's business, operating results and financial
condition.
The Company's international revenue is currently denominated in a
variety of foreign currencies and the Company does not currently engage in any
hedging activities. Although exposure to currency fluctuations to date has been
insignificant, there can be no assurance that fluctuations in the currency
exchange rates in the future will not have a material adverse effect on the
Company's business, operating results and financial condition.
YEAR 2000 COMPLIANCE. Many currently installed computer systems and
software products are coded to accept only two-digit entries in the date code
field. Beginning in the year 2000, these date code fields will need to accept
four-digit entries to distinguish 21st century dates from 20th century dates. As
a result, computer systems and/or software used by many companies will need to
be upgraded to comply with such "Year 2000" requirements. Significant
uncertainty exists concerning the potential effects associated with compliance.
The Company has not undertaken a comprehensive assessment of the
potential risks and exposures of the Company which may occur as a result of
the Year 2000 problem, the Company plans to begin more thoroughly and
systematically assessing its exposure. In light of the Company's financial
condition and level of staffing, there can be no assurance that the Company
will have the resources to complete a satisfactory review of potential Year
2000 risks in the near future or at all. Any Year 2000 compliance problem
experienced by the Company, its strategic partners, its customers or the
Internet infrastructure could result in a material adverse effect on the
Company's future operating performance.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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SANCTUARY WOODS MULTIMEDIA CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
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Page
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<S> <C>
Report of Independent Accountants - PricewaterhouseCoopers LLP............. F-1
Independent Auditors' Report - Deloitte & Touche LLP....................... F-2
Consolidated Balance Sheet:
March 31, 1998 and 1997............................................... F-4
Consolidated Statement of Operations:
Years Ended March 31, 1998 and 1997, and December 31, 1995 and
the Three Month Period Ended March 31, 1996........................... F-5
Consolidated Statement of Stockholders' Deficit:
Years Ended March 31, 1998 and 1997, and December 31, 1995 and
the Three Month Period Ended March 31, 1996........................... F-6
Consolidated Statement of Cash Flows:
Years Ended March 31, 1998 and 1997, and December 31, 1995 and
the Three Month Period Ended March 31, 1996........................... F-7
Notes to Consolidated Financial Statements................................. F-8
Consolidated Financial Statement Schedules:
Supplemental Schedule II - Valuation and Qualifying Accounts
Years Ended March 31, 1998 and 1997, and December 31, 1995 and
the Three Month Period Ended March 31, 1996........................... F-23
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of Sanctuary Woods Multimedia Corporation
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations, of stockholders' deficit and
of cash flows present fairly, in all material respects, the financial
position of Sanctuary Woods Multimedia Corporation and its subsidiaries at
March 31, 1998 and the results of their operations and their cash flows for
the year then ended, in conformity with generally accepted accounting
principles. 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 audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for the opinion expressed above.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 2 to the consolidated financial statements, the Company has suffered
recurring losses from operations and has a net capital deficiency that raises
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2.
The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
September 21, 1998
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Sanctuary Woods Multimedia Corporation:
We have audited the accompanying consolidated balance sheets of Sanctuary
Woods Multimedia Corporation as of March 31, 1997, and the related
consolidated statements of operations, stockholders' deficit, and cash flows
for the year ended March 31, 1997, the three-month period ended March 31,
1996 and the year ended December 31, 1995. Our audits also included the
consolidated financial statement schedule for the year ended March 31, 1997,
the three-month period ended March 31, 1996 and the year ended December 31,
1995 appearing on page F-23. These consolidated financial statements and the
consolidated financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and the consolidated financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Company as of March 31, 1997, and the results of its operations and its cash
flows for the year ended March 31, 1997, the three-month period ended March
31, 1996 and the year ended December 31, 1995 in conformity with generally
accepted accounting principles. Also, in our opinion, the consolidated
financial statement schedule referred to above, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 2 to the consolidated financial statements, the Company has experienced
recurring losses from operations, has generated negative cash flows from
operations and has negative working capital and a stockholders' deficit at
March 31, 1997. These matters raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans concerning these
matters are also described in Note 2. The consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
F-2
<PAGE>
DELOITTE & TOUCHE LLP
San Francisco, California
June 20, 1997
F-3
<PAGE>
SANCTUARY WOODS MULTIMEDIA CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------
1998 1997
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<S> <C> <C>
ASSETS
Current assets:
Cash $ 21,000 $ 102,000
Accounts receivable, net 190,000 275,000
Inventories 259,000 656,000
Prepaid royalties - 198,000
Prepaid expenses - 244,000
Prepaid offering expenses - 91,000
------------ ------------
Total current assets 470,000 1,566,000
Property and equipment, net 207,000 462,000
Deferred warrant expense and other 14,000 258,000
------------ ------------
Total assets $ 691,000 $ 2,286,000
------------ ------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 2,155,000 $ 1,343,000
Accrued expenses 1,411,000 579,000
Accrued interest 84,000 225,000
Royalty obligations 532,000 371,000
Capital lease obligations 500,000 14,000
Line of credit 392,000 -
------------ ------------
Total current liabilities 5,074,000 2,532,000
Convertible notes payable 869,000 -
8% convertible subordinated debentures - 5,302,000
------------ ------------
Total liabilities 5,943,000 7,834,000
------------ ------------
Commitments and contingencies (Notes 1 and 16)
Stockholders' deficit:
Preferred stock, authorized 5,000,000 shares; $0.001 par value;
Series A issued and outstanding 99,993 and nil shares
at March 31, 1998 and 1997, respectively - -
Common stock, authorized 50,000,000 shares; $0.001 par value;
issued and outstanding 5,193,303 and 1,171,582 shares
at March 31, 1998 and 1997, respectively 5,000 1,000
Additional paid-in capital 51,625,000 34,754,000
Accumulated deficit (56,130,000) (39,551,000)
Accumulated translation adjustments (752,000) (752,000)
------------ ------------
Total stockholders' deficit (5,252,000) (5,548,000)
------------ ------------
Total liabilities and stockholders' deficit $ 691,000 $ 2,286,000
------------ ------------
------------ ------------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
SANCTUARY WOODS MULTIMEDIA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED YEAR ENDED
----------------------------- MARCH 31, DECEMBER 31,
1998 1997 1996 1995
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net revenues $ 2,010,000 $ 4,749,000 $ 937,000 $ 10,981,000
Cost of revenues 1,487,000 1,513,000 924,000 12,576,000
------------ ----------- ----------- ------------
Gross margin (deficit) 523,000 3,236,000 13,000 (1,595,000)
Operating expenses:
Research and development 3,306,000 1,395,000 1,261,000 4,496,000
Marketing and sales 2,863,000 3,061,000 1,790,000 8,264,000
General and administration 1,977,000 2,851,000 1,407,000 4,330,000
Write-off of goodwill 8,142,000 - - -
------------ ----------- ----------- ------------
Total operating expenses 16,288,000 7,307,000 4,458,000 17,090,000
------------ ----------- ----------- ------------
Operating loss (15,765,000) (4,071,000) (4,445,000) (18,685,000)
Other income (expense):
Gain on forgiveness of debt, net 356,000 - - -
Foreign exchange loss - (5,000) - (4,000)
Interest expense, net (90,000) (401,000) (69,000) (9,000)
Net gain (loss) on sale and disposal
of assets (1,080,000) 800,000 - -
------------ ----------- ----------- ------------
Total other income (expense) (814,000) 394,000 (69,000) (13,000)
------------ ----------- ----------- ------------
Net loss $(16,579,000) $(3,677,000) $(4,514,000) $(18,698,000)
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
Basic and diluted loss per share $ (4.15) $ (3.30) $ (4.97) $ (22.16)
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
Shares used in computation of
basic and diluted loss per share 3,995,471 1,113,145 907,904 843,687
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
SANCTUARY WOODS MULTIMEDIA CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------ -------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
------ ------- --------- ------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1994 979,513 $1,000 $23,395,000 $(12,662,000)
Exercise of warrants 400 - 23,000 -
Exercise of stock options 27,766 - 1,034,000 -
Shares issued for cash 100,000 - 7,169,000 -
Stock option compensation - - 132,000 -
Foreign currency translation
adjustments - - - -
Net loss - - - (18,698,000)
------ ------- --------- ------ ----------- ------------
Balances, December 31, 1995 1,107,679 1,000 31,753,000 (31,360,000)
Exercise of stock options, net of
issuance costs 250 - (3,000) -
Stock option compensation - - 12,000 -
Foreign currency translation
adjustments - - - -
Net loss - - - (4,514,000)
------ ------- --------- ------ ----------- ------------
Balances, March 31, 1996 1,107,929 1,000 31,762,000 (35,874,000)
Exercise of warrants 75,000 - 750,000 -
Conversion of notes payable 156,379 - 1,563,000 -
Conversion of accounts payable
and royalty obligations 22,750 - 316,000 -
Cancellation of performance shares
in exchange for shares of common
stock, net (190,476) - (1,000) -
Stock option and warrant compensation - - 364,000 -
Foreign currency translation
adjustments - - - -
Net loss - - - (3,677,000)
------ ------- --------- ------ ----------- ------------
Balances, March 31, 1997 1,171,582 1,000 34,754,000 (39,551,000)
Issuance of common stock from
rights offering, net of issuance costs 932,518 1,000 2,156,000 -
Conversion of notes payable 99,993 $ - - - 5,302,000 -
Issuance of common stock for
Theatrix acquisition 3,089,203 3,000 8,545,000 -
Warrants issued for Theatrix
acquisition - - 868,000 -
Foreign currency transaction
adjustments - - - - - -
Net loss - - - - - (16,579,000)
------ ------- --------- ------ ----------- ------------
Balances, March 31, 1998 99,993 $ - 5,193,303 $5,000 $51,625,000 $(56,130,000)
------ ------- --------- ------ ----------- ------------
------ ------- --------- ------ ----------- ------------
<CAPTION>
ACCUMULATED
TRANSLATION
ADJUSTMENTS TOTAL
----------- ------------
<S> <C> <C>
Balances, December 31, 1994 $(751,000) $ 9,983,000
Exercise of warrants - 23,000
Exercise of stock options - 1,034,000
Shares issued for cash - 7,169,000
Stock option compensation - 132,000
Foreign currency translation
adjustments (1,000) (1,000)
Net loss - (18,698,000)
--------- ------------
Balances, December 31, 1995 (752,000) (358,000)
Exercise of stock options, net of
issuance costs - (3,000)
Stock option compensation - 12,000
Foreign currency translation
adjustments (6,000) (6,000)
Net loss - (4,514,000)
--------- ------------
Balances, March 31, 1996 (758,000) (4,869,000)
Exercise of warrants - 750,000
Conversion of notes payable - 1,563,000
Conversion of accounts payable
and royalty obligations - 316,000
Cancellation of performance shares
in exchange for shares of common
stock, net - (1,000)
Stock option and warrant compensation - 364,000
Foreign currency translation
adjustments 6,000 6,000
Net loss - (3,677,000)
--------- ------------
Balances, March 31, 1997 (752,000) (5,548,000)
Issuance of common stock from
rights offering, net of issuance costs - 2,157,000
Conversion of notes payable - 5,302,000
Issuance of common stock for
Theatrix acquisition - 8,548,000
Warrants issued for Theatrix
acquisition - 868,000
Net loss - (16,579,000)
--------- ------------
Balances, March 31, 1998 $(752,000) $ (5,252,000)
--------- ------------
--------- ------------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
SANCTUARY WOODS MULTIMEDIA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED YEAR ENDED
------------------------------- MARCH 31, DECEMBER 31,
1998 1997 1996 1995
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(16,579,000) $(3,677,000) $(4,514,000) $(18,698,000)
Depreciation and amortization 180,000 361,000 211,000 1,710,000
Stock options and warrant compensation - 143,000 13,000 132,000
Sale of intellectual property rights
in consideration for a reduction
in royalty obligations - (430,000) - -
Net loss (gain) on sale and disposal of assets 1,080,000 (800,000) - -
Consolidation of facilities and other items - - 402,000 -
Write off of research and development purchased 2,036,000 - - -
Write off of goodwill 8,142,000 - - -
Gain on forgiveness of debt, net (356,000) - - -
Provision for inventories 453,000 - - -
Changes in assets and liabilities, net of assets
and liabilities acquired:
Accounts receivable 300,000 525,000 508,000 1,610,000
Inventories 119,000 728,000 593,000 (1,277,000)
Prepaid royalties, expenses and other 960,000 (237,000) 451,000 2,651,000
Accounts payable and accrued expenses 227,000 (2,208,000) 439,000 2,148,000
------------ ----------- ----------- ------------
Net cash used in operating activities (3,438,000) (5,595,000) (1,897,000) (11,724,000)
------------ ----------- ----------- ------------
Cash flows from investing activities:
Proceeds from sale of assets - 1,921,000 - -
Purchases of property and equipment (49,000) (31,000) (79,000) (958,000)
Cash acquired in acquisition 455,000 - - -
------------ ----------- ----------- ------------
Net cash provided by (used in) investing activities 406,000 1,890,000 (79,000) (958,000)
------------ ----------- ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of notes, debentures and warrants 869,000 5,302,000 1,556,000 -
Proceeds from exercise of warrants - 750,000 - -
Common stock issued, net of issue costs 2,157,000 - (3,000) 8,225,000
Net (repayments) borrowings on bank debt (75,000) (2,227,000) 426,000 1,800,000
Repayments on long-term debt - (29,000) - -
------------ ----------- ----------- ------------
Net cash provided by financing activities 2,951,000 3,796,000 1,979,000 10,025,000
------------ ----------- ----------- ------------
Effect of exchange rate changes on cash - 3,000 (6,000) (1,000)
Net increase (decrease) in cash (81,000) 94,000 (3,000) (2,658,000)
Cash, beginning of period 102,000 8,000 11,000 2,669,000
------------ ----------- ----------- ------------
Cash, end of period $ 21,000 $ 102,000 $ 8,000 $ 11,000
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ - $ 92,000 $ 58,000 $ 74,000
Income taxes - 6,000 - 2,000
Supplemental disclosures of non-cash financing and
investing activities:
Conversion of notes payable into common stock - 1,563,000 - -
Reduction in royalty obligations in exchange
for issuance of common stock and sale of
intellectual property rights - 550,000 - -
Conversion of account payable into common stock - 195,000 - -
Capital lease obligations - - - 50,000
Issuance of common stock and warrants for acquisition 9,416,000 - - -
Conversion of debentures into preferred stock 5,302,000
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
SANCTUARY WOODS MULTIMEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- NATURE OF OPERATIONS AND CHANGE IN FISCAL YEAR-END:
Sanctuary Woods Multimedia Corporation and its subsidiaries (the
"Company") develop, publish and market interactive multimedia educational
software products for use in the K-12 school and home consumer markets. Sales
are made directly to schools, educational dealers and distributors, hardware
manufacturers and bundlers (OEM), and international distributors, and the
Company's products are sold directly over the Internet. Revenue is also
generated from licensing and other activities related to the Company's
products and intellectual properties. Prior to 1996, the Company published
interactive entertainment products and provided interactive multimedia
services to trade and textbook publishers.
The Company changed its reporting and tax fiscal year to March 31 from
December 31 effective April 1, 1996. Accordingly, the accompanying consolidated
financial statements include the Company's fiscal years ended December 31, 1995,
the three month transition period ended March 31, 1996 and the fiscal years
ended March 31, 1997 and 1998.
On April 15, 1997, the Company's stockholders approved a special
resolution authorizing the Company to change its jurisdiction of incorporation
from British Columbia, Canada to the state of Delaware and the adoption by the
Company of a Certificate of Incorporation and Bylaws under Delaware's corporate
legislation. The domestication became effective April 16, 1997. In addition, the
Company's stockholders approved a one-for-twenty share consolidation of the
Company's common stock and an increase in the number of the Company's authorized
shares of common stock to 50,000,000. All references in the accompanying
consolidated financial statements to share information, per share amounts, stock
option data and market prices of the Company's common stock have been restated
to reflect such stock consolidation.
In August 1997, the Company acquired 100% of the outstanding shares of
Theatrix Interactive, Inc. ("Theatrix"). The Company issued 3,089,203 shares of
the Company's common stock in consideration (see Note 8).
On November 4, 1997, Sanctuary Woods and Theatrix proposed a plan of
settlement (the "Proposed Settlement") to all their general unsecured
creditors (the "Creditors"). The Proposed Settlement excluded a
first-priority secured claim of $525,000 due under an arrangement with a
bank. In addition, the Proposed Settlement excluded $500,000 in amounts due
under software license agreements and $90,000 of amounts due to software
fulfillment houses as the licensing and fulfillment houses are necessary to
the continued operations of Sanctuary Woods and Theatrix. The Proposed
Settlement provided that (1) the Creditors owed less than $50,000, receive a
payment of fifteen percent of the aggregate claim on or before December 27,
1997 or seventeen percent of the aggregate claim on or before March 20, 1998
and (2) the Creditors owed more than $50,000, receive seventeen percent of
aggregate claims by March 20, 1998. Sanctuary Woods and Theatrix met with the
Creditors on November 21, 1997 and requested that the Creditors vote on the
Proposed Settlement by December 5, 1997. In December 1997, the Creditors who
elected to receive a payment of fifteen percent of the aggregate claims
totaling $491,000 were paid an amount totaling $74,000. No other amounts have
been paid under the Proposed Settlement. All outstanding trade claims have
been included in these financial statements at their face value.
NOTE 2 -- GOING CONCERN UNCERTAINTY:
The Company incurred net losses of $16,579,000, $3,677,000, $4,514,000
and $18,698,000 in the fiscal years ended March 31, 1998, 1997, the three months
ended March 31, 1996 and the year ended December 31, 1995, respectively. Net
cash used by operating activities was $3,438,000, $5,595,000, $1,897,000 and
$11,724,000 in the same periods, respectively. At
F-8
<PAGE>
SANCTUARY WOODS MULTIMEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
March 31, 1998 working capital deficit was $4,604,000 and stockholders'
deficit was $5,252,000.
CURRENT STATUS AND MANAGEMENT'S PLANS
Management believes that the Company will need to raise significant
working capital through additional debt or equity financing to sustain its
operations and fund its fiscal March 31, 1999 operating plan.
The Company plans to pursue various sources of additional funding
including, but not limited to, debt, equity and strategic investors. The
Company is also actively exploring strategic relationships that may enhance
the Company's ability to develop, publish and distribute its products, as
well as augment the business with Internet website development for the
growing adolescent population. No assurance can be given that additional
financing will be available or that, if available, such financing will be
obtainable on terms favorable to the Company.
GOING CONCERN UNCERTAINTY
The accompanying consolidated financial statements have been prepared on
the going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The matters
discussed above, among others, may indicate that the Company will be unable to
continue as a going concern for a reasonable period of time.
The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern. The Company's continuation as
a going concern is dependent upon its ability to generate sufficient cash flow
to meet its obligations on a timely basis, to obtain additional financing or
refinancing, and ultimately to attain successful operations. Management is
continuing its efforts to obtain additional funds so that the Company can meet
its obligations and sustain its operations.
NOTE 3 -- SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION. In April 1997, the Company reincorporated from
Canada into Delaware. The consolidated financial statements have been prepared
in accordance with generally accepted accounting principles of the United States
of America (U.S. GAAP).
Consolidation. The consolidated financial statements include the
accounts of Sanctuary Woods Multimedia Corporation and its wholly-owned
subsidiaries, Theatrix Interactive, Inc., Magic Quest Inc. and Sanctuary
Woods Multimedia Inc. All intercompany balances and transactions are
eliminated in consolidation.
Foreign Currency Translation. The consolidated financial statements are
stated in U.S. dollars. Assets and liabilities of foreign operations that have a
different functional currency are translated into their U.S. dollar equivalents
based on the rate of exchange as of the balance sheet dates. Revenue and expense
accounts are translated based on average rates of exchange during the period.
Gains or losses resulting from foreign currency translation are reported as a
separate component of stockholders' equity. Foreign currency transaction gains
and losses are included in the statements of operations. As of March 31, 1998,
the Company had no foreign accounts or operations.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
F-9
<PAGE>
SANCTUARY WOODS MULTIMEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
estimates and assumptions that affect the reported amount of assets and
liabilities, the 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.
Inventories consist of finished goods and raw materials and are stated at
the lower of cost (first-in, first-out) or market (net realizable value). The
Company estimates the net realizable value of inventories based on anticipated
future revenues. It is reasonably possible that such estimates of anticipated
future revenues could be significantly reduced from time to time due to
competitive products and pricing pressures. In the event that inventory cannot
be sold above its estimated net realizable value, the Company could incur
significant additional write-offs.
Prepaid and Deferred Royalties represent prepayments made and current
guaranteed minimum payments to be made under licensing and development
agreements. Prepaid and deferred royalties are expensed as cost of goods sold
based on actual net product sales and are classified as current or noncurrent
based upon estimated product sales within the next year. Management estimates
the future value of prepaid and deferred royalties quarterly and any amounts
that management deems unlikely to be recouped through anticipated product sales
are charged to cost of goods sold.
Royalty Obligations represent guaranteed minimum royalty payments to be
made pursuant to contractual license agreements. Generally, royalties are
calculated based on a percentage of sales ranging from 5% to 35%. Royalty
expense was $371,000, $147,000 for the fiscal years ended March 31, 1998 and
1997, respectively, $94,000 in the three months ended March 31, 1996 and
$7,233,000 for the year ended December 31, 1995. The 1995 royalty expense
includes write-offs of prepaid and deferred royalties totaling $4,261,000.
Property and Equipment are recorded at cost and depreciation is provided
using the declining balance method over the following useful lives:
Computer equipment 3 years
Computer software 3 years
Furniture and equipment 5 years
Leasehold improvements are amortized using the straight-line method over
the term of the lease.
Technology Amortization represents the amortization of the cost of
technology acquired through the 1994 acquisition of Magic Quest Inc. and relates
to products for which technological feasibility had been established.
Amortization of the deferred development expenditures commenced in 1994 upon
release of such products and is included in cost of sales. Amounts were
amortized using the straight-line method and were fully amortized as of December
31, 1995.
Research and Development Expenses. Software development costs incurred
prior to achieving technological feasibility are treated as research and
development expenses and are expensed as incurred. All software development
costs incurred by the Company have been expensed.
The establishment of technological feasibility and the ongoing assessment
of recoverability of capitalized software development costs requires
considerable judgement by management with respect to certain factors affecting
the Company's products, including, but not limited to, anticipated future
F-10
<PAGE>
SANCTUARY WOODS MULTIMEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
gross revenues, estimated economic life and changes in software and hardware
technologies. Amounts that could have been capitalized after consideration of
the above factors were immaterial and, therefore, no costs have been
capitalized.
Licenses and Other Intangible Assets. The Company capitalizes costs
relating to the acquisition of licenses, copyrights and trademarks. These costs
are capitalized until the related products are available for sale, at which time
they are amortized against income using the straight-line method over
management's estimate of the economic lives of the underlying assets, generally
one to two years. The Company regularly reviews the recoverability of intangible
assets based on estimated undiscounted future cash flows from operating
activities compared with the carrying values of the intangible assets. In the
fourth quarter of 1995, such estimates of the economic lives were significantly
reduced and $235,000 of licenses and other intangible assets were written-off.
In the second quarter of 1998, the Company wrote off goodwill of $8,142,000 (see
Note 8).
Fair Value of Financial Instruments. Certain of the Company's
financial instruments are comprised of cash and accounts receivable. The
carrying amounts of these instruments approximate their fair value. The
Company's financial instruments also include a line of credit which is in
default (see Note 9). The Company's other financial instruments include
accounts payable, accrued expenses capital lease obligations and convertible
notes payable. Due to the Company's financial conditions the fair value of
these instruments are not determinable.
Revenue Recognition. The Company recognizes revenue in accordance with
the American Institute of Certified Public Accountants' Statement of Position
91-1 on Software Revenue Recognition ("SOP 91-1"). Revenue from product sales is
recognized when products are shipped if no significant vendor obligation remains
and collection of the resulting receivable is probable. The Company provides
estimated reserves for future returns and price protection. It is reasonably
possible that actual future returns and price protection allowances could exceed
such estimates. As a result, the Company's reserves could be significantly
increased in the near term.
Certain revenue from sales and licensing agreements is recognized when
the Company fulfills its obligations under the related agreements. These include
the Company's delivery of software and associated documentation to the licensee
in reproducible form. Royalty income from subsequent product sales during the
licensing period is recorded in the period the products are sold by the
licensee.
In October 1997 and March 1998, the American Institute of Certified
Public Accountants issued Statements of Position No. 97-2, "Software Revenue
Recognition," ("SOP 97-2) and No. 98-4, "Deferral of the Effective Date of the
Provisions of SOP 97-2, "Software Revenue Recognition" ("SOP 98-4"), which the
Company is currently required to adopt for transactions entered into in the
fiscal year beginning April 1, 1998. SOP 97-2 and SOP 98-4 provide guidance on
recognizing revenue on software transactions and supersedes previous guidance
provided by SOP 91-1. The Company believes that the adoption of SOP 97-2 and SOP
98-4 will not have a significant impact on its current licensing or revenue
recognition practices. However, should the Company amend its existing licensing
practice, the Company's revenue recognition practices may be subject to change
to comply with the accounting guidance provided by SOP 97-2 and SOP 98-4.
Income taxes are recorded using the asset and liability approach as
defined by Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes."
In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (SFAS 128). All earnings per share
data for prior periods have been restated to conform with SFAS 128.
SFAS 128 requires a dual presentation of basic and diluted loss per
share. Basic earnings per share excludes dilution and is computed by dividing
net income (loss) available to common stockholders (numerator) by the
weighted average number of common shares
F-11
<PAGE>
SANCTUARY WOODS MULTIMEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
outstanding (denominator) during a period. Diluted earnings per share reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock during a
period.
Stock-based Compensation. The Company accounts for stock based awards to
employees using the intrinsic value method in accordance with APB No. 25,
"Accounting For Stock Issued To Employees." As allowed under the provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), the Company provides pro forma disclosures (see Note
13) of net income (loss) and earnings (loss) per share as if the accounting
provisions of SFAS 123 had been adopted.
Recent Accounting Pronouncements. In February 1997, the FASB issued
Statement of Financial Accounting Standards No. 129, "Disclosure of Information
about Capital Structure" ("SFAS 129"). SFAS 129 requires disclosure of certain
information related to the Company's capital structure and is not anticipated to
have a material impact on the Company's financial position or results of
operations.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"). This statement is effective for the Company's fiscal year ending
March 31, 1999. The statement establishes presentation and disclosure
requirements for reporting comprehensive income. Comprehensive income includes
charges or credits to equity that are not the result of transactions with
owners. The Company expects there to be no material impact on the Company's
financial position and results of operations as a result of the adoption of this
new accounting standard.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS 131"). The statement requires the
Company to report certain information about operating segments in annual
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. The Company
will adopt SFAS 131 beginning in fiscal year 1999 and does not expect such
adoption to have a material effect on the consolidated financial statement
disclosures.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-1, "Software for Internal Use" ("SOP 98-1")
which provides guidance on accounting for the cost of computer software
developed or obtained for internal use. SOP 98-1 is effective for the Company's
fiscal year ending March 31, 2000. The Company does not expect that the adoption
of SOP 98-1 will have a material effect on the Company's financial position or
results of operations.
Reclassifications. Certain prior year amounts have been reclassified
to conform with the current year presentation.
NOTE 4 -- ACCOUNTS RECEIVABLE:
The Company allows customers to exchange and/or return products. In order
to promote sell-through and limit product returns, the Company also provides
"price protection" on slow moving products. In addition, the Company's products
are sold with a ninety-day warranty against defects. The Company has recorded
reserves for sales returns and allowances and price protection based on
historical experience and management's current estimates of potential returns
and allowances and necessary price protection.
F-12
<PAGE>
SANCTUARY WOODS MULTIMEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Accounts receivable consisted of:
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Accounts receivable $ 821,000 $ 1,210,000
Less allowances for:
Doubtful accounts (502,000) (123,000)
Sales returns and allowances (129,000) (812,000)
------------ ------------
Accounts receivable, net $ 190,000 $ 275,000
------------ ------------
------------ ------------
</TABLE>
As a result of reduced fourth quarter 1995 sales and significantly
increased requests for returns in the three months ended March 31, 1996, the
Company provided $5,475,000 for returns and price protection during the fourth
quarter of 1995. These reserves related primarily to products sold during the
third quarter of 1995.
NOTE 5 -- INVENTORIES:
Inventories consisted of:
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------
1998 1997
---------- ---------
<S> <C> <C>
Finished goods $ 325,000 $ 489,000
Raw materials (packaging) 389,000 339,000
--------- ---------
714,000 828,000
Less allowance for obsolete, slow moving and
non-salable inventories (455,000) (172,000)
--------- ---------
Inventories, net $ 259,000 $ 656,000
--------- ---------
--------- ---------
</TABLE>
Inventory write downs were $453,000 and $150,000 for the years ended
March 31, 1998 and 1997, respectively, $250,000 for the three months ended March
31, 1996, and $1,083,000 for the year ended December 31, 1995.
NOTE 6 -- PROPERTY AND EQUIPMENT:
Property and equipment consisted of:
F-13
<PAGE>
SANCTUARY WOODS MULTIMEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
MARCH 31,
---------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Computer equipment $ 604,000 $ 695,000
Computer software 99,000 99,000
Furniture and equipment 120,000 147,000
Leasehold improvements 31,000 66,000
----------- -----------
854,000 1,007,000
Less accumulated depreciation (647,000) (545,000)
----------- -----------
Property and equipment, net $ 207,000 $ 462,000
----------- -----------
----------- -----------
</TABLE>
In May 1996 the Company sold its Victoria, British Columbia studio. At
March 31, 1996, net property and equipment included approximately $1,000,000
related to such operations.
NOTE 7 -- ACCRUED EXPENSES:
Accrued expenses consisted of:
<TABLE>
<CAPTION>
MARCH 31,
------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Professional fees $ 721,000 $ 150,000
Other accrued liabilities 690,000 429,000
---------- ----------
$1,411,000 $ 579,000
---------- ----------
---------- ----------
</TABLE>
NOTE 8 -- THEATRIX ACQUISITION:
On August 12, 1997, the Company acquired 100% of the outstanding shares
of Theatrix Interactive, Inc. ("Theatrix"). The acquisition was accounted for as
a purchase. The Company issued 3,089,203 shares of the Company's common stock in
consideration for all the shares of Theatrix capital stock. Up to an additional
500,000 shares of the Company's common stock are issuable one year and three
months after the effective date of the merger if certain revenue goals are met
with respect to products acquired from Theatrix. In addition, Sanctuary Woods
set aside 300,000 shares, pursuant to its 1996 Stock Option Plan, for issuance
to former Theatrix employees who became employees of Sanctuary Woods and issued
a warrant to Kingdom Capital, a shareholder of Theatrix, to purchase 500,000
Sanctuary Woods common shares at $3.00 per share. Management ascribed a value of
$726,000 to the warrant. In exchange for services provided, an investment banker
received cash and a warrant to purchase 100,000 shares of Sanctuary Woods common
stock at $3.00 per share. Management ascribed a value of $142,000 to the
warrant. In addition, the Company recorded a charge of $2,036,000 to write-off
in-process research and development acquired in the transaction.
The net assets acquired and liabilities assumed in the acquisition of
Theatrix are as follows:
F-14
<PAGE>
SANCTUARY WOODS MULTIMEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<S> <C>
Assets:
Current assets $ 894,000
Property and equipment 956,000
Other assets, including goodwill 10,312,000
------------
12,162,000
Liabilities:
Current liabilities (2,746,000)
-------------
Net assets acquired and liabilities assumed $ 9,416,000
-------------
-------------
</TABLE>
The results of operations of Theatrix are included in the consolidated
financial statements of the Company since the date of acquisition. The unaudited
pro forma combined condensed results of operations of the Company and Theatrix
for the years ended March 31, 1998 and 1997, assuming the acquisition had taken
place on April 1 of each year, after giving effect to certain pro forma
adjustments, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net revenues $ 2,172,000 $ 6,612,000
------------ ------------
Net loss $(19,322,000) $(17,100,000)
------------ ------------
Basic and diluted loss per share $ (3.75) $ (4.06)
------------ ------------
------------ ------------
</TABLE>
The pro forma combined condensed results of operations is provided for
information purposes only and does not purport to be indicative of the future
results or financial position of the Company or what the results of operations
or financial position would have been had the acquisition been effective on the
dates indicated. This information should be read in conjunction with these
audited consolidated financial statements.
Subsequent to the acquisition, in the second quarter of fiscal year 1998
the Company determined that the goodwill recorded in the transaction was
impaired and recorded a charge of $8,142,000 to write-off the goodwill. The
goodwill was to be amortized over three years. Management determined that the
goodwill was impaired and recorded the charge after management developed the
plan of settlement with the Company's general unsecured Creditors (see Note 1).
NOTE 9 -- LINE OF CREDIT:
The Company's line of credit allowed for borrowings up to $750,000.
Borrowings are payable in 36 monthly installments of principal and interest.
Interest accrues on the outstanding balance at the bank's prime rate (6.5% at
March 31, 1998) plus 1.5% per annum. Borrowings are secured by substantially all
of the Company's assets and the agreement requires that the Company comply with
certain financial covenants. At March 31, 1998, the Company was not in
compliance with certain of these covenants and, accordingly, the outstanding
F-15
<PAGE>
SANCTUARY WOODS MULTIMEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
balance as of March 31, 1998 was classified as a current liability in the
balance sheet and the Company does not have access to the unused line of credit.
NOTE 10 -- CAPITAL LEASE OBLIGATIONS:
At March 31, 1998, the Company was not in compliance with certain
covenants of its capital lease agreements. Accordingly, the outstanding balance
as of March 31, 1998 was classified as a current liability in the balance sheet.
NOTE 11 -- CONVERTIBLE NOTES PAYABLE:
In November 1997, the Company executed a note purchase agreement with its
principal stockholder for borrowings of up to $3,000,000. The notes bear
interest at 15% per annum. The notes mature on varying dates from November of
2000 through January of 2001. At maturity, the note holder may elect to i)
convert the outstanding principal and unpaid accrued interest to shares of
common stock at a rate of $0.20 per share of common stock; ii) demand payment in
cash of any outstanding balance, or iii) extend the maturity date. Interest is
payable every six months in the form of cash or shares of common stock at the
conversion rate described above at the option of the note holder. The Company
will incur a 15% prepayment penalty of the outstanding principal amount and the
note holder can elect the payment in the form of cash or shares of common stock
at the conversion rate described above.
In addition, the Company issued a warrant to the note holder for one
share of the Company's common stock for each dollar loaned to the Company. The
exercise price for each warrant is $0.15. Management ascribed a nominal value to
the warrants using a fair value method. As such, no amounts were recorded in the
consolidated financial statements to reflect the issuance of the warrants. At
March 31, 1998, the Company had issued 869,000 warrants associated with the
convertible notes payable.
NOTE 12 -- CONVERTIBLE SUBORDINATED DEBENTURES:
In September 1996, the Company privately placed for cash $5,302,000 in 8%
convertible subordinated debentures due July 31, 1999. The debentures were
convertible into shares of the Company's common stock at the rate of one share
for each $11.00 of principal (482,000 shares) plus accrued interest. In
addition, the Company issued to each purchaser of the debentures a warrant to
purchase one share of common stock for each $40.00 invested or 132,550 shares.
Each warrant was exercisable at a price of $13.75 per share until September
1999.
In April 1997, the Company exchanged all of these 8% convertible
subordinated debentures for 99,993 shares of the Company's Series A Preferred
Stock. The Series A Preferred Stock has an aggregate liquidation preference of
$5,302,000 and is convertible into common stock at a rate of $2.40 per share
(2,209,167 shares) and has voting privileges on an "as converted" basis. The
Series A Preferred automatically converts into common stock on July 1, 1999 or
upon the occurrence of either (i) the Company's obtaining equity financing of
not less than $2,000,000 at a price not less than $4.40 per share or (ii) the
closing price of the Company's common stock having been 250% of the conversion
price of Series A Preferred Stock ($6.00) for any 21 trading days in any
consecutive 40 day trading period.
In addition, the Company issued to the debenture holders warrants to
purchase an additional 1,154,024 shares of the Company's common stock at an
exercise price of U.S. $3.00 per share.
F-16
<PAGE>
SANCTUARY WOODS MULTIMEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The warrants must be exercised if the closing price of the Company's common
stock equals or exceeds 300% of the exercise price ($9.00) for any 21 trading
days in any consecutive 40 day trading period. In consideration for the
exchange, the Debenture Holders agreed to retroactively forgo interest
($225,000 at March 31, 1997, which was payable in common stock) on the
Convertible Debentures. The holders of common stock issued upon conversion of
preferred stock or exercise of the warrants have certain rights to have these
shares registered. Management ascribed a value of $1,143,000 to the warrants
using a fair value method and such amount is included in the value of
preferred stock and additional paid in capital.
NOTE 13 -- COMMON STOCK, OPTIONS AND WARRANTS:
COMMON STOCK. In April 1997, the Company completed a stock rights
offering in which it issued approximately 932,500 shares at $2.40 per share and
received gross proceeds of $2,238,000.
STOCK OPTIONS. Stock options for employees, officers, independent
contractors and directors are granted by the Board of Directors.
Prior to August 1995, options were granted at a discount of 10-15% to
fair market value. Under the provisions of APB 25, the Company recognized as
compensation cost an amount equal to the difference between the fair market
value of the stock and the exercise price of the option at the date of grant or
repricing. The related cost was amortized to expense over the option vesting
period. Compensation expense was $12,000 for the three months ended March 31,
1996 and $133,000 for the year ended, December 31, 1995. No compensation expense
was recorded in fiscal years 1998 and 1997.
In August 1995, the Company adopted a fixed option plan allowing the
Company to grant options for up to 98,500 shares of common stock. Under the
plan, all options have been granted at an exercise price of each option equal to
the market price of the Company's stock on the date of grant. The options
generally vest over a three-year period and expire five years from the date of
grant. In November 1996, the stockholders approved an amendment to the Plan to
increase the number of options available for grant to 200,000.
On May 31, 1996, the Company repriced 41,338 options (originally granted
at a weighted average exercise prices of $27.50 to $122.50) to $17.50 per share,
which was the fair market value as of that date.
In April 1997, the Company's stockholders ratified a fixed option plan
(1996 Stock Option Plan) allowing the Company to grant options for up to 400,000
shares of common stock. Under the plan, the Company intends that the exercise
price of each option shall equal the market price of the Company's stock on the
date of grant. The options generally vest over a three-year period and expire
ten years from the date of grant.
Option activity is summarized as follows:
F-17
<PAGE>
SANCTUARY WOODS MULTIMEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
------------------------
WEIGHTED
AVERAGE
NUMBER OF PRICE PER
SHARES SHARE
--------- ---------
<S> <C> <C>
Outstanding at December 31, 1994 87,122 $40.87
Granted (at a weighted fair value of $59.98) 82,025 93.73
Exercised (27,766) 37.21
Canceled (14,239) 45.34
------- ------
Outstanding at December 31, 1995 127,142 75.13
Granted (at a weighted fair value of $9.10) 20,200 20.07
Exercised (250) 38.24
Canceled (42,743) 92.83
------- ------
Outstanding at March 31, 1996 104,349 57.56
Granted (at a weighted fair value of $7.84) 93,638 17.33
Canceled (127,287) 43.65
------- ------
Outstanding at March 31, 1997 70,700 29.20
Granted (at a weighted fair value of $2.31) 151,950 2.95
Exchanged for options of Theatrix 10,750 5.26
Canceled (93,442) 17.54
------- ------
Outstanding at March 31, 1998 139,958 5.52
------- ------
------- ------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
------------------------------------------------- DECEMBER 31,
1998 1997 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Options exercisable at year end 133,705 48,385 49,553 40,991
</TABLE>
The following table summarizes information about fixed stock options
outstanding at March 31, 1998:
F-18
<PAGE>
SANCTUARY WOODS MULTIMEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
----------------------------------------- -------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF AT MARCH 31, LIFE EXERCISE AT MARCH 31, EXERCISE
EXERCISE PRICES 1998 (IN YEARS) PRICE 1998 PRICE
--------------- ------------ --------- -------- ------------ --------
<C> <C> <C> <C> <C> <C>
$2.38-2.40 100,084 2.29 $ 2.40 100,084 $ 2.40
3.81-4.00 12,824 8.69 3.99 9,623 3.99
10.00 250 3.44 10.00 83 10.00
17.50 25,400 2.88 17.50 22,515 17.50
24.00 1,400 1.83 24.00 1,400 24.00
------- -------
139,958 133,705
------- -------
------- -------
</TABLE>
The Company applies APB No. 25 in accounting for its stock options. Had
compensation cost been recognized under the fair value method, the Company's net
loss and loss per share would have been changed to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
YEAR ENDED MARCH 31, MARCH 31, DECEMBER 31,
------------------------------ ------------- ------------
1998 1997 1996 1995
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net loss
As reported $(16,579,000) $(3,677,000) $(4,514,000) $(18,698,000)
Pro forma (16,790,000) (4,240,000) (4,836,000) (19,287,000)
------------ ----------- ----------- ------------
Net loss per share
As reported $ (4.15) $ (3.30) $ (4.97) $ (22.16)
Pro forma (4.20) (3.81) (5.40) (24.00)
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
YEAR ENDED MARCH 31, MARCH 31, DECEMBER 31,
-------------------- ------------ ------------
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Dividend yield 0% 0% 0% 0%
Volatility 100% 80% 98% 89%
Risk free interest rate 5.89% 5.25% 5.75% 5.31%
Expected term - years 5.00 4.00 4.72 4.72
</TABLE>
F-19
<PAGE>
SANCTUARY WOODS MULTIMEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
STOCK WARRANTS. Warrants to purchase 2,858,000 shares of common stock at
$0.15 to $117.88 per share were outstanding at March 31, 1998 (see Notes 8, 11
and 12).
NOTE 14 -- INCOME TAXES:
Deferred income taxes, which result from temporary differences in the
recognition of revenue and expense for tax and financial reporting purposes,
relate approximately to:
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------
1998 1997
------------ --------------
<S> <C> <C>
Deferred tax assets:
Reserves and accruals $ 422,000 $ 784,000
Deferred development expenditures - 321,000
Depreciation and amortization (8,000) (84,000)
Operating loss carryforwards 18,233,000 14,000,000
Tax credits 535,000 220,000
Valuation allowance (19,182,000) (15,241,000)
------------ --------------
Deferred tax assets, net $ - $ -
------------ --------------
------------ --------------
</TABLE>
The Company has recorded a 100% valuation allowance against the deferred
tax assets reflecting the uncertainty of their future realization.
At March 31, 1998, the Company had approximately $49,042,000 and
$25,543,000 of net operating loss carryforwards to reduce future taxable income
for federal and state purposes, respectively. If not utilized, these
carryforwards expire beginning in the year 2000. Under the Tax Reform Act of
1986, the amounts of and benefits from net operating loss carryforwards that can
be carried forward may be limited in certain circumstances, but not limited to,
a cumulative stock ownership change of more than 50% over a three-year period,
as defined.
NOTE 15 -- CONCENTRATION OF CREDIT RISK:
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of accounts receivable. The
Company's accounts receivable are primarily derived from revenues to
distributors and resellers located in the United States. The Company performs
ongoing credit evaluations of its customers financial condition and maintains an
allowance for uncollectible accounts receivable based upon the expected
collectibility of all accounts.
During the fiscal year ended March 31, 1998, the Company had one customer
that represented 10% of total net revenues. During the fiscal year ended March
31, 1997, the Company had sales to two customers that represented 18% and 16% of
total net revenues. During the three months ended March 31, 1996, the Company
had sales to two customers that represented 22% and 16% of total net sales.
During the year ended December 31, 1995, the Company had sales to two customers
that represented 16% and 11% of total net revenues. Export sales to various
countries were approximately $553,000 for the year ended March 31, 1998.
F-20
<PAGE>
SANCTUARY WOODS MULTIMEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 16 -- COMMITMENTS AND CONTINGENCIES:
The Company has recorded liabilities in the consolidated financial
statements for judgements against the Company arising from employee severance
and vendor liabilities (see Note 1). The Company is a party to various claims,
litigation and threatened litigation in the normal course of operations.
Management believes, based upon the advice of counsel, that the ultimate
resolution of such matters will not have a material adverse effect on the
Company's financial statements taken as a whole.
Operating Lease Obligations. The Company leases its facilities under a
noncancelable operating lease agreement. The future minimum annual lease
payments are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING MARCH 31,
- ---------------------------------------------------------
<S> <C>
1999 $171,000
2000 128,000
--------
$299,000
--------
</TABLE>
Rent expense under operating leases totaled $201,000 and $258,000 in the
years ended March 31, 1998 and 1997 respectively, $134,000 in the three months
ended March 31, 1996, $495,000 in the year ended December 31, 1995.
Benefit Plans. In August 1996, the Company established a 401(k)
retirement savings plan for its employees. Each participant may elect to
contribute a percentage of his or her salary to the plan, subject to IRS
limitations. The Company, at its discretion, may make contributions to the plan.
There were no such contributions made in the fiscal years ended March 31, 1998
and 1997.
NOTE 17 -- CANCELLATION OF PERFORMANCE SHARES:
In October 1991, in connection with the sale of 90,000 common shares to
the Company's founders and principal stockholders, the Company issued 200,000
common "performance" shares (the "Performance Shares") at CDN $0.20 per share to
certain of these individuals. In July 1996, a total of 60,000 of these shares
were sold and transferred to certain members of current management at their then
estimated fair market value of $.60 per performance share.
In March 1997, all of the Performance Shareholders surrendered their
shares for cancellation. In exchange, the Company issued these holders 9,524
shares of common stock and warrants to purchase 30,009 shares of common stock at
$3.20 per share through March 31, 1998 and $3.40 per share thereafter until
March 6, 1999. Pursuant to the transaction, the Company recorded an expense of
$12,000.
F-21
<PAGE>
SANCTUARY WOODS MULTIMEDIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 18 -- FOURTH QUARTER ADJUSTMENTS:
The Company's net loss for the following periods have included certain
significant adjustments recorded in the fourth quarter related to the matters
described as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
----------------
<S> <C>
Estimated sales returns and price protection $ 5,475,000
Write-off of unrecoverable prepaid and deferred royalties 4,261,000
Provision for inventory obsolescence 1,033,000
Write off of licenses and other intangibles 235,000
----------------
$ 11,004,000
----------------
----------------
</TABLE>
F-22
<PAGE>
SANCTUARY WOODS MULTIMEDIA CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING CHARGED TO WRITE-OFFS/ END OF
OF PERIOD EXPENSE RETURNS OTHER PERIOD
---------------- ---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1998
Allowance for doubtful accounts $ 123,000 $ 547,000 $ (168,000) $ - $ 502,000
Sales returns and allowances 812,000 345,000 (1,028,000) - 129,000
Inventory obsolesence 172,000 583,000 (300,000) - 455,000
Year ended March 31, 1997 $ 207,000 $ 329,000 $ (413,000) $ - $ 123,000
Allowance for doubtful accounts 3,806,000 1,973,000 (4,967,000) - 812,000
Sales returns and allowances 1,450,000 150,000 (1,428,000) - 172,000
Inventory obsolesence
Three months ended March 31, 1996
Allowance for doubtful accounts $ 200,000 $ 16,000 $ (9,000) $ - $ 207,000
Sales returns and allowances 5,428,000 623,000 (2,246,000) - 3,805,000
Inventory obsolesence 1,518,000 250,000 (318,000) - 1,450,000
Year ended December 31, 1995
Allowance for doubtful accounts $ 217,000 $ 119,000 $ (136,000) $ - $ 200,000
Sales returns and allowances 414,000 8,168,000 (3,396,000) 242,000 (A) 5,428,000
Inventory obsolesence 299,000 1,083,000 (132,000) 268,000 (A) 1,518,000
</TABLE>
(a) Consolidation of reserve accounts
F-23
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
As of October 16, 1997, the Company had not paid Deloitte & Touche
LLP amounts due in connection with Deloitte & Touche LLP's audit of the
Company's financial statements for the year ended March 31, 1997. On October
16, 1997, Deloitte & Touche LLP ceased to serve as the Company's independent
accountants, as fully detailed in a Current Report on Form 8-K dated October
16, 1997 which the Company filed with the Commission.
Deloitte & Touche LLP's report, dated April 12, 1996 disclaimed an
opinion on the consolidated financial statements of the Registrant as of and for
the year ended December 31, 1995 because of the possible material effects of the
uncertainty about the Registrant's ability to continue as a going concern.
Deloitte & Touche LLP's updated report, dated October 11, 1996, on the
consolidated financial statements of the Registrant as of and for the year ended
December 31, 1995, expressed a different opinion from the above-mentioned prior
report and such October 11, 1996 report on the December 31, 1995, March 31, 1996
and June 30, 1996 consolidated financial statements did not include an adverse
opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principle. Deloitte & Touche LLP's
report, dated June 20, 1997 on the consolidated financial statements of the
Registrant as of and for the fiscal periods ended March 31, 1997, March 31, 1996
and December 31, 1996 included an explanatory paragraph referring to substantial
doubt about the Registrant's ability to continue as a going concern. The
Registrant's Board of Directors participated in and approved the decision to
cease the relationship with Deloitte & Touche LLP. In connection with its audits
for the two most recent fiscal years and through October 16, 1997, there have
been no disagreements with Deloitte & Touche LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements if not resolved to the satisfaction of Deloitte &
Touche LLP would have caused them to make reference thereto in their report on
the financial statements for such years. During the two most recent fiscal years
and through October 16, 1997, there have been no reportable events, as defined
in Regulation S-K Item 304(a)(1)(v).
Deloitte & Touche LLP furnished the Registrant with a letter addressed
to the SEC stating that it agrees with the above statements. A copy of the
letter was filed as Exhibit 16 to the Form 8-K dated October 16, 1997 filed by
the Registrant.
In connection with the preparation of the audited financial
statements for the acquisition of Theatrix Interactive, Inc. and for fiscal
1998, the Company determined that it would be in the best interests of the
Company and its stockholders to retain the national accounting firm of
PricewaterhouseCoopers LLP to serve as its independent accountants. This
change was more time consuming than the Company initially anticipated and was
not completed until August 10, 1998. Concurrent with the filing of this
report on Form 10-K, the Company has filed a Current Report on Form 8-K with
the Commission to announce the change in accountants, as is required by the
rules and regulations of the Commission.
During the Company's two most recent fiscal years and the subsequent
interim period prior to engaging PricewaterhouseCoopers, the Company has not
consulted PricewaterhouseCoopers with respect to any of the matters described
in Regulation S-K Item 304(a)(2)(i) or (ii) except for the following:
The Company consulted with PricewaterhouseCoopers in the fall of
1997 regarding the SEC reporting requirements associated with the Company's
acquisition of Theatrix Interactive, Inc. PricewaterhouseCoopers engaged in
discussions with Company management regarding the Form 8-K reporting and
filing requirements and the accounting requirements for acquisitions in
accordance with APB No. 16.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of Sanctuary Woods and their
respective ages and positions with the Company are set forth in the following
table.
-28-
<PAGE>
<TABLE>
<CAPTION>
Name Age Position
------------------------ ----- -----------------------------------------------
<S> <C> <C>
Michelle P. Kraus, Ph.D. 40 Chief Executive Officer, President and Director
Marylyn Rosenblum 52 Chairman of the Board of Directors
Erik W. Jansen 39 Director
Lawrence Lenihan 33 Director
</TABLE>
MICHELLE P. KRAUS. Michelle Kraus has served as a member of the Company's Board
of Directors, Chief Executive Officer and President since September 1997. From
1995 to 1996, Dr. Kraus was the founder, chief executive officer and president
of MagicMaker, Inc., the first next-generation interactive digital media studio.
From 1988 to 1995, Dr. Kraus served as an executive consultant and raised
financing, advised management on strategy, repositioning and direction, managed
turnarounds, and built management teams for a diverse portfolio of clients
including Claris Corporation, Compaq Computers, and Quarterdeck Corporation. Dr.
Kraus earned a B.A. from Douglass College, Rutgers University, an M.A. from the
University of Michigan and a Ph.D. from Carnegie-Mellon University.
MARYLYN ROSENBLUM. Marylyn Rosenblum has served as a member and chairman of the
Company's Board of Directors since July, 1997. Ms. Rosenblum served as Acting
President and Chief Executive Officer from July 1997 until September 1997 and
Acting Executive Vice President, Sales from November 1996 until December 1997.
From September 1995 to April 1996, she was Vice-President of Education Sales and
Marketing at Softkey International (The Learning Company), a software company.
From June 1992 to September 1995, she was Vice-President of Education Sales and
Marketing at Broderbund Software, a software company.
ERIK W. JANSEN. Erik Jansen has served as a member of the Company's Board of
Directors since April 1997. Mr. Jansen has served as Vice President of
Dawson-Samberg Capital Management, Inc., an investment management firm, since
July 1998. From May 1997 until June 1998, Mr. Jansen served as Chief Operating
Officer and a member of Digital Media Capital, LLC, a private venture capital
firm. From February 1994 to July 1996, he was President of Digital Media Group,
Inc., a private venture capital firm. From March 1993 to February 1994, he was
Senior Vice President of S.N. Phelps & Co., a merchant and investment banking
company. From September 1986 to February 1993, he was Managing Director of
Martek & Associates, a Management Consulting firm. Mr. Jansen graduated from
Netherlands School of Business with a degree in International Business and
earned a Masters in Business Administration from Southern Methodist University.
LAWRENCE D. LENIHAN, JR. Mr. Lenihan has served as a member of the Company's
Board of Directors since April 1997. Since October 1996, he has been a Principal
at Dawson-Samberg Capital Management, Inc., an investment management firm. From
August 1993 to October 1996, Mr. Lenihan was a principal at Broadview
Associates, an investment banking firm. From July 1987 to June 1993 he held a
variety of positions at International Business Machines, Inc. He is a member of
the Board of Directors of Memotek Communications. Mr. Lenihan graduated from
Duke University with a degree in Electrical Engineering and earned a Masters in
Business Administration from Wharton School, University of Pennsylvania.
-29-
<PAGE>
BOARD OF DIRECTORS COMMITTEES AND OTHER INFORMATION
All directors hold office until the next annual meeting of shareholders
and until their successors have been duly elected and qualified. Officers are
elected by and serve at the discretion of the Board of Directors. There are no
family relationships among the directors or officers of the Company.
The Board of Directors currently has an Audit Committee and a
Compensation Committee. The Audit Committee oversees the actions taken by the
Company's independent auditors and reviews the Company's internal financial and
accounting controls and policies. The Compensation Committee is responsible for
determining salaries, incentives and other forms of compensation for officers,
employees and consultants of the Company and administers the Company's incentive
compensation and benefit plans.
DIRECTOR COMPENSATION
Directors of the Company do not receive cash for services they provide
as directors. From time to time, certain directors who are not employees of the
Company have served as consultants to the Company for which they have been paid
customary fees based on the value of the services rendered and/or received
grants of options to purchase shares of the Company's Common Stock. The Company
does not provide additional compensation for committee participation or special
assignments of the Board of Directors.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and Directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership on Form 3 and changes in ownership on Form 4 or 5 with the Securities
and Exchange Commission (the "SEC") and the National Association of Securities
Dealers, Inc. Such officers, Directors and ten-percent stockholders are also
required by SEC rules to furnish the Company with copies of all forms that they
file pursuant to Section 16(a). Based solely on its review of the copies of such
forms received by it, or written representations from certain reporting persons
that no other reports were required for such persons, the Company believes that
all Section 16(a) filing requirements applicable to its officers, Directors and
ten-percent stockholders were complied with in a timely fashion, except for Erik
Jansen, who filed a late Form 3 after the Company failed to file a Form 3 on his
behalf in a timely manner.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table sets forth the information, on an accrual basis,
with respect to the compensation of Michelle Kraus, the Chief Executive Officer
of the Company, for the three fiscal years ended March 31, 1998.
<TABLE>
<CAPTION>
YEAR ENDED SALARY/OTHER NO. OF SECURITIES
NAME AND POSITION MARCH 31, COMPENSATION UNDERLYING OPTIONS
- ----------------------------- ------------- -------------- --------------------
<S> <C> <C> <C>
Michelle P. Kraus, 1998 $ 65,000 --(3)
President and Chief 1997 -- --
Executive Officer (1) 1995(2) -- --
</TABLE>
(1) Dr. Kraus joined the Company in September, 1997.
(2) The fiscal year end was December 31, 1995.
-30-
<PAGE>
(3) Dr. Kraus received the right to receive a grant of an option for 75,000
shares of Common Stock pursuant to an employment agreement executed as
of September, 1997. However, the Board of Directors of the Company did
not formally grant this option to Dr. Kraus until September, 1998.
The total annual salary and bonus for any other executive officer did
not exceed $100,000 for the fiscal year ended March 31, 1998.
STOCK OPTION GRANTS
No grants of stock options were made to executive officers and
directors during the fiscal year ended March 31, 1998.
STOCK OPTIONS EXERCISED DURING FISCAL YEAR
No stock options or stock appreciation rights were exercised by any
executive officers or directors of the Company during the fiscal year ending
March 31, 1998.
OPTION VALUES
No unexercised options were held by executive officers as of March 31,
1998.
LTIP AWARDS DURING FISCAL YEAR
No long term incentive plan awards were made to any executive officers
or directors of the Company during the fiscal year ending March 31, 1998.
EMPLOYMENT CONTRACTS
In September 1997, the Company entered into an employment agreement
with Dr. Kraus. After expiration of the initial term of the Agreement in
September 1998, Dr. Kraus' employment became at-will, pursuant to the Agreement.
Dr. Kraus will receive a base salary per year of $150,000 per year, plus
additional bonuses at the discretion of the Board of Directors. The Agreement
also provides that Dr. Kraus has a further bonus program based upon the exit
strategy of the Company. Under the terms of the Agreement, the Company agrees to
pay to Dr. Kraus a one-time, lump sum bonus (the "Sales Bonus") upon the
occurrence of a Sales Event. Executive shall be entitled to receive the Sales
Bonus if the Company enters into a definitive agreement covering the applicable
Sales Event (i) during the Employment Term, or (ii) within ninety (90) days
following the termination or expiration of the Employment Term. The amount of
the Sales Bonus will range from $150,000 to as much as $300,000 plus 10% of the
Sale Proceeds in excess of $6,000,000, depending on the amount of total Sales
Proceeds from a Sales Event. In addition, Dr. Kraus received the right to
receive an option for 75,000 shares of the Company's Common Stock, which option
may be exercised by Dr. Kraus for up to a year after the termination of her
employment with the Company. The Company's Board of Directors granted this
option to Dr. Kraus in September, 1998.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
The Company's Restated Certificate of Incorporation provides that the
Company shall indemnify its directors and officers to the fullest extent
permitted by Delaware law, including circumstances in which indemnification is
otherwise discretionary under Delaware law. The Company has entered into
indemnification agreements with its officers and directors containing provisions
which will in some respects be broader than the specific indemnification
provisions contained in the Delaware General Corporations
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<PAGE>
Law. The indemnification agreements require the Company, among other things,
to indemnify such officers and directors against certain liabilities that may
arise by reason of their status or service as directors or officers (other
than liabilities arising from willful misconduct of a culpable nature) and to
advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified.
At present, there is no pending material litigation or proceeding
involving a director or officer of the Company where indemnification will be
required or permitted. The Company is not aware of any threatened material
litigation or proceeding which may result in a claim for such indemnification.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of September 30, 1998 for
(i) each entity or group that is known by the Company to beneficially own five
percent or more of the outstanding Common Stock of the Company, (ii) each
director, (iii) each executive officer and (iv) the Company's directors and
officers as a group. Except pursuant to applicable community property laws or as
indicated in the footnotes to this table, to the Company's knowledge, each
shareholder identified in the table possesses voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by such
shareholder.
<TABLE>
<CAPTION>
NAME AND ADDRESS Common PERCENT
OF BENEFICIAL OWNER Stock(1) OF CLASS
- ---------------------------------------------------------- ----------- ----------
<S> <C> <C>
Dawson-Samberg Capital Management, Inc.(2)
354 Pequot Avenue 8,313,106 63.5%
Southport, CT 06490
Kingdon Capital(3)
152 West 57th Street 2,198,149 38.6%
New York, NY 10019
The Travelers Indemnity Company(4)
388 Greenwich Street, 36th Floor 638,138 11.5%
New York, NY 10013
NEC USA, Inc.(5)
8 Corporate Center Drive 583,562 11.2%
Melville, NY 11757-3148
Michelle P. Kraus(6) 150,000 2.8%
Marylyn Rosenblum(7) 75,000 1.4%
Erik W. Jansen(8) -- --
Lawrence D. Lenihan, Jr.(8) -- --
All directors and executive officers as a group (4 persons) 225,000 4.2%
</TABLE>
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules and
regulation of the U.S. Securities and Exchange Commission and generally
includes voting or investment power with respect to
-32-
<PAGE>
securities. The percentage of beneficial ownership is based on 5,193,303
shares of Common Stock outstanding as of September 30, 1998 and unless
otherwise indicated excludes conversion of the outstanding Series A
Preferred Stock. Options to purchase shares of Common Stock which are
currently exercisable or will become exercisable within 60 days of
September 30, 1998 are deemed to be outstanding for purposes of
computing the percentage of the shares held by an individual but are not
outstanding for purposes of computing the percentage of any other
person. Except as indicated otherwise in the footnotes below, and
subject to community property laws where applicable, the persons named
in the table above have sole voting and investment power with respect to
all shares of Common Stock shown as beneficially owned by them.
(2) Includes 208,334 shares of Common Stock held by Pequot Partners Fund, L.P.
("PPF") and 208,334 shares of Common Stock held by Pequot International
Fund, Inc. ("PIF"). Also includes (i) 37,721 shares of Series A Preferred
Stock (convertible into 833,319 shares of Common Stock), warrants to
purchase 942,755 shares of the Company's Common Stock, and convertible debt
in the principal amount of $434,429 which may be converted into 2,172,145
shares of Common Stock held by PPF and (ii) 37,721 shares of Series A
Preferred Stock (convertible into 833,319 shares of Common Stock), warrants
to purchase 942,755 shares of the Company's Common Stock, and convertible
debt in the principal amount of $434,429 which may be converted into
2,172,145 shares of Common Stock held by PIF.
(3) Includes 254,722, 424,537 and 1,018,890 shares of Common Stock held
respectively by Kingdon Associates, Kingdon Partners and M. Kingdon
Offshore N.V. Also includes a warrant to purchase 500,000 shares of Common
Stock held by Kingdon Capital.
(4) Neither The Travelers Indemnity Company or any of its affiliates has
assumed or has any responsibility for the management, business or
operations of the Company or for the statements contained in this Proxy
Statement (other than the limited information regarding the stock ownership
of such entities under the caption "Principal Stockholders"). Includes
10,373 shares of Series A Preferred Stock (convertible into 229,157 shares
of Common Stock) and warrants to purchase 139,786 shares of Common Stock
and.
(5) Includes 58,356 shares of Common Stock held in escrow in connection with
the Company's acquisition of Theatrix Interactive, Inc.
(6) Represents options for Common Stock.
(7) Represents an option for Common Stock.
(8) Mr. Jansen and Mr. Lenihan are a Vice President and a Principal,
respectively, at Dawson-Samberg Capital Management, Inc. and, therefore,
may be deemed to beneficially own the shares held by Pequot Partners Fund,
L.P. and Pequot International Fund, Inc. Mr. Jansen and Mr. Lenihan
disclaim beneficial ownership of the shares held by Pequot partners Fund,
L.P. and Pequot International Fund, Inc.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In August, 1998 the Company issued secured promissory notes in the
amount of $40,000.00 and bearing interest at a rate of 10% per annum to each of
Pequot Partners Fund, L.P. and Pequot International Fund, Inc. (collectively,
the "Lenders"), each of which are affiliates of Dawson-Samberg Capital
-33-
<PAGE>
Management, Inc., a significant stockholder of the Company. At September 30,
1998 the Company was in default in payment of $64,000 of accrued interest under
the promissory notes.
In November, 1997 the Company entered into a Note Purchase Agreement
(the "Purchase Agreement") with the Lenders. In connection with the Agreement,
the Company issued to the Lenders an aggregate of $868,858 in secured promissory
notes bearing interest at 15% per annum and which may be converted into Common
Stock of the Company at the option of each Lender at a conversion rate of $0.20
per share. In addition, the Company issued to the Lenders warrants for an
aggregate of 868,858 shares of the Company's Common Stock at a conversion price
of $0.15 per share.
In October, 1997 the Company issued promissory notes bearing interest
at 10% per annum in the aggregate amount of $250,000 to the Lenders. The
principal amounts and all interest accrued under these notes were rolled-over as
secured promissory notes issued pursuant to the Note Purchase Agreement.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
2.1 Certificate of Domestication (Incorporated by reference to
Exhibit 2.1 to Registrant's Form 8-B filed May 2, 1997).
3.1 Certificate of Incorporation (Incorporated by reference to
Exhibit 3.1 to Registrant's Form 8-B filed May 2, 1997).
3.2 Amended and Restated Certificate of Incorporation
(Incorporated by reference to Exhibit 3.2 to Registrant's
Form 8-B filed May 2, 1997).
3.3 Bylaws (Incorporated by reference to Exhibit 3.3 to
Registrant's Form 8-B filed May 2, 1997).
4.1 Specimen Common Stock Certificate (Incorporated by reference
to Exhibit 4.1 to Registrant's Form 8-B filed May 2, 1997).
10.13 Form of Warrant to Purchase Common Stock issued by the
Company to the placement agent in connection with the July
1995 private placement (Incorporated herein by reference to
Exhibit 7.5 of Registrant's Report on Form 8-K dated
February 14, 1995).
10.18 Amendment to Loan Agreement between Sanctuary Woods
Multimedia, Inc. and a bank, dated April 2, 1996 and related
warrant (Incorporated herein by reference to Exhibit 10.18
of Registrant's Report on Form 10-K/A-1 filed April 15,
1996).
10.20 Warrant granted in connection with Second Amendment to Loan
Agreement between the Registrant and Imperial Bank
(Incorporated herein by reference to Exhibit 10.20 of
Registrant's Report on Form 10-Q filed June 19, 1996).
10.21 Agreement with Strategic Marketing Partners dated May 13,
1996 (Incorporated herein by reference to Exhibit 10.21 of
Registrant's Report on Form 10-Q filed June 19, 1996).
-34-
<PAGE>
<S> <C>
10.23 Amendment 1 to License Agreement between Ripley
Entertainment and the Registrant (effective August 1, 1996)
(Incorporated herein by reference to Exhibit 10.23 of
Registrant's Report on Form 10-Q filed August 14, 1996).
10.25 Form of Indemnification Agreement Executed by Registrant and
its officers and directors (Incorporated by reference to
Exhibit 3.3 to Registrant's Form 8-B filed on May 2, 1997).
10.28 Form of Warrant to Purchase Common Stock issued by the
Company to the holders of Series A Preferred Stock.
(Incorporated herein by reference to Exhibit 10.28 of
Registrant's Report on Form 10-K filed June 30, 1997).
10.28A Form of Warrant to Purchase Common Stock issued by the
Company to the holders of Series A Preferred Stock
(Incorporated herein by reference to Exhibit 10.28A of
Registrant's Report on Form 10-K filed June 30, 1997).
10.29 Form of Warrant to Purchase Common Stock issued by the
Company to certain individuals and employees pursuant to the
cancellation of their performance shares (Incorporated
herein by reference to Exhibit 10.29 of Registrant's Report
on Form 10-K filed June 30, 1997).
10.30 Note Purchase Agreement dated as of November 20, 1997 by and
between the Registrant and each of Pequot Partners Fund,
L.P. and Pequot International Fund, Inc., with forms of
Secured Convertible Promissory Note and Warrant for Common
Stock attached.
10.31 Securities Exchange Agreement dated as of April 10, 1997 by
and between the Registrant and the Individuals listed on the
Schedule of Purchasers contained therein.
10.32 Employment Agreement dated as of September 15, 1997 by and
between the Registrant and Michelle Kraus.
10.33 Lease dated November 14, 1994 by and between Fordham
Properties Inc. and the Registrant.
10.34 Registrant's 1996 Stock Option Plan, as amended.
21.1 List of Subsidiaries.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Deloitte & Touche LLP.
27.1 Financial Data Schedule.
</TABLE>
(b) REPORTS ON FORM 8-K
No reports were filed during the fourth quarter of the year ended March
31, 1998.
-35-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this Annual Report on Form 10-K to be signed on
October 2, 1998, on its behalf by the undersigned, thereunto duly authorized.
SANCTUARY WOODS MULTIMEDIA CORPORATION
By /s/ Michelle Kraus
----------------------------------
Michelle Kraus
Director, President and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the date indicated.
<TABLE>
<CAPTION>
Signature: Date:
<S> <C>
/s/ Michelle Kraus October 2, 1998
- ------------------------------------------------------
Director, President and CEO
(principal executive and financial officer)
/s/ Marylyn Rosenblum October 2, 1998
- ------------------------------------------------------
Chairman and Director
/s/ Lawrence Lenihan October 2, 1998
- ------------------------------------------------------
Director
/s/ Erik Jansen October 2, 1998
- ------------------------------------------------------
Director
</TABLE>
<PAGE>
Exhibit 10.30
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SANCTUARY WOODS MULTIMEDIA CORPORATION
NOTE PURCHASE AGREEMENT
November 20, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. The Credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 The Advance of Funds . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Closing Date.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.3 Delivery.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.4 Interest Rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.5 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.6 Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.7 No Usury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.8 Fees and Commissions . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.9 Additional Agreements. . . . . . . . . . . . . . . . . . . . . . . . . 4
2. Representations and Warranties of the Lenders . . . . . . . . . . . . . . . 5
2.1 Experience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.2 Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.3 Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.4 Rule 144 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.5 Authority. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.6 Access to Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.7 Accredited Investor. . . . . . . . . . . . . . . . . . . . . . . . . . 7
3. Representations and Warranties of the Company . . . . . . . . . . . . . . . 7
3.1 Corporate Organization and Authority of the Company. . . . . . . . . . 7
3.2 Corporate Power. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.3 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.4 Authorization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.5 Validity of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.6 Accuracy of Reports. . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.7 Governmental Consent, etc. . . . . . . . . . . . . . . . . . . . . . . 10
3.8 Third Party Consents . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.9 Full Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4. Securities Laws Covenants of Lenders. . . . . . . . . . . . . . . . . . . . 11
5. Conditions of Lenders' Obligations at Closing . . . . . . . . . . . . . . . 11
5.1 Representations and Warranties . . . . . . . . . . . . . . . . . . . . 11
5.2 Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
5.3 Blue Sky Compliance. . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.4 Proceedings Satisfactory . . . . . . . . . . . . . . . . . . . . . . . 12
5.5 Other Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.6 No Actions Pending . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6. Conditions of the Company's Obligations at Closing. . . . . . . . . . . . . 12
6.1 Representations and Warranties . . . . . . . . . . . . . . . . . . . . 12
6.2 Blue Sky Compliance. . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.3 No Order Pending . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
7. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
7.1 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
7.2 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . 13
7.3 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
7.4 Notices, etc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
7.5 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.6 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.7 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.8 Survival of Representations and Warranties . . . . . . . . . . . . . . 14
7.9 Amendment of Agreement . . . . . . . . . . . . . . . . . . . . . . . . 14
7.10 Finder's Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.11 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
SCHEDULES
Schedule A - Lenders
Schedule B - Investors (Pursuant to Section 1.9)
EXHIBITS
Exhibit A - Form of Convertible Promissory Note
Exhibit B - Form of Warrant
Exhibit C - Security Agreement
Exhibit D - Registration Rights Agreement
Exhibit E - Schedule of Exceptions
-ii-
<PAGE>
NOTE PURCHASE AGREEMENT
This Note Purchase Agreement (the "Agreement") is entered into as of
November 20, 1997, by and between Sanctuary Woods Multimedia Corporation, a
Delaware corporation (the "Company") and the parties listed on the Schedule of
Lenders attached hereto as SCHEDULE A ("Lenders") (as amended from time to time
pursuant to Section 1.2.
In consideration of the mutual covenants and conditions herein contained,
the parties hereto agree as follows:
1. THE CREDIT
1.1 THE ADVANCE OF FUNDS.
(i) Under this Agreement, the Company has authorized the
borrowing of up to $3,000,000 (the "Credit") from Lenders, subject to Section
1.9 of this Agreement. Lenders hereby agree to make one or more loans to the
Company up to the full amount of the Credit, to be paid to the Company by check
or wire transfer on or before the Closing (as defined below) for such loan, or
by tendering outstanding promissory notes issued by the Company which have
become due and payable on or prior to the Closing for such loan (or will become
due and payable within 30 days of such Closing).
(ii) The Company's obligations to each Lender at the time of a
Closing shall be evidenced by a secured convertible promissory note delivered to
each Lender, in the form attached as EXHIBIT A hereto (the "Notes"), and a
warrant for one share of Common Stock of the Company per dollar of Credit loaned
to the Company from such Lender and with a strike price of $0.15 per share, in
the form attached as EXHIBIT B hereto (the "Warrants").
<PAGE>
(iii) The Company's obligations to Lenders are secured by lien on
collateral pursuant to a Security Agreement, dated November 20, 1997, in the
form attached hereto as EXHIBIT C (the "Security Agreement").
1.2 CLOSING DATE. The closing of the purchase and sale of the Notes
hereunder shall be held at the offices of Wilson Sonsini Goodrich & Rosati, 650
Page Mill Road, Palo Alto, California on November 19, 1997 (the "First Closing")
or at such other time and place upon which the Company and the Lenders shall
agree (the date of the First Closing is hereinafter referred to as the "First
Closing Date"). Following the First Closing Date, and prior to January 31,
1998, subject to Section 1.9 herein the Company may borrow additional amounts
from the Lenders or from lenders in addition to those listed on SCHEDULE A (the
"Additional Lenders"), upon the same terms and conditions hereunder as loans
made on the First Closing Date, up to the full aggregate amount of the Credit at
one or more closings to be held at such other times and places upon which the
Company and the Additional Lenders making such loans at such closing shall agree
(a "Subsequent Closing"). Such Additional Lenders shall be deemed to be listed
on SCHEDULE A as parties to this Agreement and shall be deemed to be "Lenders"
for the purposes of this Agreement. The date of a Subsequent Closing is
hereinafter referred to as a "Subsequent Closing Date." The First Closing and
each Subsequent Closing is hereinafter referred to as a "Closing" and the First
Closing Date and each Subsequent Closing Date is hereinafter referred to as a
"Closing Date."
1.3 DELIVERY. At the Closing, the Company will issue to each of the
Lenders a Note, registered in such Lender's name, representing the principal
amount of the Credit loaned by such Lender, against the loan of such funds.
1.4 INTEREST RATE. The outstanding principal balance of the Credit
shall bear interest from the Closing Date until payment in full is made. The
interest rate shall be fifteen percent (15%)
-2-
<PAGE>
accumulating interest per annum; provided that in no event shall such rate
exceed the maximum rate of interest allowed by applicable law.
1.5 TERM. All outstanding principal and interest due under the Notes
shall be due and payable as set forth therein.
1.6 PREPAYMENT. The Company may prepay the principal and accrued
interest under the Notes according to the terms of Section 2 of the Notes.
1.7 NO USURY. This Agreement, the Notes, the Security Agreement, the
Registration Rights Agreement, which is attached hereto as EXHIBIT D (the
"Registration Rights Agreement"), the Warrants, and other agreements referred to
herein (collectively the "Transaction Agreements"), and any other agreements
which may subsequently be entered into between the Company and the Lenders, are
hereby expressly limited so that in no event whatsoever, whether by reason of
deferment or advancement of loan proceeds, acceleration of maturity of the loan
evidenced hereby, or otherwise, shall the amount paid or agreed to be paid to
Lenders hereunder for the loan, use, forbearance or detention of money exceed
that permissible under applicable law. If at any time the performance of any
provision hereof or of any other such agreement involves a payment exceeding the
limit of the price that may be validly charged for the loan, use, forbearance or
detention of money under applicable law, then automatically and retroactively,
ipso facto, the obligation to be performed shall be reduced to such limit, it
being the specific intent of the Company and Lenders hereof that all payments
under this Agreement or the Notes are to be credited first to interest as
permitted by law, but not in excess of (i) the agreed rate of interest set forth
herein, or (ii) that permitted by law, whichever is the lesser, and the balance
toward the reduction of principal. The provisions of this paragraph shall never
be superseded or waived and shall control every
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other provision of the Transaction Agreements and all other agreements
between the Company and Lenders.
1.8 FEES AND COMMISSIONS. Except for a processing fee payable to
each of the Lenders equal to 3% of any loans made to the Company pursuant to
this Agreement, there shall be no fees or commissions paid by the Company
pursuant to this Agreement.
1.9 ADDITIONAL AGREEMENTS. The Lenders listed on SCHEDULE B (the
"Investors") shall have the following additional rights:
a. RIGHT OF FIRST REFUSAL. The Company hereby grants to each
Investor a right of first refusal (the "Right of First Refusal") to purchase a
Pro Rata Share (as defined below) of all (or any part) of any Note issued by the
Company pursuant to this Agreement at any Subsequent Closing Date beyond the
first $500,000 aggregate principal amount of Notes sold by the Company (a "New
Note") hereunder. A Pro Rata Share for an Investor, for purposes of this
section, is the ratio of (i) the aggregate principal amount of any Notes issued
by the Company to such Investor pursuant to this Agreement to (ii) the total
aggregate principal amount of all Notes issued by the Company to the Investors
pursuant to this Agreement. The Right of First Refusal shall be subject to the
following provisions:
(1) In the event the Company proposes to issue New
Notes pursuant to this agreement, it shall give each Investor written notice of
its intention. Each Investor shall have ten (10) days after receipt of such
notice to agree to purchase its Pro Rata Share of the New Notes under the terms
of this Agreement. If any Investor fails to agree to purchase its full Pro Rata
Share within such ten (10) day period, the Company will give the Investors who
did so agree (the "Electing Investors") notice of the amount of New Notes which
were not subscribed for. Such notice may be by telephone if followed by written
confirmation within two days. The Electing Investors shall have ten (10) days
from
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the date of such notice to agree to purchase pro rata any or all of the New
Note not purchased by such non-purchasing Investors.
(2) In the event that the Investors fail to exercise
in full the Right of First Refusal within the ten (10) plus ten (10) day period
specified above, the Company shall have thirty (30) days thereafter to sell (or
enter into an agreement to sell) New Notes upon the terms of this Agreement to
Additional Lenders. In the event the Company has not sold (or entered into an
agreement to sell) the New Notes within such thirty (30) day period the Company
shall not thereafter issue or sell any New Notes, without first offering such
New Notes to the Investors in the manner provided above.
b. RIGHT TO PURCHASE ADDITIONAL NOTES. The Company hereby
agrees to sell to each of the Investors at the election of such Investor at any
time prior to December 31, 1997 a Pro Rata Share of $250,000 aggregate principal
amount of Notes pursuant to the terms of this Agreement, subject in all cases to
the $3,000,000 Credit limitation contained in Section 1.1 hereof. In the event
that upon exercise of such right, the total amount borrowed by the Company would
exceed the amount of the Credit limitation, the Investors' right to purchase
additional Notes will be deemed to represent a right to purchase such lesser
amount of Notes which, together with Notes previously purchased hereunder, will
equal the Credit limitation.
2. REPRESENTATIONS AND WARRANTIES OF THE LENDERS
Each Lender hereby represents and warrants to the Company with respect
to the issuance of the Notes and the Warrants and the issuance of the Common
Stock issuable upon conversion of the Notes and the purchase of the Common Stock
issuable upon exercise of the Warrants (collectively, the "Securities") as
follows:
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<PAGE>
2.1 EXPERIENCE. It is experienced in evaluating and investing in
high technology companies such as the Company.
2.2 INVESTMENT. It is acquiring the Securities for investment for
its own account and not with the view to, or for resale in connection with, any
distribution thereof. It understands that the Securities to be purchased have
not been registered under the Securities Act of 1933, as amended (the
"Securities Act") by reason of a specific exemption from the registration
provisions of the Securities Act which depends upon, among other things, the
bona fide nature of the investment intent as expressed herein and the accuracy
of the Lenders' representations and warranties as expressed herein.
2.3 TAX CONSEQUENCES. It understands and acknowledges that any
financing structured in the manner provided for herein involves certain tax
risks, and therefore it has consulted its own tax advisors regarding all the
federal and state tax consequences of the transactions contemplated by this
Agreement.
2.4 RULE 144. It acknowledges that the Securities must be held
indefinitely unless subsequently registered under the Securities Act or an
exemption from such registration is available. It is aware of the provisions of
Rule 144 promulgated under the Securities Act.
2.5 AUTHORITY. It has all corporate rights, power and authority to
enter into the Transaction Agreements and to consummate the transactions
contemplated thereby. The execution and delivery of the Transaction Agreements
by the Lenders and the consummation by it of the transactions contemplated
thereby have been duly authorized by all necessary corporate action on its
behalf. The Transaction Agreements have been duly executed and delivered by and
constitute legal, valid and binding obligations of the Lenders, enforceable in
accordance with their respective terms, subject to laws of general application
relating to bankruptcy, insolvency and the relief of debtors and rules of law
governing
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specific performance, injunctive relief or other equitable remedies, and to
limitations of public policy as they may apply to Section 9 of the
Registration Rights Agreement.
2.6 ACCESS TO DATA. It has had an opportunity to discuss the
Company's business, management, and financial affairs with its management and
the opportunity to review the Company's facilities. It understands that such
discussions, as well as any written information issued by the Company, were
intended to describe the aspects of the Company's business and prospects which
it believes to be material but were not necessarily a thorough or exhaustive
description.
2.7 ACCREDITED INVESTOR. It is an "accredited investor" within the
meaning of Regulation D promulgated by the Securities and Exchange Commission
pursuant to the Securities Act.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
For purposes of this Section 3, unless the context otherwise requires,
the term "Company" shall include the Company and its subsidiaries as listed on
its most recent Annual Report on Form 10-K for the year ended March 31, 1997,
filed with the Securities and Exchange Commission (the "SEC"). Except as set
forth in the Schedule of Exceptions attached hereto as EXHIBIT E, the Company
represents and warrants to the Lenders as follows:
3.1 CORPORATE ORGANIZATION AND AUTHORITY OF THE COMPANY. The Company
and each of its subsidiaries:
(i) is a corporation duly organized, validly existing,
authorized to exercise all its corporate powers, rights and privileges and in
good standing in the state or jurisdiction of its incorporation;
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(ii) has the corporate power and authority to own and operate
its properties and to carry on its business as presently conducted and as
proposed to be conducted; and
(iii) is qualified to do business as a foreign corporation in
each jurisdiction in which the ownership of its property or the nature of its
business requires such qualification, except where failure to so qualify would
not have a material adverse effect on the business, properties or financial
condition of the Company and its subsidiaries, taken as a whole. The Company
has made available to the Lenders true and correct copies of its Certificate of
Incorporation and By-laws as amended.
3.2 CORPORATE POWER. The Company will have at the Closing Date all
requisite legal and corporate power and authority to execute and deliver the
Transaction Agreements, to sell and issue the Notes and Warrants hereunder to
issue Common Stock upon conversion of the Notes and upon exercise of the
Warrants and to carry out and perform its obligations under the terms of the
Transaction Agreements.
3.3 CAPITALIZATION. The authorized capital stock of the Company
consists of:
(i) COMMON STOCK. 50,000,000 shares of Common Stock, $0.001
par value, of which 2,104,155 shares were issued and outstanding as of October
23, 1997.
(ii) PREFERRED STOCK. 5,000,000 shares of Preferred Stock,
$0.001 par value, of which 99,993 shares were issued and outstanding as of
October 23, 1997.
(iii) All outstanding shares of the Company's Common Stock
have been duly authorized and validly issued (including, without limitation,
issued in compliance with applicable federal and state securities laws), and
are fully-paid and nonassessable.
(iv) At October 31, 1997, the Company had reserved 400,000
shares of Common Stock for future issuance to employees, officers, directors,
and consultants of the Company
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pursuant to employee stock benefit plans or agreements approved by the Board
of Directors, and 1,886,305 shares of Common Stock for issuance upon exercise
of outstanding warrants. Except as provided or described in this Agreement,
there are no other options, warrants, conversion privileges or other
contractual rights presently outstanding to purchase or otherwise acquire any
shares of the Company's capital stock or other securities (whether or not
authorized).
3.4 AUTHORIZATION. All corporate action on the part of the Company,
its officers, directors and stockholders necessary for the authorization,
execution, delivery and performance by the Company of all its obligations under
this Agreement and the other Transaction Agreements and for the authorization,
issuance, sale and delivery of the shares of common stock issuable upon
conversion of the Notes and exercising of the Warrants has been taken, and this
Agreement, the Registration Rights Agreement, the Notes and the Warrants, once
executed by the Company and the Lenders, will constitute legally binding valid
obligations of the Company enforceable in accordance with their respective
terms, such enforceability being subject only to laws of general application
relating to bankruptcy, insolvency and the relief of debtors and rules of law
governing specific performance, injunctive relief or other equitable remedies,
and to limitations of public policy as they may apply to Section 9 of the
Registration Rights Agreement. Except as provided herein, the issuance of the
Notes and the Warrants and the issuance of the common stock upon conversion of
the Notes and upon exercise of the Warrants will not give rise to any preemptive
rights or rights of first refusal on behalf of any person in existence on the
date hereof.
3.5 VALIDITY OF SHARES. The shares of common stock, when issued and
delivered in accordance with the terms and for the consideration expressed in
the Notes and the Warrants, shall be
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duly and validly issued (including, without limitation, compliance with
applicable federal and state securities laws), fully-paid and nonassessable.
3.6 ACCURACY OF REPORTS. The Company's Annual Report on Form 10-K
for the year ended March 31, 1997 filed with the SEC, and all reports required
to be filed by the Company thereafter up to the date of this Agreement under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), copies of
which have been made available to the Lenders, have been duly filed, were in
substantial compliance with the requirements of their respective report forms,
were complete and correct in all material respects as of the dates at which the
information was furnished, and contained (as of such dates) no untrue statement
of a material fact nor omitted to state a material fact necessary in order to
make the statements made therein in light of the circumstances in which made not
misleading. Since the date of the latest of such reports, there has not been
any material adverse change in the condition (financial or otherwise) or results
of operations of the Company and its subsidiaries taken as a whole.
3.7 GOVERNMENTAL CONSENT, ETC. No consent, approval or authorization
of or designation, declaration or filing with any governmental authority on the
part of the Company is required in connection with the valid execution and
delivery of the Transaction Agreements, or the offer, sale or issuance of the
Notes or the shares of common stock issuable upon conversion of the Notes, or
the consummation of any other transaction contemplated hereby, except such
filings as may be required to be made with the SEC and the National Association
of Securities Dealers, Inc. and except for filings to perfect security interests
pursuant to the Security Agreement and Notes.
3.8 THIRD PARTY CONSENTS. No third party consents are required in
connection with any indebtedness of the Company, or with respect to indebtedness
of Theatrix Interactive, Inc., the
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Company's wholly-owned subsidiary, including existing bank lines of credit
with Silicon Valley Bank, Phoenix Leasing, Inc. or Steelcase Financial
Services, Inc.
3.9 FULL DISCLOSURE. The representations and warranties of the
Company contained in this Agreement, the other provisions of this Agreement, the
Schedule of Exceptions and the other exhibits, when read together, do not
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements contained herein or therein in
light of the circumstances under which they were made not misleading.
4. SECURITIES LAWS COVENANTS OF LENDERS. Each Lender covenants that it
will dispose of any of the shares of Common Stock issuable upon conversion of
the Notes and upon exercise of the Warrants only in compliance with the
Registration Rights Agreement. All certificates representing such shares shall
bear the legend set forth in Section 3 of such Registration Rights Agreement.
5. CONDITIONS OF LENDERS' OBLIGATIONS AT CLOSING. The obligations of the
Lenders under Section 1 of this Agreement are subject to the fulfillment at or
before the Closing of each of the following conditions, any of which may be
waived in writing by the Lenders:
5.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company contained in the Security Agreement and in this
Agreement shall be true on and as of such Closing with the same effect as if
made on and as of such Closing.
5.2 PERFORMANCE. The Company shall have performed or fulfilled all
agreements, obligations and conditions contained herein and in the Security
Agreement required to be performed or fulfilled by the Company before such
Closing.
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5.3 BLUE SKY COMPLIANCE. The Company shall have complied with and be
effective under all state securities or Blue Sky laws applicable to the
execution and delivery of the Notes and the issuance of the common stock upon
conversion of the Notes to the Lenders.
5.4 PROCEEDINGS SATISFACTORY. All corporate and legal proceedings
taken by the Company in connection with the transactions contemplated by this
Agreement and all documents and papers relating to such transactions shall be
satisfactory to the Lenders, in the reasonable exercise of the judgment of the
Lenders.
5.5 OTHER AGREEMENTS. The Company and the Lenders shall have entered
into the Registration Rights Agreement and the Security Agreement.
5.6 NO ACTIONS PENDING. There shall not then be in effect any order
enjoining or restraining the transactions contemplated by the Transaction
Agreements.
6. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING. The obligations
of the Company under Section 1 of this Agreement are subject to the fulfillment
at or before the Closing of each of the following conditions, any of which may
be waived in writing by the Company:
6.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Lenders contained in Section 2 hereof shall be true on and as
of the Closing with the same effect as though said representations and
warranties had been made on and as of the Closing.
6.2 BLUE SKY COMPLIANCE. The Company shall have complied with and be
effective under the securities laws of the State of Oregon and any other
applicable states as necessary to execute and deliver the Notes to the Lenders
and to issue the common stock upon conversion of the Notes to the Lenders.
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6.3 NO ORDER PENDING. There shall not then be in effect any order
enjoining or restraining the transactions contemplated by the Transaction
Agreements.
7. MISCELLANEOUS
7.1 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of California applicable to contracts
entered into and wholly to be performed within the State of California by
California residents.
7.2 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
7.3 ENTIRE AGREEMENT. The Transaction Agreements and the other
documents delivered hereto and thereto constitute the full and entire
understanding and agreement between the parties with regard to the subjects
hereof and thereof. None of the Transaction Agreements nor any term hereof and
thereof may be amended, waived, discharged or terminated other than by a written
instrument signed by the party against whom enforcement of any such amendment,
waiver, discharge or termination is sought.
7.4 NOTICES, ETC. Any notice and other communications as required or
permitted under the Transaction Agreements shall be mailed, by registered or
certified mail, postage prepaid with return receipt requested, or otherwise
delivered by hand, by messenger or by facsimile (with confirmation of receipt),
addressed (a) if to a Lender, at such Lender's address set forth on the
signature page hereof, or at such other address as such Lender shall have
furnished to the Company in writing, or, until any such holder so furnishes an
address to the Company, then to and at the address of the last holder of such
Securities who has so furnished an address to the Company, or (c) if to the
Company, at its address set
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forth on the signature page of this Agreement, or at such other address as
the Company shall have furnished to the Lenders.
7.5 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which may be executed by less than all of the parties
hereto, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
7.6 SEVERABILITY. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision; provided that no such severability shall be effective if
it materially changes the economic benefit of this Agreement to any party.
7.7 HEADINGS. Headings and the table of contents in this Agreement
are for reference purposes only and shall not be deemed to have any substantive
effect.
7.8 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties of the parties contained in or made pursuant to this Agreement
and the Security Agreement shall survive the execution and delivery of this
Agreement and the Closing; provided however, that such representations and
warranties need only be accurate as of the date of such execution and delivery
and as of the Closing.
7.9 AMENDMENT OF AGREEMENT. Any provision of this Agreement may be
modified or amended by a written instrument signed by the Company and by the
Lenders.
7.10 FINDER'S FEES. Each of the Company and the Lenders represents
and warrants to the others that no person is entitled, directly or indirectly,
to compensation by reason of any contract or understanding with such party, as a
finder or broker in connection with the sale and purchase of the Notes and
Warrants hereunder or in connection with the issuance of the common stock upon
conversion of the
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Notes or upon exercise of the Warrants. Each of the Company and the Lenders
will indemnify the other against all liabilities incurred by the indemnifying
party with respect to claims related to investment banking or finders fees in
connection with the transactions contemplated by this Agreement, arising out
of arrangements between the party asserting such claims and the indemnifying
party, and all costs and expenses (including reasonable fees of counsel) of
investigating and defending such claims.
7.11 EXPENSES. The Company and the Lenders will each bear their
respective legal and other fees and expenses in connection with the transactions
contemplated by this Agreement.
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The foregoing agreement is hereby executed as of the date first above
written.
SANCTUARY WOODS MULTIMEDIA PEQUOT PARTNERS FUND, L.P.
CORPORATION,
A DELAWARE CORPORATION
By: By:
---------------------------------- -----------------------------------
Name:
-----------------------
Name: Its:
-------------------------------- -----------------------
Title:
-------------------------------
Address: 1250 45th Street, Suite 350 Address:
Emeryville, CA 94608-2924 ------------------------------
------------------------------
PEQUOT INTERNATIONAL FUND, INC.
By:
-----------------------------------
Name:
-----------------------
Its:
-----------------------
Address:
------------------------------
------------------------------
*NOTE PURCHASE AGREEMENT*
SCHEDULE A
<PAGE>
LENDERS
Pequot Partners Fund, L.P. $250,000.00
Pequot International Fund, Inc. $250,000.00
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SCHEDULE B
INVESTORS
(Pursuant to Section 1.9)
Pequot Partners Fund, L.P.
Pequot International Fund, Inc.
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EXHIBIT A
FORM OF CONVERTIBLE PROMISSORY NOTE
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<PAGE>
EXHIBIT B
FORM OF WARRANT
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<PAGE>
EXHIBIT C
SECURITY AGREEMENT
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<PAGE>
EXHIBIT D
REGISTRATION RIGHTS AGREEMENT
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<PAGE>
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD OR OTHERWISE
TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT
IN EFFECT WITH RESPECT TO SUCH SECURITIES, OR DELIVERY OF AN OPINION OF COUNSEL
IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF THESE SECURITIES THAT SUCH
OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE WITH THE ACT.
SANCTUARY WOODS MULTIMEDIA CORPORATION
SECURED CONVERTIBLE PROMISSORY NOTE
December 29, 1997
Subject to the terms and conditions of this Secured Convertible Promissory
Note (the "Note"), for value received, SANCTUARY WOODS MULTIMEDIA CORPORATION, a
Delaware corporation (the "Company"), whose address is 1250 45th Street, Suite
350, Emeryville, CA 94608-2924 promises to pay to PEQUOT INTERNATIONAL FUND,
INC., the principal amount of ONE HUNDRED TWENTY-EIGHT THOUSAND SEVEN HUNDRED
FIFTY DOLLARS ($128,750) (the "Principal Amount"), together with interest at
the rate of 15.0% per annum, payable on the terms set forth in Section 2 herein.
The following is a statement of the rights of the holder of this Note and the
terms and conditions to which this Note is subject, and to which the holder
hereof, by the acceptance of the Note agrees:
THE OBLIGATIONS DUE UNDER THIS NOTE ARE SECURED BY A SECURITY AGREEMENT
(THE "SECURITY AGREEMENT") DATED AS OF THE DATE HEREOF AND EXECUTED BY COMPANY
IN FAVOR OF HOLDER. ADDITIONAL RIGHTS OF HOLDER ARE SET FORTH IN THE SECURITY
AGREEMENT.
1. CERTAIN DEFINITIONS. Unless the context otherwise requires, as used
in this Note, the following terms will have the following meanings:
1.1 "Company" means Sanctuary Woods Multimedia Corporation and any
corporation which succeeds to, or assumes the obligations of Sanctuary Woods
Multimedia Corporation under this Note.
1.2 "Noteholder," "Holder," "Holder of this Note," or similar terms,
when the context refers to a holder of this Note, will mean any person who at
the time in question is the registered holder of this Note.
1.3 The "Act" means the Securities Act of 1933, as amended.
<PAGE>
1.4 "Conversion Stock" mean the Common Stock of the Company to be
issued on conversion of this Note.
1.5 "Purchase Agreement" means the Note Purchase Agreement, dated as
of November 20, 1997, by and between the Company and the Lenders set forth on
Schedule A thereto (as amended from time to time).
1.6 "Registration Rights Agreement" means the Registration Rights
Agreement, dated as of November 20, 1997 by and between the Company and the
Investors set forth on Exhibit A thereto.
1.7 "Senior Indebtedness" shall mean, unless expressly subordinated
to or made on a parity with the amounts due under this Note, the principal of
(and premium, if any), unpaid interest on, amounts reimbursable and fees,
expenses, costs of enforcement and other amounts due in connection with, (i)
indebtedness of the Company, or with respect to indebtedness of Theatrix
Interactive Inc., the Company's wholly-owned subsidiary, pursuant to existing
bank lines of credit with Silicon Valley Bank, Phoenix Leasing, Inc. or
Steelcase Financial Services, Inc., (ii) indebtedness of the Company, or with
respect to which the Company is a guarantor, to a lending institution for a bank
line of credit created after the date hereof and for a principal amount greater
than or equal to $125,000, whether or not secured and (iii) any such
indebtedness or any debentures, notes or other evidence of indebtedness issued
in exchange for such Senior Indebtedness, or any indebtedness arising from the
satisfaction of such Senior Indebtedness by a guarantor.
2. MATURITY DATE AND PAYMENT.
2.1 MATURITY DATE. Unless otherwise extended as provided in Section
2.4 herein, this Note will mature and be subject to Holder's options, in
accordance with Section 2.3 hereof, on December 29, 2000 (the "Maturity Date").
Subject to Section 3 below, interest shall accrue hereon and shall be payable
every six months (an "Interest Payment Date") in cash or in Common Stock of the
Company, at the Holder's election, provided, however, that unless the Holder
provides the Company with notice within 5 business days of an Interest Payment
Date of its election to convert such interest payment to Common Stock in
accordance with Section 3.1 hereof, the Holder shall be deemed to have elected
to receive cash.
2.2 PREPAYMENT. The remaining principal amount of this Note and all
accrued but unpaid interest of this Note may be prepaid by the Company at any
time upon fifteen (15) business days prior written notice to the Holder (the
fifteenth business day following the date such notice is delivered shall be
defined as the "Prepayment Date") at 115% of the Principal Amount plus any
accrued interest; provided however, that in such event, the Holder may convert
the Note to Common Stock of the Company according to the provisions of
Section 3.1 hereof by delivering to the Company a Conversion Notice, a form of
which is attached hereto as EXHIBIT A (the "Conversion Notice"), at least one
business day prior to the Prepayment Date.
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2.3 HOLDER'S OPTIONS AT MATURITY DATE. On the Maturity Date, the
Holder shall have the option to (i) convert the outstanding principal amount and
all interest and other amounts owing to the Holder in connection with Note to
Common Stock pursuant to Section 3.1 hereof, by delivering to the Company a
Conversion Notice at least one business day prior to the Maturity Date, (ii)
demand payment of the principal amount of the Note and all accrued interest
thereon, which amounts have not been prepaid pursuant to Section 2.2 hereof, by
delivering to the Company a Demand Notice, a form of which is attached hereto as
EXHIBIT B, at least one business day prior to the Maturity Date, or (iii) extend
the Maturity Date pursuant to and subject to the conditions of Section 2.4
hereof. The Holder shall give the Company notice, not less than three business
days but not more than five business days prior to the Maturity Date, as to its
option pursuant to this Section 2.3; provided however, that if the Holder has
not given the Company notice by the Maturity Date, the Maturity Date shall be
extended for ninety (90) days, and this extended date shall be deemed the
Maturity Date for purposes of this Note, including the provisions of this
Section 2.3.
2.4 EXTENSION OF MATURITY DATE. On or prior to the Maturity Date,
the Holder shall have the option, with the prior written consent of the Company,
to extend the date on which this Note is due and payable or convertible, by
executing and delivering to the Company an Extension Agreement, a form of which
is attached hereto as EXHIBIT C, at least one business day prior to the Maturity
Date; and, if agreed by the Company, this agreed-upon date shall be deemed the
Maturity Date for purposes of this Note.
3. CONVERSION.
3.1 CONVERSION. If the Company receives from the Holder a Conversion
Notice at least one business day prior to the Maturity Date, the Prepayment Date
or in the event of a deemed conversion election for an Interest Payment Date, as
the case may be, the outstanding principal amount of the Note and all interest
and other amounts owing to the Holder in connection with such Note (in the case
of a Conversion Notice delivered with respect to the Maturity Date or the
Prepayment Date) or the amount of interest payable on the Note (in the case of a
deemed conversion election for an Interest Payment Date) shall be converted into
shares of Common Stock of the Company, on the date specified on the Conversion
Notice, or in the case of a deemed conversion of interest pursuant to Section
2.1, on such Interest Payment Date. The number of shares of Conversion Stock of
the Company upon such conversion shall be calculated by dividing the amount
payable with respect to the Note for such Maturity Date, Prepayment Date or
Interest Payment Date, as the case may be, by a conversion rate (the "Conversion
Rate") of $0.20 per share of Common Stock. The Conversion Rate and the number
of shares issuable upon conversion hereof are subject to adjustment from time to
time as follows:
(a) RECLASSIFICATION, ETC. If the Company at any time while
this Note, or any portion thereof, remains outstanding and unexpired shall,
by reclassification of securities or otherwise, change any of the securities
as to which conversion rights under this Note exist into the same or a
different number of securities of any other class or classes, this Note shall
thereafter be convertible into such number and kind of securities as would
have been issuable as the result of such change with respect to the securities
which were subject to the conversion rights under this Note
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<PAGE>
immediately prior to such reclassification or other change and the Conversion
Rate therefor shall be appropriately adjusted, all subject to further
adjustment as provided in this Section 3.1.
(b) SPLIT, SUBDIVISION OR COMBINATION OF SHARES. If the Company
at any time while this Note, or any portion hereof, remains outstanding and
unexpired shall split, subdivide or combine the securities as to which
conversion rights under this Note exist, into a different number of securities
of the same class, the Conversion Rate for such securities shall be
proportionately decreased and the number of securities issuable upon conversion
proportionately increased in the case of a split or subdivision or the
Conversion Rate of such securities shall be proportionately increased and the
number of securities issuable upon conversion proportionately decreased in the
case of a combination.
(c) ADJUSTMENTS FOR DIVIDENDS IN STOCK OR OTHER SECURITIES OR
PROPERTY. If, while this Note, or any portion hereof, remains outstanding and
unexpired the holders of the securities as to which conversion rights under this
Note exist at the time shall have received, or, on or after the record date
fixed for the determination of eligible Stockholders, shall have become entitled
to receive, without payment therefor, other or additional stock or other
securities or property (other than cash) of the Company by way of dividend, then
and in each case, this Note shall be convertible into, in addition to the number
of shares of the security receivable upon the conversion of this Note, the
amount of such other or additional stock or other securities or property (other
than cash) of the Company which such holder would hold on the date of such
conversion had it been the holder of record of the security receivable upon
conversion of this Note on the date hereof and had thereafter, during the period
from the date hereof to and including the date of such conversion, retained such
shares and/or all other additional stock available by it as aforesaid during
such period, giving effect to all adjustments called for during such period by
the provisions of this Section 3.1.
(d) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment pursuant to this Section 3.1, the Company shall, upon
the written request, at any time, of such holder of this Note, furnish or cause
to be furnished to such holder a certificate setting forth: (i) such adjustments
and readjustments; (ii) the Conversion Rate at the time in effect; and (iii) the
number of shares and the amount, if any, of other property which at the time
would be received upon the conversion of the Note.
(e) NO IMPAIRMENT. The Company will not, by any voluntary
action, avoid or seek to avoid the observance or performance of any of the terms
to be observed or performed hereunder by the Company, but will at all times in
good faith assist in the carrying out of all of the provisions of this Section
3.1 and in the taking of all such action as may be necessary or appropriate in
order to protect the rights of the holders of this Note against impairment.
3.2 MECHANICS AND EFFECT OF CONVERSION. No fractional shares of
Conversion Stock will be issued upon conversion under Section 3.1. In lieu of
any fractional share to which the Holder would otherwise be entitled, the
Company will pay to the Holder in cash that amount of the unconverted balance
under this Note (including both principal and accrued interest); provided that
such fractional share amount shall not be deemed to constitute an amount due
under the Note. Upon conversion of the outstanding principal amount of this
Note in accordance with Section 3.1, the
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<PAGE>
Holder of this Note shall surrender this Note, duly endorsed, at the
principal offices of the Company or any transfer agent for the Company. At
its expense, the Company will, as soon as practicable after a conversion by a
Holder pursuant to Section 3.1 and, in accordance with this Section 3.2,
issue and deliver to such Holder at the Holder's address set forth on the
signature page of the Purchase Agreement, a certificate or certificates for
the number of shares of Conversion Stock to which such Holder is entitled
upon such conversion, together with any other securities and property to
which the Holder is entitled upon such conversion under the terms of this
Note, including a check payable to the Holder for any cash amounts payable as
described above. Upon conversion of the outstanding principal amount of this
Note, the Company will be forever released from all its obligations and
liabilities under this Note, including without limitation the obligation to
pay the principal amount or accrued interest.
3.3 LEGENDS. The Conversion Stock shall bear the legends set forth
in Section 3 of the Registration Rights Agreement.
4. SUBORDINATION. The indebtedness evidenced by this Note is hereby
expressly subordinated, to the extent and in the manner hereinafter set forth,
in right of payment to the prior payment in full of all of Company's Senior
Indebtedness.
(a) INSOLVENCY PROCEEDINGS. If there shall occur any receivership,
insolvency, assignment for the benefit of creditors, bankruptcy, reorganization,
or arrangements with creditors (whether or not pursuant to bankruptcy or other
insolvency laws), sale of all or substantially all of the assets, dissolution,
liquidation, or any other marshaling of the assets and liabilities of Company,
(i) no amount shall be paid by Company in respect of the principal of, interest
on or other amounts due with respect to this Note at the time outstanding,
unless and until the principal of and interest on the Senior Indebtedness then
outstanding shall be paid in full, and (ii) no claim or proof of claim shall be
filed with Company by or on behalf of Holder of this Note which shall assert any
right to receive any payments in respect of the principal of and interest on
this Note except subject to the payment in full of the principal of and interest
on all of the Senior Indebtedness then outstanding.
(b) DEFAULT ON SENIOR INDEBTEDNESS. If there shall occur an event of
default which has been declared in writing with respect to any Senior
Indebtedness, as defined therein, or in the instrument under which it is
outstanding, permitting the holder to accelerate the maturity thereof and Holder
shall have received written notice thereof from the holder of such Senior
Indebtedness, then, unless and until such event of default shall have been cured
or waived or shall have ceased to exist, or all Senior Indebtedness shall have
been paid in full, no payment shall be made in respect of the principal of or
interest on this Note, unless within sixty (60) days after the happening of such
event of default, the maturity of such Senior Indebtedness shall not have been
accelerated. Not more than one notice may be given to Holder pursuant to the
terms of this Section 4(b) during any 360 day period.
(c) FURTHER ASSURANCES. By acceptance of this Note, Holder agrees to
execute and deliver customary forms of subordination agreement requested from
time to time by holders of Senior Indebtedness, and as a condition to Holder's
rights hereunder, Company may require that Holder
-5-
<PAGE>
execute such forms of subordination agreement; provided that such forms shall
not impose on Holder terms less favorable than those provided herein and in
the Security Agreement.
(d) OTHER INDEBTEDNESS. No indebtedness which does not constitute
Senior Indebtedness shall be senior in any respect to the indebtedness
represented by this Note.
(e) SUBROGATION. Subject to the payment in full of all Senior
Indebtedness, Holder shall be subrogated to the rights of the holder(s) of such
Senior Indebtedness (to the extent of the payments or distributions made to the
holder(s) of such Senior Indebtedness pursuant to the provisions of this
Section 4) to receive payments and distributions of assets of Company applicable
to the Senior Indebtedness. No such payments or distributions applicable to the
Senior Indebtedness shall, as between Company and its creditors, other than the
holders of Senior Indebtedness and Holder, be deemed to be a payment by Company
to or on account of this Note; and for purposes of such subrogation, no payments
or distributions to the holders of Senior Indebtedness to which Holder would be
entitled except for the provisions of this Section 4 shall, as between Company
and its creditors, other than the holders of Senior Indebtedness and Holder, be
deemed to be a payment by Company to or on account of the Senior Indebtedness.
(f) NO IMPAIRMENT. Subject to the rights, if any, of the holders of
Senior Indebtedness under this Section 4 to receive cash, securities or other
properties otherwise payable or deliverable to Holder, nothing contained in this
Section 4 shall impair, as between Company and Holder, the obligation of
Company, subject to the terms and conditions hereof, to pay to Holder the
principal hereof and interest hereon as and when the same become due and
payable, or shall prevent Holder, upon default hereunder, from exercising all
rights, powers and remedies otherwise provided herein or by applicable law.
(g) RELIANCE OF HOLDERS OF SENIOR INDEBTEDNESS. Holder, by its
acceptance hereof, shall be deemed to acknowledge and agree that the foregoing
subordination provisions are, and are intended to be, an inducement to and a
consideration of each holder of Senior Indebtedness, whether such Senior
Indebtedness was created or acquired before or after the creation of the
indebtedness evidenced by this Note, and each such holder of Senior Indebtedness
shall be deemed conclusively to have relied on such subordination provisions in
acquiring and holding, or in continuing to hold, such Senior Indebtedness.
Holder agrees to execute all other documents reasonably requested by the Company
or holders of Senior Indebtedness to evidence such subordination.
5. ASSIGNMENT. The rights and obligations of the Company and the Holder
of this Note will be binding upon and inure to the benefit of the successors,
assigns, heirs, administrators and transferees of the parties. Notwithstanding
the foregoing, the Holder may not assign, pledge or otherwise transfer this Note
without the prior written consent of the Company.
6. WAIVER AND AMENDMENT. This Note or any provisions hereof may be
amended, waived or modified with the written consent of the Company and the
Holder.
-6-
<PAGE>
7. LOST DOCUMENTS. Upon receipt by the Company of evidence and indemnity
satisfactory to it of the loss, theft, destruction or mutilation of, and upon
surrender and cancellation of this Note, if mutilated, the Company will make and
deliver in lieu of this Note a new Note of the same series and of like tenor and
unpaid principal amount and dated as of the date to which interest, if any, has
been paid on the unpaid principal amount of this Note.
8. GOVERNING LAW. This Note shall be governed by, and construed in
accordance with, the laws of the State of California, excluding that body of law
relating to conflict of laws.
-7-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Note to be issued as of the
date first written above.
SANCTUARY WOODS MULTIMEDIA
CORPORATION
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
ACCEPTED AND AGREED TO:
PEQUOT INTERNATIONAL FUND, INC.
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
-8-
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
Pursuant to Section 3.1 of the Secured Convertible Promissory Note, dated
December 29, 1997, the Holder hereby irrevocably converts the outstanding
principal and accrued interest on the Note in accordance with Section 3.1 of the
Note.
This conversion notice may be revoked only with the express written consent
of the Holder and the Company.
_____________, 19__
PEQUOT INTERNATIONAL FUND, INC.
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
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<PAGE>
EXHIBIT B
DEMAND NOTICE
Pursuant to Section 2.3 of the Secured Convertible Promissory Note, dated
December 29, 1997, the Holder hereby demands immediate payment of the principal
amount of the Note and all accrued interest thereon, which amounts have not been
prepaid pursuant to Section 2.2 of the Note.
PEQUOT INTERNATIONAL FUND, INC.
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
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<PAGE>
EXHIBIT C
AGREEMENT TO EXTEND MATURITY DATE
Pursuant to Section 2.4 of the Secured Convertible Promissory Note, dated
December 29, 1997, the Holder and the Company agree to extend the Maturity Date,
as defined in the Note, to ___________, 19__; and this date shall be the
Maturity Date for purposes of the Note.
PEQUOT INTERNATIONAL FUND, INC.
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
ACCEPTED AND AGREED TO:
SANCTUARY WOODS MULTIMEDIA
CORPORATION
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
-11-
<PAGE>
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD OR OTHERWISE
TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT
IN EFFECT WITH RESPECT TO SUCH SECURITIES, OR DELIVERY OF AN OPINION OF COUNSEL
IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF THESE SECURITIES THAT SUCH
OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE WITH THE ACT.
Warrant to Purchase
125,000 Shares
of Common Stock
Dated December 29, 1997
WARRANT TO PURCHASE COMMON STOCK
OF
SANCTUARY WOODS MULTIMEDIA CORPORATION
Void after December 29, 2002
This certifies that, for value received, PEQUOT INTERNATIONAL FUND, INC.
or its registered assigns ("Holder") is entitled, subject to the terms set
forth below, to purchase from SANCTUARY WOODS MULTIMEDIA CORPORATION (the
"Company"), a Delaware corporation, ONE HUNDRED TWENTY-FIVE THOUSAND
(125,000) shares of the Common Stock of the Company, as constituted on the
date hereof (the "Warrant Issue Date"), upon surrender hereof, at the
principal office of the Company referred to below, with the subscription form
attached hereto duly executed, and simultaneous payment therefor in lawful
money of the United States or otherwise as hereinafter provided, at the
Exercise Price as set forth in Section 2 below. The number, character and
Exercise Price of such shares of Common Stock are subject to adjustment as
provided below.
1. TERM OF WARRANT. Subject to the terms and conditions set forth
herein, this Warrant shall be exercisable, in whole or in part, during the
term commencing on the Warrant Issue Date and ending at 5:00 p.m., Pacific
Standard Time, on December 29, 2002 (the "Term"), and shall be void
thereafter.
2. EXERCISE PRICE. The Exercise Price at which this Warrant may be
exercised shall be $0.15 per share of Common Stock as adjusted from time to
time pursuant to Section 10 hereof (the "Exercise Price").
3. EXERCISE OF WARRANT.
(a) This Warrant is exercisable by the Holder in whole or in part,
but not for less than one hundred thousand (100,000) shares at a time (or if
the maximum number of shares purchasable upon exercise of this Warrant is
less than 100,000, this Warrant shall be exercisable for such lesser number
of shares which may then constitute the maximum number purchasable), at any
time, or from time to time, during the term hereof as described in Section 1
above, by the surrender of this Warrant and the Notice
<PAGE>
of Exercise annexed hereto duly completed and executed on behalf of the
Holder, at the office of the Company (or such other office or agency of the
Company as it may designate by notice in writing to the Holder at the address
of the Holder appearing on the books of the Company), upon payment (i) in
cash or by check acceptable to the Company, (ii) by cancellation by the
Holder of indebtedness of the Company to the Holder, or (iii) by a
combination of (i) and (ii), of the Exercise Price multiplied by the number
of shares being purchased.
(b) This Warrant shall be deemed to have been exercised
immediately prior to the close of business on the date of its surrender for
exercise as provided above, and the person entitled to receive the shares of
Common Stock issuable upon such exercise shall be treated for all purposes as
the holder of record of such shares as of the close of business on such date.
As promptly as practicable on or after such date and in any event within ten
(10) days thereafter, the Company at its expense shall issue and deliver to
the person or persons entitled to receive the same a certificate or
certificates for the number of shares issuable upon such exercise. In the
event that this Warrant is exercised in part, the Company at its expense will
execute and deliver a new Warrant of like tenor exercisable for the remaining
number of shares for which this Warrant may then be exercised.
4. NO FRACTIONAL SHARES OR SCRIP. No fractional shares or scrip
representing fractional share shall be issued upon the exercise of this
Warrant. In lieu of any fractional share to which the Holder would otherwise
be entitled, the Company shall make a cash payment equal to the Exercise
Price multiplied by such fraction.
5. REPLACEMENT OF WARRANT. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction, or mutilation of
this Warrant and, in the case of loss, theft, or destruction, on delivery of
an indemnity agreement reasonably satisfactory in form and substance to the
Company or, in the case of mutilation, on surrender and cancellation of this
Warrant, the Company at its expense shall execute and deliver, in lieu of
this Warrant, a new warrant of like tenor and amount.
6. RIGHTS OF STOCKHOLDERS. Subject to Sections 8 and 10 of this
Warrant, the Holder shall not be entitled to vote or receive dividends or be
deemed the holder of Common Stock or any other securities of the Company that
may at any time be issuable on the exercise hereof for any purpose, nor shall
anything contained herein be construed to confer upon the Holder, as such,
any of the rights of a stockholder of the Company or any right to vote for
the election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action
(whether upon any recapitalization, issuance of stock, reclassification of
stock, change of par value, or change of stock to no par value,
consolidation, merger, conveyance, or otherwise) or to receive notice of
meetings, or to receive dividends or subscription rights or otherwise until
the Warrant shall have been exercised and the shares of Common Stock
purchasable upon the exercise hereof (the "Warrant Shares") shall have been
issued, as provided herein.
7. COMPLIANCE WITH SECURITIES LAWS. This Warrant may not be
transferred or assigned in whole or in part without compliance with all
applicable federal and state securities laws by the transferor and the
transferee (including the delivery of investment representation letters and
legal opinions reasonably satisfactory to the Company, if such are requested
by the Company).
-2-
<PAGE>
(a) The Holder of this Warrant, by acceptance thereof,
acknowledges that this Warrant and the shares of Common Stock to be issued
upon exercise hereof are being acquired solely for the Holder's own account
and not as a nominee for any other party, and for investment, and that the
Holder will not offer, sell or otherwise dispose of this Warrant or any
shares of Common Stock to be issued upon exercise hereof except under
circumstances that will not result in a violation of any federal securities
laws, including without limitation the Securities Act of 1933, as amended
(the "Act"), any state securities laws or any applicable securities law of
foreign jurisdictions, or any rules or regulations promulgated thereunder.
Upon exercise of this Warrant, the Holder shall, if requested by the Company,
confirm in writing in a form satisfactory to the Company, that the shares of
Common Stock so purchased are being acquired solely for the Holder's own
account and not as a nominee for any other party, for investment, and not
with a view toward distribution or resale.
(b) Without in any way limiting the representations set forth in
(a) above, the Holder further agrees not to make any disposition of all or
any portion of this Warrant or any Warrant Shares unless and until the
transferee has agreed in writing for the benefit of the Company to be bound
by this Section 7, and:
(i) the Holder shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and (ii)
if reasonably requested by the Company, the Holder shall have furnished the
Company with an opinion of counsel, reasonably satisfactory to the Company,
that such disposition will not require registration of such securities under
the Act.
(c) This Warrant and all shares issuable hereunder shall bear the
following legends:
(i) "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY
NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO SUCH
SECURITIES, OR DELIVERY OF AN OPINION OF COUNSEL IN FORM AND SUBSTANCE
SATISFACTORY TO THE ISSUER OF THESE SECURITIES THAT SUCH OFFER, SALE OR
TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE WITH THE ACT."
(ii) Any legend required by applicable state law.
8. RESERVATION OF STOCK. The Company covenants that during the Term
this Warrant is exercisable, the Company will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the
issuance of Common Stock upon the exercise of this Warrant and, from time to
time, will take all steps necessary to provide sufficient reserves of shares
of the Common Stock issuable upon the exercise of the Warrant. The Company
further covenants that all shares that may be issued upon the exercise of
rights represented by this Warrant and payment of the Exercise Price, all as
set forth herein, will be free from all taxes, liens, and charges in respect
of the issue thereof (other than taxes in respect of any transfer occurring
contemporaneously or otherwise specified herein). The
-3-
<PAGE>
Company agrees that its issuance of this Warrant shall constitute full
authority to its officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for shares of
Common Stock upon the exercise of this Warrant.
9. AMENDMENTS AND WAIVERS. Any term of this Warrant may be amended and
the observance of any term of this Warrant may be waived (either generally or in
a particular instance and either retroactively or prospectively) only with the
written consent of the Company and the Holder. No waivers of or exceptions to
any term, condition or provision of this Warrant, in any one or more instances,
shall be deemed to be, or construed as, a further or continuing waiver of any
such term, condition or provision.
10. ADJUSTMENTS. The Exercise Price and the number of shares
purchasable hereunder are subject to adjustment from time to time as follows:
(a) RECLASSIFICATION, ETC. If the Company at any time while this
Warrant, or any portion thereof, remains outstanding and unexpired shall, by
reclassification of securities or otherwise, change any of the securities as
to which purchase rights under this Warrant exist into the same or a
different number of securities of any other class or classes, this Warrant
shall thereafter represent the right to acquire such number and kind of
securities as would have been issuable as the result of such change with
respect to the securities which were subject to the purchase rights under
this Warrant immediately prior to such reclassification or other change and
the Exercise Price therefor shall be appropriately adjusted, all subject to
further adjustment as provided in this Section 10.
(b) SPLIT, SUBDIVISION OR COMBINATION OF SHARES. If the Company
at any time while this Warrant, or any portion hereof, remains outstanding
and unexpired shall split, subdivide or combine the securities as to which
purchase rights under this Warrant exist, into a different number of
securities of the same class, the Exercise Price for such securities shall be
proportionately decreased and the number of securities issuable upon exercise
proportionately increased in the case of a split or subdivision or the
Exercise Price of such securities shall be proportionately increased and the
number of securities issuable upon exercise proportionately decreased in the
case of a combination.
(c) ADJUSTMENTS FOR DIVIDENDS IN STOCK OR OTHER SECURITIES OR
PROPERTY. If, while this Warrant, or any portion hereof, remains outstanding
and unexpired the holders of the securities as to which purchase rights under
this Warrant exist at the time shall have received, or, on or after the
record date fixed for the determination of eligible Stockholders, shall have
become entitled to receive, without payment therefor, other or additional
stock or other securities or property (other than cash) of the Company by way
of dividend, then and in each case, this Warrant shall represent the right to
acquire, in addition to the number of shares of the security receivable upon
the exercise of this Warrant, and without payment of any additional
consideration thereof, the amount of such other or additional stock or other
securities or property (other than cash) of the Company which such holder
would hold on the date of such exercise had it been the holder of record of
the security receivable upon exercise of this Warrant on the date hereof and
had thereafter, during the period from the date hereof to and including the
date of such exercise, retained such shares and/or all other additional stock
available by it as aforesaid during such period, giving effect to all
adjustments called for during such period by the provisions of this
Section 10.
-4-
<PAGE>
(d) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment pursuant to this Section 10, the Company shall,
upon the written request of any holder of this Warrant, furnish or cause to
be furnished to such holder a certificate setting forth: (i) such adjustments
and readjustments; (ii) the Exercise Price at the time in effect; and (iii)
the number of shares and the amount, if any, of other property which at the
time would be received upon the exercise of the Warrant.
(e) NO IMPAIRMENT. The Company will not, by any voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Company, but will at all times in good
faith assist in the carrying out of all of the provisions of this Section 10 and
in the taking of all such action as may be necessary or appropriate in order to
protect the rights of the holders of this Warrant against impairment.
11. SUCCESSORS AND ASSIGNS. The terms and provisions of this Warrant
shall inure to the benefit of and be binding upon the Company and Holder and
their respective permitted successors and assigns.
12. ATTORNEYS' FEES. If any action of law or equity is necessary to
enforce or interpret the terms of this Warrant, the prevailing party shall be
entitled to its reasonable attorneys' fees, costs and disbursements in
addition to any other relief to which it may be entitled.
13. GOVERNING LAW. This Warrant shall be governed by the laws of the
State of California.
14. NOTICES. All notices required under this Warrant and shall be
deemed to have been given or made for all purposes (i) upon personal
delivery, (ii) upon confirmation receipt that the communication was
successfully sent to the applicable number if sent by facsimile; (iii) one
day after being sent, when sent by professional overnight courier service, or
(iv) five days after posting when sent by registered or certified mail to
either party hereto at the address set forth below or at such other address
as either party may designate by notice pursuant to this Section 14.
If to the Company: Sanctuary Woods Multimedia Corporation
1250 45th Street, Suite 350
Emeryville, CA 94608-2924
Attn: President
with a copy to: Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
Attn: Judith O'Brien
If to the Holder: PEQUOT INTERNATIONAL FUND, INC.
Dawson-Samberg Capital Management, Inc.
354 Pequot Avenue
Southport, CT 06490
-5-
<PAGE>
15. CAPTIONS. The Section and subsection headings of this Warrant are
inserted for convenience only and shall not constitute a part of this Warrant
in construing or interpreting any provision hereof.
-6-
<PAGE>
IN WITNESS HEREOF, SANCTUARY WOODS MULTIMEDIA CORPORATION has caused this
Warrant to be executed by its officers thereunto duly authorized.
Dated: December 29, 1997
SANCTUARY WOODS MULTIMEDIA CORPORATION
By:
----------------------------------
*PEQUOT INTERNATIONAL FUND, INC. WARRANT*
-7-
<PAGE>
NOTICE OF EXERCISE
To: SANCTUARY WOODS MULTIMEDIA CORPORATION
(1) The undersigned hereby elects to:
Purchase _______________________ shares of Common Stock of
SANCTUARY WOODS MULTIMEDIA CORPORATION, pursuant to the terms of the
attached Warrant and tenders herewith payment of the purchase price for
such shares in full;
(2) In exercising this Warrant, the undersigned hereby confirms and
acknowledges that the shares of Common Stock are being acquired solely for the
account of the undersigned and not as a nominee for any other party, and for
investment, and that the undersigned will not offer, sell, or otherwise dispose
of any such shares of Common Stock except under circumstances that will not
result in a violation of any federal securities laws, including without
limitation the Securities Act of 1933, as amended, any state securities laws or
any applicable securities laws of foreign jurisdictions or any rules or
regulations promulgated thereunder.
PEQUOT PARTNERS FUND, L.P.
By:
- ------------------------- ---------------------------------------
[Date]
Title:
------------------------------------
-8-
<PAGE>
Exhibit 10.31
SANCTUARY WOODS MULTIMEDIA CORPORATION
SECURITIES EXCHANGE AGREEMENT
As of April 10, 1997
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C> <C>
SECTION 1 Authorization and Sale of the Securities; Advances . . . . . . . . . . 1
1.1 Authorization of Securities. . . . . . . . . . . . . . . . . . . . . . 1
1.2 Exchange of the Debentures . . . . . . . . . . . . . . . . . . . . . . 2
1.3 Warrants to Purchase Common Stock. . . . . . . . . . . . . . . . . . . 2
SECTION 2 Closing Date; Delivery . . . . . . . . . . . . . . . . . . . . . . . . 3
2.1 Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.2 Delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
SECTION 3 Representations and Warranties of the Company. . . . . . . . . . . . . 3
3.1 Organization; Articles and Bylaws. . . . . . . . . . . . . . . . . . . 3
3.2 Corporate Power. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3.3 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3.4 Authorization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.5 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.6 Risk Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.7 Brokers or Finders . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.8 Tax Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.9 Litigation, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.10 Governmental Consent, etc. . . . . . . . . . . . . . . . . . . . . . . 5
3.11 Patents, Trademarks and Trade Secrets. . . . . . . . . . . . . . . . . 5
3.12 Permits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
SECTION 4 Representations and Warranties of the Purchasers . . . . . . . . . . . 6
4.1 Investment Representations and Covenants of the Purchasers . . . . . . 6
4.2 Legends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.3 Authorization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.4 Advisors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
SECTION 5 Conditions to Closing of the Purchasers. . . . . . . . . . . . . . . . 9
5.1 Representations and Warranties Correct . . . . . . . . . . . . . . . . 9
5.2 Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
5.3 Third Party Consents . . . . . . . . . . . . . . . . . . . . . . . . . 9
5.4 Compliance with Federal Securities Laws. . . . . . . . . . . . . . . . 9
5.5 Blue Sky . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
SECTION 6 Conditions to Closing of Company . . . . . . . . . . . . . . . . . . . 10
6.1 Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
6.2 Compliance with Federal Securities Laws. . . . . . . . . . . . . . . . 10
6.3 Blue Sky . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
6.4 Certificate of Incorporation . . . . . . . . . . . . . . . . . . . . . 10
</TABLE>
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
(CONTINUED)
Page
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<S> <C> <C>
SECTION 7 Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
7.1 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
7.2 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . 10
7.3 Entire Agreement; Amendment. . . . . . . . . . . . . . . . . . . . . . 10
7.4 Notices, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
7.5 Delays or Omissions. . . . . . . . . . . . . . . . . . . . . . . . . . 11
7.6 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
7.7 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
7.8 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
7.9 California Corporate Securities Law. . . . . . . . . . . . . . . . . . 12
EXHIBITS
A Schedule of Purchasers
B Rights and Privileges of the Series A Preferred Stock
C Form of Warrant for 27.5% Coverage
D Form of Warrant for 55% Coverage
E Disclosure Schedule
</TABLE>
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<PAGE>
SANCTUARY WOODS MULTIMEDIA CORPORATION
SECURITIES EXCHANGE AGREEMENT
This Securities Exchange Agreement (this "Agreement") is made as of
April 10, 1997 by and among Sanctuary Woods Multimedia Corporation, a British
Columbia, Canada corporation (the "Company"), and the individuals and
entities listed on the Schedule of Purchasers attached hereto as EXHIBIT A
(the "Purchasers").
WHEREAS, the Purchasers and the Company entered into that certain
Securities Purchase Agreement dated as of September 18, 1996 (the "Purchase
Agreement") pursuant to which the Purchasers purchased 8% Convertible
Debentures due July 31, 1999 of the Company (the "Debentures");
WHEREAS, in connection with the purchase of the Debentures the Company
issued to the Purchasers warrants to purchase Common Stock of the Company at
the rate of one share of Common Stock for every US$2.00 principal amount of
the Debentures;
WHEREAS, the Company has granted to holders of record of Common Stock
and Debentures who are not Canadian residents as of March 7, 1997 rights to
purchase shares of Common Stock (the "Rights Offering" and each right granted
a "Right");
WHEREAS, the Company and Purchasers wish to exchange the Debentures for
shares of the Company's Series A Preferred Stock and additional warrants to
purchase Common Stock of the Company;
NOW, THEREFORE, for good and valuable consideration the value of which
is hereby acknowledged, the Company and the Purchasers agree as follows:
SECTION 1
AUTHORIZATION AND SALE OF THE SECURITIES; ADVANCES
1.1 AUTHORIZATION OF SECURITIES. The Company has or prior to the
Closing Date (defined in Section 2.1) will have authorized the issuance of
(a) 100,000 shares of Series A Preferred Stock with rights and privileges as
set forth in EXHIBIT B attached hereto; (b) warrants to purchase up to an
aggregate of 24,300,833 shares of the Company's Common Stock in substantially
the form attached hereto as EXHIBIT C or EXHIBIT D (the "Warrants"), which
warrants shall be exercisable at a price of US$0.15 per share, and (c) up to
an aggregate of 68,484,166 shares of the Company's Common Stock for issuance
upon conversion of the Series A Preferred Stock and exercise of the Warrants.
The Series A Preferred Stock and the Warrants shall hereinafter be
collectively referred to as the "Securities" and the Common Stock issuable
upon conversion of the Series A Preferred Stock and exercise of the Warrants
shall hereinafter be collectively referred to as the "Conversion Stock".
<PAGE>
1.2 EXCHANGE OF THE DEBENTURES. As soon as practicable after the
Closing Date, for each US$53.02 principal amount of Debentures held by a
Purchaser, the Company will deliver to such Purchaser one share of Series A
Preferred Stock. No fractional shares of Series A Preferred Stock shall be
issued but the number of shares of Series A Preferred Stock shall be rounded
down to the nearest whole share and no cash shall be paid to Purchaser in
lieu of any fractional shares.
1.3 WARRANTS TO PURCHASE COMMON STOCK.
(a) If the Purchaser has subscribed to exercise less than 25% of
the total Rights granted to such Purchaser pursuant to the Rights Offering,
which total Rights shall include both those Rights granted based on the
Common Stock held by such Purchaser as of March 7, 1997 (the "Record Date")
and those Rights granted based on the aggregate principal amount of
Debentures held by such Purchaser as of the Record Date, as soon as
practicable after the Closing Date, the Company shall issue the Purchaser a
Warrant to purchase that number of shares of the Company's Common Stock set
forth in Column 4 of Exhibit A, which number shall be equal to 27.5% of the
shares of Common Stock issuable upon conversion of the Series A Preferred
Stock to be issued to such Purchaser pursuant to Section 1.2 of this
Agreement, in substantially the form attached hereto as EXHIBIT C.
(b) If the Purchaser shall have subscribed to exercise 25% or more
of the total Rights granted to such Purchaser in the Rights Offering, which
total Rights shall include both those Rights granted based on the Common
Stock held by such Purchaser on the Record Date and those Rights granted
based on the aggregate principal amount of debentures held by such Purchaser,
the Company shall issue to the Purchaser a Warrant to purchase that number of
shares of the Company's Common Stock set forth in Column 5 of Exhibit A,
which shall be equal to 55% of the shares of Common Stock issuable upon
conversion of the Series A Preferred Stock to be issued to such Purchaser
pursuant to Section 1.2 of this Agreement, in substantially the form attached
hereto as EXHIBIT D.
(c) For the purpose of determining the number of Warrants to be
granted to each Purchaser, the Series A Preferred Stock shall be convertible
into one share of Common Stock for each US$0.12 of principal amount of the
Debentures held by such Purchaser just prior to the Exchange. The Company
shall not issue a Warrant which is exercisable for a fraction of a share of
Common Stock and the aggregate number of shares issuable under such Warrant
shall be automatically rounded to the next lowest whole integer without any
other compensation payable to the Purchaser of such Warrant.
1.4 REGISTRATION RIGHTS. The Purchasers shall be entitled to the
registration rights set forth on Exhibit G to the Securities Purchase
Agreement dated September 18, 1996 by and among the Company and the
Purchasers, which is incorporated herein by reference and made a part hereof
as if fully set forth herein; provided, however, that the Company shall have
the right to file a Registration Statement on Form S-2 in lieu of a
Registration Statement on Form S-1, if such form is available to the Company.
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<PAGE>
SECTION 2
CLOSING DATE; DELIVERY
2.1 CLOSING DATE. The closing of the exchange shall occur on April 18,
1997 (the "Closing Date").
2.2 DELIVERY. As soon as practicable after the Closing, the Company
will deliver to each Purchaser a certificate evidencing the Purchaser's
shares of Series A Preferred Stock as specified opposite such Purchaser's
name on EXHIBIT A hereto together with a Warrant or Warrants to purchase the
number of shares of the Company's Common Stock as determined in accordance
with Section 1.3 against delivery of the original Debentures and warrants
granted pursuant to the Purchase Agreement for exchange to the Company.
SECTION 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth on the Disclosure Schedule attached hereto as
EXHIBIT E, the Company hereby represents and warrants to the Purchasers as
follows:
3.1 ORGANIZATION; ARTICLES AND BYLAWS. The Company is a corporation
duly organized and existing under, and by virtue of, the laws of British
Columbia, Canada. The Company has the requisite corporate power to own and
operate its properties and assets, and to carry on its business as presently
conducted and as proposed to be conducted. The Company is in good standing
in British Columbia, Canada and authorized to do business as a foreign
corporation and in good standing in the state of California, the only
jurisdiction in the United States in which such authorization is presently
required to carry on the Company's business.
3.2 CORPORATE POWER. The Company has all requisite legal and corporate
power to execute and deliver this Agreement, to issue and sell the Securities
and the Conversion Stock hereunder and to carry out and perform its
obligations under the terms of this Agreement and the Warrants.
3.3 CAPITALIZATION. As of March 7, 1997, the Company was authorized to
issue 100,000,000 shares of Common Stock, of which 23,241,164 shares are
issued and outstanding. As of March 7, 1997, the Company had granted
warrants to purchase 5,751,000 shares of Common Stock. Furthermore, as of
March 7, 1997, the Company had options to purchase 1,456,000 shares of Common
Stock outstanding pursuant to the 1995 Stock Option Plan and options to
purchase 1,179,000 shares of Common Stock had been granted pursuant to the
1996 Stock Plan subject to shareholder approval of the 1996 Stock Plan.
-3-
<PAGE>
3.4 AUTHORIZATION. All corporate action on the part of the Company,
its officers, directors and shareholders necessary for the authorization,
execution, delivery and performance by the Company of this Agreement, the
authorization, sale, issuance and delivery of the Securities, the
authorization, sale, issuance and delivery of the Conversion Stock, and the
performance of the Company's obligations hereunder has been taken and the
sale, issuance and delivery of the Securities and the Conversion Stock and
the execution, delivery and performance of this Agreement will not violate
the Company's articles, bylaws or any of its material agreements. This
Agreement and the Warrants, when executed and delivered by the Company, shall
constitute valid and binding obligations of the Company enforceable in
accordance with their terms, subject to laws of general application relating
to bankruptcy, insolvency and the relief of debtors (other than usury laws)
and rules of law governing specific performance, injunctive relief or other
equitable remedies. The Securities (including the Conversion Stock), when
issued in compliance with the provisions of this Agreement, will be validly
issued, fully paid and nonassessable, and will be free of any consensual
liens or encumbrances created by the Company; provided, however, that the
Securities may be subject to restrictions on transfer under state and/or
federal securities laws as well as laws of other jurisdictions such as Canada
as set forth herein or as otherwise required at the time a transfer is
proposed.
3.5 SUBSIDIARIES. Except for Sanctuary Woods Multimedia, Inc., a
Nevada corporation, and Magic Quest, Inc., a California corporation, both of
which are wholly-owned subsidiaries of the Company, which are duly
incorporated and validly existing corporations and are in good standing in
the state of California, the Company has no subsidiaries or affiliated
companies. The Company is not a participant in any joint venture,
partnership or similar arrangement.
3.6 RISK DISCLOSURES. The Company has provided or made available to
each Purchaser a copy of or access to copies of the Company's 1995 Annual
Report on Form 10-K/A-3 and Quarterly Report on Form 10-Q for the period
ended December 31, 1996 (the "Public Disclosure Documents") and such were
accurate and complete as of the date of filing. There has been no material
change in the Company's financial condition since those documents were filed,
except as disclosed to the Purchasers in writing. In addition, each
Purchaser has been provided with a Prospectus dated as of March 14, 1997 in
connection with the Company's Rights Offering and a Prospectus/Proxy
Statement dated March 14, 1997 in connection with the Company's Extraordinary
General Meeting of Shareholders to consider, among other things, the
Company's domestication into the State of Delaware (collectively, the
"Prospectuses"), which is incorporated herein by reference and made a part
hereof as if fully set forth herein. The disclosures set forth in this
Agreement and in the documents and information delivered to the Purchasers
represent the Company's reasonable best effort, under the circumstances of a
financially distressed company, to disclose, fairly and adequately, its
business condition and prospects. Each Purchaser had a reasonable
opportunity to ask questions of and receive answers from the officers or
directors of the Company concerning the terms and conditions of the offering
of the Securities including the business and business prospects of the
Company, and to obtain additional information, to the extent possessed or
obtainable without unreasonable effort or expense, necessary to verify the
accuracy of the information provided to the Purchasers. The information and
documents delivered to each Purchaser described above contain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933,
as amended (the "Securities Act") and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). These forward-looking
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<PAGE>
statements involve risks and uncertainties which include, without limitation,
certain risks related to continued competitive pressures in the marketplace,
inventory levels in the retail channel, the introduction of competitive
products and downward pricing pressures, intellectual property rights and
litigation, as well as the Company's continuing lack of capital resources.
In particular, and without limiting the generality of the foregoing, all
financial projections of the Company's future prospects and financial results
provided by the Company are qualified in their entirety by the risk factors
set forth in the Prospectuses. The Company will not update such financial
projections, and has informed the Purchasers that such projections may not be
met.
3.7 BROKERS OR FINDERS. Except as set forth herein, the Company has
not incurred, directly or indirectly, any liability for brokerage or finders'
fees, agent's commission or other similar charges in connection with this
Agreement or any of the transactions contemplated hereby.
3.8 TAX MATTERS. The Company has filed all necessary federal and state
property, income and franchise tax returns and has paid all taxes shown as
due thereon or otherwise owed by it to any taxing authority except those
contested in good faith and for which appropriate amounts have been reserved
in accordance with generally accepted accounting principles.
3.9 LITIGATION, ETC. There are no actions, suits, proceedings or
investigations pending against the Company, any of its subsidiaries or its
properties (or any written threats thereof), or, to the Company's knowledge,
against any of the Company's or its subsidiaries' employees, before any court
or governmental agency (nor has the Company received any written notice or
written threat thereof), the outcome of which, if determined adversely to the
Company individually or in the aggregate would have a material adverse effect
upon the Company's financial condition, except as disclosed in the Public
Disclosure Documents.
3.10 GOVERNMENTAL CONSENT, ETC. No consent, approval or authorization
of or designation, declaration or filing with any governmental authority on
the part of the Company is required in connection with the valid execution
and delivery of this Agreement or the offer, sale or issuance of the
Securities or Conversion stock, or the consummation of any other transaction
contemplated hereby, except (a) the filing of the Certificate of
Incorporation with the State of Delaware if the Company's Domestication into
Delaware is approved by the Company's shareholders or the approval of the
terms of the Series A Preferred Stock by the British Columbia Securities
Commission if the Domestication is not approved by the Company's
shareholders, and (b) qualification (or taking such action as may be
necessary to secure an exemption from qualification, if available) of the
offer and sale of the Securities and Conversion stock under applicable
federal and state securities laws, which filings and qualifications, if
required, will be accomplished in a timely manner.
3.11 PATENTS, TRADEMARKS AND TRADE SECRETS. The Company owns or has a
valid right to use the patents, patent rights, licenses, trade secrets,
trademarks, trademark rights, trade names or trade name rights, copyrights,
inventions and intellectual property rights being used to conduct its
business as now operated and as now proposed to be operated; and to the
Company's knowledge the conduct of its business as now operated and as now
proposed to be operated does not and will not
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<PAGE>
conflict with valid patents, patent rights, licenses, trade secrets,
trademarks, trademark rights, trade names or trade name rights, copyrights,
inventions and intellectual property rights of others.
3.12 PERMITS. The Company has all franchises, permits, licenses, and
any similar authority necessary for the conduct of its business as now being
conducted by it, the lack of which would materially and adversely affect the
business, properties, prospects, or financial condition of the Company and
its subsidiaries considered as one enterprise. The Company is not in default
in any material respect under any of such franchises, permits, licenses, or
other similar authority except for such defaults which would not have a
material adverse effect on the business of the Company and its Subsidiaries
considered as one enterprise.
SECTION 4
REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
The Purchasers hereby severally represent and warrant to the Company
with respect to the purchase of the Securities (including the Conversion
Stock) as follows:
4.1 INVESTMENT REPRESENTATIONS AND COVENANTS OF THE PURCHASERS.
(a) This Agreement is made by the Company with each Purchaser in
reliance upon such Purchaser's representations and covenants made in this
Section 4, which by its execution of this Agreement the Purchaser hereby
confirms.
(b) Each Purchaser understands that the Securities (and the
Conversion Stock) have not been registered under the Securities Act of 1933,
as amended (the "Securities Act") or any state securities qualification
requirements and are being offered and sold pursuant to an exemption from
registration or qualification contained in the Securities Act based in part
upon the representations of such Purchaser contained herein.
(c) Each Purchaser knows of no public solicitation or
advertisement of an offer in connection with the proposed issuance and sale
of the Securities.
(d) Each Purchaser is acquiring the Securities to be issued and
sold hereunder (and the Conversion Stock) for its own account for investment
and not as a nominee and not with a view to the distribution thereof. Each
Purchaser understands that it must bear the economic risk of this investment
indefinitely unless the Securities or such Conversion Stock are registered
pursuant to the Securities Act, or an exemption from such registration is
available, and that the Company has no present intention of registering the
Securities or such Conversion Stock. Each Purchaser further understands that
there is no assurance that any exemption from the Securities Act will be
available or, if available, that such exemption will allow such Purchaser to
dispose of or otherwise transfer any or all of the Securities or such
Conversion Stock under the circumstances, in the amounts or at the times
Purchaser might propose.
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<PAGE>
(e) By reason of its business or financial experience, or that of
its professional advisor, each Purchaser has the capacity to protect its own
interests in connection with the purchase of the Securities hereunder and has
the ability to bear the economic risk (including the risk of total loss) of
its investment.
(f) Each Purchaser further covenants that it will not make any
sale, transfer or other disposition of the Securities or such Conversion
Stock in violation of the Securities Act, the Exchange Act, or the rules and
regulations of the Commission promulgated thereunder.
(g) Each Purchaser acknowledges that the Securities (including the
Conversion Stock) must be held indefinitely unless subsequently registered
under the Securities Act or an exemption from such registration is available.
It is aware of the provisions of Rule 144 promulgated under the Securities
Act which permit limited resale of securities purchased in a private
placement subject to the satisfaction of certain conditions, including, among
other things, the existence of a public market for the securities, the
availability of certain current public information about the Company, the
resale occurring not less than two years (or "one year" following the
effective date of certain amendments by the Securities and Exchange
Commission to Rule 144) after a party has purchased and paid for the security
to be sold, the sale being through a "broker's transaction" or in
transactions directly with a "market maker" (as provided by Rule 144(f)) and
the number of securities being sold during any three-month period not
exceeding specified limitations. It is further aware that Rule 144(k)
permits persons who have not been affiliates (as defined in Rule 144(a)) of
the Company for at least three months and who have beneficially owned their
securities for at least three years (or "two years" following the effective
date of certain amendments by the Securities and Exchange Commission to Rule
144) after full payment for such securities to sell such securities without
regard to the current public information, manner of sale and volume
limitations described above.
(h) Each Purchaser acknowledges that in the event all of the
requirements of Rule 144 are not met, registration under the Securities Act
or an exemption from registration will be required for any disposition of the
Securities and the Conversion Stock. Each Purchaser understands that
although Rule 144 is not exclusive, the Commission has expressed its opinion
that persons proposing to sell restricted securities received in a private
offering other than in a registered offering or pursuant to Rule 144 will
have a substantial burden of proof in establishing that an exemption from
registration is available for such offers or sales and that such persons and
the brokers who participate in the transactions do so at their own risk.
(i) Each Purchaser covenants that, in the absence of an effective
registration statement covering the Securities and the Conversion Stock, it
will sell, transfer, or otherwise dispose of the Securities and any
Conversion Stock only in a manner consistent with its representations and
covenants set forth in this Section 4.
(j) The residence of each Purchaser (or, in the case of a
partnership or corporation, such entity's principal place of business as
office) is correctly set forth on EXHIBIT A.
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<PAGE>
(k) Each Purchaser acknowledges that it has received or has had
access to the Public Disclosure Documents as filed with the Securities and
Exchange Commission and the Prospectuses. Each Purchaser acknowledges that
the disclosures set forth herein and therein represent the Company's
reasonable best efforts, under the circumstances of a financially-distressed
corporation, to disclose, fairly and adequately, its business condition and
prospects. Each Purchaser has had a reasonable opportunity to ask questions
of and receive answers from the officers or directors of the Company
concerning the terms and conditions of the offering of the Securities
including the business and business prospects of the Company, and to obtain
additional information necessary to verify the accuracy of the information
provided to Purchasers.
(l) Each Purchaser is an "Accredited Investor" as such term is
defined in Rule 501(a) promulgated by the Securities and Exchange Commission
pursuant to the Securities Act.
4.2 LEGENDS. Each Purchaser understands and acknowledges that the
Securities and the Conversion Stock thereof will be imprinted with certain
legends, including but not limited to, the following:
(a) THIS SECURITY AND THE SECURITIES INTO WHICH IT IS CONVERTIBLE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY
NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED
UNLESS AND UNTIL REGISTERED UNDER THE ACT OR IN AN OPINION OF COUNSEL,
IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE COMPANY, AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE ACT IS AVAILABLE
FOR SUCH OFFER, SALE, OR TRANSFER, PLEDGE OR HYPOTHECATION.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A HOLD
PERIOD EXPIRING AT MIDNIGHT ON APRIL 17, 1998 AND MAY NOT BE TRADED IN
BRITISH COLUMBIA, CANADA UNTIL THE EXPIRY OF THE HOLD PERIOD EXCEPT AS
PERMITTED BY THE BRITISH COLUMBIA SECURITIES ACT AND REGULATIONS MADE
UNDER SUCH ACT.
(b) Any legend required by applicable state law.
4.3 AUTHORIZATION. Each Purchaser has the full power and authority to
execute, deliver and perform this Agreement. This Agreement when executed
and delivered by each Purchaser will constitute valid and legally binding
obligations of such Purchaser, enforceable in accordance with their terms,
subject to laws of general application relating to bankruptcy, insolvency,
and the relief of debtors and other laws of general application affecting
enforcement of creditors' rights generally, rules
-8-
<PAGE>
of law governing specific performance, injunctive relief and other equitable
remedies, and limitations of public policy.
4.4 ADVISORS. Each Purchaser is not relying on any statements or
representations of the Company or any of its agents with respect to the
financial, tax or other legal consequences of this investment and the
transactions contemplated by the Agreement except to the extent contained in
the representations made by the Company in Section 3 of this Agreement.
SECTION 5
CONDITIONS TO CLOSING OF THE PURCHASERS
Each Purchaser's obligation to purchase the Securities at the Closing,
except as specifically indicated below, is subject to the fulfillment or
waiver on or prior to the Closing Date of the following conditions:
5.1 REPRESENTATIONS AND WARRANTIES CORRECT. The representations and
warranties made by the Company in Section 3 hereof shall be true and correct
in all material respects on the Closing Date with the same force and effect
as if they had been made on and as of said date.
5.2 INVESTMENT. Pequot Partners Fund, L.P. and Pequot International
Fund, Inc., together, shall hereinafter be referred to as "Pequot." Pequot
shall have subscribed to exercise Rights granted in the Rights Offering and,
in connection with such exercise, to purchase at least 8,333,334 shares of
Common Stock for an aggregate amount of US$1,000,000 or more.
5.3 THIRD PARTY CONSENTS. All necessary third party consents on the
part of the Company, if any, shall have been obtained.
5.4 COMPLIANCE WITH FEDERAL SECURITIES LAWS. There is an exemption to
the registration requirement of the Securities Act of 1933, as amended (the
"Securities Act").
5.5 BLUE SKY. The Company shall have obtained all necessary Blue Sky
law permits and qualifications, or secured an exemption therefrom, required
by any state in which the exchange of securities shall occur.
SECTION 6
CONDITIONS TO CLOSING OF COMPANY
The Company's obligation to sell and issue the Securities at each
Closing is subject to the fulfillment of the following conditions:
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<PAGE>
6.1 INVESTMENT. For the purposes of this Section 6.1, Pequot shall be
considered one Purchaser. Pequot shall have subscribed to exercise Rights
granted in the Rights Offering, and, in connection with such offering, shall
have agreed to purchase at least 8,333,334 shares of Common Stock for an
aggregate amount of US$1,000,000 or more.
6.2 COMPLIANCE WITH FEDERAL SECURITIES LAWS. There is an exemption to
the registration requirement of the Securities Act.
6.3 BLUE SKY. The Company shall have obtained all necessary Blue Sky
law permits and qualifications, or secured an exemption therefrom, required
by any state in which the exchange of securities shall occur.
6.4 CERTIFICATE OF INCORPORATION. The Certificate of Incorporation
shall have been filed with the Secretary of State of Delaware, or, if the
Domestication is not approved, approval for the issuance of the issuance of
the Series A Preferred Stock shall have been received from the British
Columbia Securities Commission.
SECTION 7
MISCELLANEOUS
7.1 GOVERNING LAW. This Agreement shall be governed in all respects by
the internal substantive laws of the State of California.
7.2 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the
provisions hereof shall inure to the benefit of, and be binding upon, the
successors and assigns of the parties hereto, provided, however, that the
rights of the Purchasers to purchase the Securities shall not be assignable
without the prior written consent of the Company.
7.3 ENTIRE AGREEMENT; AMENDMENT. This Agreement and the exhibits
hereto constitute the full and entire understanding and agreement between the
parties with regard to the subjects hereof and thereof. Neither this
Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the party against
whom enforcement of any such amendment, waiver, discharge or termination is
sought.
7.4 NOTICES, ETC. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by registered or
certified mail, postage prepaid, or otherwise delivered by hand or by
messenger, addressed (a) if to a Purchaser, at such Purchaser's address set
forth on EXHIBIT A, or at such other address as such Purchaser shall have
furnished to the Company, or (b) if to the Company, as follows:
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<PAGE>
Sanctuary Woods Multimedia Corporation
1825 Grant Street
San Mateo, California 94402
Attn: President
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Attn: Judith M. O'Brien
7.5 DELAYS OR OMISSIONS. No delay or omission to exercise any right,
power or remedy accruing to the Purchasers upon any breach or default of the
Company under this Agreement shall impair any such right, power or remedy of
the Purchasers nor shall it be construed to be a waiver of any such breach or
default, or an acquiescence therein, or of or in any similar breach or
default thereafter occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default theretofore or
thereafter occurring. Any waiver, permit, consent or approval of any kind or
character by any Purchaser of any provisions or conditions of this Agreement,
must be in writing and shall be effective only to the extent specifically set
forth in such writing. All remedies, either under this Agreement, or by law
or otherwise afforded to the Purchasers, shall be cumulative and not
alternative.
7.6 EXPENSES. The Company and the Purchasers shall each bear their own
expenses and legal fees incurred on their behalf with respect to this
Agreement and the transactions contemplated hereby.
7.7 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original and all of which shall
constitute one instrument.
7.8 SEVERABILITY. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision; provided that no such severability shall be effective
if it materially changes the economic benefit of this Agreement to any party.
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<PAGE>
7.9 CALIFORNIA CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES
WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE
COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF
SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION
THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS AN EXEMPTION FROM
SUCH QUALIFICATION IS AVAILABLE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT
ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, OR SUCH
EXEMPTION BEING AVAILABLE.
[Intentionally Blank]
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<PAGE>
IN WITNESS WHEREOF, the undersigned parties have hereunto set their
hands as of the date first set forth above.
"COMPANY" "PURCHASER"
SANCTUARY WOODS
MULTIMEDIA CORPORATION ---------------------------------
a British Columbia, (Print or Type Name of Purchaser)
Canada corporation
- --------------------------------- ---------------------------------
Charlotte Walker, President and (Signature)
Chief Executive Officer
---------------------------------
(Print or Type Name and Title, if
different from Purchaser)
(SIGNATURE PAGE FOR PURCHASE AGREEMENT)
<PAGE>
EXHIBIT A
SCHEDULE OF PURCHASERS
<TABLE>
<CAPTION>
Shares of
Principal Series A
Amount of Preferred Number of Shares Number of Shares
Name and Address Debenture Stock Subject to Warrant Pre-Split Subject to Warrant Post-Split
- ------------------------------- ------------ -------- -------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
27.5% 55% 27.5% 55%
Travelers Indemnity Company $ 550,000 10,373 1,260,362 2,520,725 63,018 126,036
388 Greenwich Street
New York, NY 10013
Pequot Partners Fund, L.P. $2,000,000 37,721 4,583,258 9,166,516 229,163 458,326
354 Pequot Avenue
Southport, CT 06490
Pequot International Fund, Inc. $2,000,000 37,721 4,583,258 9,166,516 229,163 458,326
Hemisphere House
9 Church Street
Hamilton, HMOX Bermuda
David Clayton $ 110,000 2,074 251,999 503,999 12,600 25,200
35 Stonecourt Drive
Dallas, TX 75225
Anthony Low-Beer $ 110,000 2,074 251,999 503,999 12,600 25,200
c/o Mitchell Securities
100 Park Avenue
New York, NY 10017
Edward Nersessian $ 110,000 2,074 251,999 503,999 12,600 25,200
c/o Mitchell Securities
100 Park Avenue
New York, NY 10017
Garret and Carol Thunen $ 110,000 2,074 251,999 503,999 12,600 25,200
c/o Mitchell Securities
100 Park Avenue
New York, NY 10017
Ebbets Field Investment Co. $ 72,000 1,357 164,881 329,762 8,244 16,488
87 Veranda Lane
Pointe Vedra, FL 32082
Willow Creek Capital Partners, LP $ 72,000 1,357 164,881 329,762 8,244 16,488
60 East Sir Francis Drake Blvd.,
Suite 200
Larkspur, CA 94939
D. C. Degan $ 42,000 792 96,231 192,462 4,812 9,623
1955 South Valley Parkway
Lewisville, TX 75067-5401
Richard Dwelle $ 42,000 792 96,231 192,462 4,812 9,623
201 South Prairieville Street
Athens, TX 75751
Michael Griesser $ 42,000 792 96,231 192,462 4,812 9,623
12700 Park Central, Suite 455
Dallas, TX 75251-1511
Randall Boyd $ 42,000 792 96,250 192,462 4,812 9,623
123 North Elm Street
Denton, TX 76201
</TABLE>
<PAGE>
EXHIBIT B
RIGHTS AND PRIVILEGES OF THE SERIES A PREFERRED STOCK<PAGE>
<PAGE>
EXHIBIT C
FORM OF WARRANT FOR 27.5% COVERAGE
<PAGE>
EXHIBIT D
FORM OF WARRANT FOR 55% COVERAGE
<PAGE>
EXHIBIT E
DISCLOSURE SCHEDULE
<PAGE>
Exhibit 10.32
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as of
this 15th day of September, 1997 by and between MICHELLE KRAUS, an
individual, ("EXECUTIVE") and SANCTUARY WOODS MULTIMEDIA CORPORATION, a
Delaware corporation ("COMPANY"), with reference to the following:
A. Executive desires to be employed by Company as its President and its Chief
Executive Officer.
B. Executive desires to be a member of the Board of Directors of Company.
C. Company desired Executive to hold those positions.
D. Executive is willing to accept such employment according to the terms
described below.
NOW, THEREFORE, in consideration of the mutual promises, benefits and covenants
herein contained, Company and Executive hereby agree as follows:
1. EMPLOYMENT; TERM OF EMPLOYMENT
Executive has agreed to be employed by Company, and Company has agreed to employ
Executive for a term commencing as of September, 1997 (the "COMMENCEMENT DATE"),
and continuing for a period of one (1) year thereafter, unless sooner terminated
pursuant to Section 5 hereof (the "EMPLOYMENT TERM"). If Executive continues as
an Executive after the Employment Term, such employment shall be deemed an
employment at will unless Company and Executive enter into a written extension
of this Agreement or a new written employment agreement.
2. TITLE AND DUTIES
(a) TITLE. Executive shall have the title and serve in the capacity
of Chief Executive Officer of Company and, in such capacity, shall be subject to
the control and direction of the Board of Directors of Company (the "BOARD OF
DIRECTORS").
(b) DUTIES. Executive's primary duties and responsibilities
hereunder shall be to perform all reasonable duties that are customary for her
position within the multimedia and online/Internet industry and as may be
prescribed by the Board of Directors. Executive shall also render such other
services as Company may from time to time reasonably request which are
consistent with the duties Executive is to perform and Executive's stature and
experience. Executive hereby agrees to perform such duties and satisfy such
responsibilities throughout the Employment Term and thereafter so long as
employed by Company. Executive shall devote her full time and efforts to the
performance of her duties hereunder and shall comply with all of the reasonable
and
<PAGE>
customary employment policies of Company. Executive agrees to perform such
services in a competent and professional manner, consistent with the skills
of a senior executive officer in Company's business.
(c) REPORTING REQUIREMENTS AND AUTHORITY. Executive shall report to
the Board of Directors of Company. Except for those officers and executives
subject to election by the Board of Directors of Company, Executive shall have
the authority to select and employ all personnel necessary to conduct the
business of Company and each of its subsidiaries; provided, however, that the
Board of Directors must approve the appointment or dismissal of (i) any officers
of the Company, and (ii) any employees of the Company receiving annual
compensation in excess of $75,000. All such personnel shall ultimately report
to, and be subject to the control and direction of, Executive.
3. COMPENSATION
(a) BASE SALARY AND BONUS. During the term of this Agreement, Company
agrees to pay Executive an annualized base salary of One Hundred Fifty Thousand
Dollars ($150,000) (the "BASE SALARY"). In addition to the Base Salary,
Executive may be entitled to a potential bonus (the "BONUS"), the exact amount
of which, if any, shall be determined by the Board of Directors in its sole and
absolute discretion but which shall be based upon the success or failure of
Company in reaching its financial goals. The payment of the Base Salary and
Bonus (if any) shall be according to Company's standard policies and procedures.
(b) STOCK OPTION. In addition to the Base Salary and Bonus,
Company will grant to Executive an option to purchase seventy-five thousand
(75,000) shares of the common stock of Company (the "OPTION"). The Option
will be granted sixty days after the later of (i) the Commencement Date, or
(ii) the date this Agreement is executed, pursuant to the Company's Stock
Option Plan. Unless otherwise provided in the Company's Stock Option Plan,
the exercise price of the Option shall be the average of the closing bid and
ask price of the Company's common stock on the trading day immediately prior
to the day of grant. The Option may be exercised by Executive in whole or in
part at any time for a period of ten (10) years after the date of grant.
However, in the event that Executive is terminated for Cause hereunder,
Executive's right to exercise the Option shall expire twelve (12) months
following the date of such termination. The number of shares subject to the
Option and the exercise price for such shares shall be appropriately adjusted
to reflect any stock split, stock dividends, recapitalization or other
modifications of the equity securities of the Company.
(c) SALES BONUS. In addition to the compensation set forth in
Sections 3(a) and 3(b), Company agrees to pay to Executive a one-time, lump sum
bonus (the "SALES BONUS") upon the occurrence of a Sales Event (as defined
below). Executive shall be entitled to receive the Sales
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<PAGE>
Bonus if the Company enters into a definitive agreement covering the
applicable Sales Event (i) during the Employment Term, or (ii) within ninety
(90) days following the termination or expiration of the Employment Term.
The amount of the Sales Bonus shall be as follows.
(i) If the total Sales Proceeds (as defined below) are
less than or equal to $2,000,000, the Sales Bonus shall be $150,000.
(ii) If the total Sales Proceeds exceed $2,000,000 but are
less than or equal to $4,000,000, the Sales Bonus shall equal $150,000 plus two
and one-half percent (2 1/2%) of the amount by which the Sales Proceeds exceed
$2,000,000.
(iii) If the total Sales Proceeds exceed $4,000,000 but are
less than or equal to $6,000,000, the Sales Bonus shall equal $200,000 plus
five percent (5%) of the amount by which the Sales Proceeds exceed $4,000,000.
(iv) If the total Sales Proceeds exceed $6,000,000, the
Sales Bonus shall equal $300,000 plus ten percent (10%) of the amount by
which the Sales Proceeds exceed $6,000,000.
Notwithstanding the foregoing, if Company is adjudicated bankrupt or
insolvent, consents to the institution of bankruptcy or insolvency
proceedings against it, files a petition, answer or consent seeking
reorganization or relief under any applicable bankruptcy laws, or consents to
the appointment of a receiver for Company's assets or an assignment for the
benefit of Company's creditors, then the amount of the Sales Bonus shall in
no event exceed the amount of funds remaining in Company after full payment
of all debts owed by Company to its secured and unsecured creditors.
For purposes of this Section 3(c), a "SALES EVENT" shall mean (i) the
disposition by Company of all or substantially all its assets; (ii) the
acquisition by a third party of beneficial ownership of voting securities of
Company constituting more than fifty percent (50%) of the combined voting
power of Company's then outstanding voting securities; (iii) a merger,
consolidation or similar reorganization involving Company, in which the
shareholders of Company immediately before such merger, consolidation or
reorganization, retain less than fifty percent (50%) of the combined voting
power of the outstanding voting securities of the corporation following such
merger, consolidation or reorganization; or (iv) a complete liquidation or
dissolution of Company.
For purposes of this Section 3(c), "SALES PROCEEDS" shall mean the aggregate
amount of cash and "other liquid assets" actually received by Company or any
shareholder(s) of Company pursuant to a Sales Event. For purposes of the
foregoing, "other liquid assets" shall mean any assets, securities, property
or other consideration received by Company or any shareholder(s) of Company,
which (i) can be freely traded on an open, active public market, (ii) is not
subject to any restrictions on transfer
-3-
<PAGE>
in the hands of Company or the shareholder(s), as the case may be, and (iii)
by virtue of clause (i) and (ii), can be readily converted into cash without
material discount, within no more than thirty (30) days following the receipt
thereof. For purposes of clarification, "Sales Proceeds" shall not include
any cancellation, assumption or forgiveness of indebtedness that may occur in
conjunction with a Sales Event.
(d) FRINGE BENEFITS AND VACATION. Executive shall be entitled to
(i) medical, life and disability insurance at levels equal to that provided
by Company to its executive employees, if any, and (ii) other fringe benefits
generally provided by Company to its executive employees in accordance with
Company's policies as they may exist from time to time. During the
Employment Term, Executive shall be entitled to two (2) weeks paid vacation
per year. Executive shall not be entitled to schedule or take vacation time
without the prior written consent of Company, which consent shall not be
unreasonably withheld.
(e) EXPENSES. In addition to all other compensation provided
hereunder, Executive shall be entitled to reimbursement for all travel and other
expenses necessary for the performance of her duties hereunder, all in
accordance with Company's standard policies and procedures as they may exist
from time to time. All claims for expenses shall be reasonable and documented
in accordance with Company's standard policies and procedures with respect
thereto. All expense reimbursements to which Executive is entitled hereunder
shall be paid within twenty-one (21) days of submission by Executive of the
appropriate documentation therefor.
(f) TAX WITHHOLDING. Company shall deduct and withhold from all
compensation payable to Executive hereunder any and all applicable Federal,
state and local income and employment withholding taxes and any other amounts
required to be deducted or withheld by Company under applicable statutes,
regulations, ordinances or orders governing or requiring the withholding or
deduction of amounts otherwise payable as compensation or wages to Executives.
4. LIMITATIONS
(a) NO COMPETITIVE ACTIVITIES. During the Employment Term, Executive
shall not directly or indirectly (whether for compensation or otherwise) own,
manage, operate, join, control or participate in the ownership, management,
operation or control of, or furnish any capital to or be connected in any manner
(whether alone or as a partner, officer, director, employee, agent or
shareholder) with, or provide any advice or services as a consultant for, any
business which competes with Company's business as such businesses may be
conducted from time to time; provided, however, that nothing contained in this
Agreement shall be deemed to preclude Executive from purchasing or owning,
directly or beneficially, as a passive investment, less than two percent (2%) of
any class of the publicly traded securities of any corporation. For purposes of
the foregoing, the "Company's business" shall be the development of educational
software designed for children.
-4-
<PAGE>
Further, for a period of one (1) year following the termination or expiration
of the Employment Term, Executive shall not, directly or indirectly, solicit
or assist others in soliciting, any person or entity that is a customer of
Company as of the date of such termination or expiration; provided, however,
that the foregoing clause shall not apply to any persons or entities with
whom Executive had a material preexisting relationship prior to the time she
became employed with Company.
(b) NO SOLICITATION. For a period of one (1) year following the
termination or expiration of the Employment Term, Executive shall not, directly
or indirectly, recruit, solicit, or assist others in recruiting or soliciting,
any person who is an employee of Company or any of its subsidiaries.
(c) PROPRIETARY INFORMATION AND CONFIDENTIALITY. Executive shall
execute and comply with Company's standard confidentiality, non-disclosure and
inventions agreement which is attached hereto as EXHIBIT A.
-5-
<PAGE>
5. TERMINATION
(a) TERMINATION FOR CAUSE.
(i) RIGHT TO TERMINATE. Company shall have the right, at its
election, to terminate this Agreement for Cause. "CAUSE" with respect to
Executive shall mean (i) conviction of Executive of any felony involving
moral turpitude or otherwise affecting or relating to the business of Company
(including, without limitation, her entering of any plea of nolo contendere
in connection with any such felony proceeding); (ii) Executive's grossly
negligent, willful or intentional conduct resulting in material damage to
Company or Company's business reputation or image; (iii) Executive's material
breach of any provision of this Agreement or of her employment with Company
(including, without limitation, her breach of any of the provisions of
Section 4); (iv) Executive's willful failure or gross neglect to obey the
good faith directions of the Board of Directors; or (v) the good faith
determination of the Board of Directors that Executive is performing her
duties in a manner which is not commensurate with reasonable standards for
Executives in similar circumstances and with similar duties to those of
Executive hereunder ("SUBSTANDARD PERFORMANCE"); provided that Executive may
not be terminated for Substandard Performance unless and until (A) the Board
of Directors has provided Executive with notice of Substandard Performance,
which notice specifies with particularity the areas of such Substandard
Performance, (B) Executive is given at least thirty (30) days (the "CURE
PERIOD") to improve her performance in the specified areas, and (C) the Board
of Directors determines in good faith after the Cure Period that Executive is
still providing Substandard Performance in the specified areas.
(ii) EFFECT OF TERMINATION FOR CAUSE. Should this Agreement
be terminated by Company for Cause, Executive shall have no right to receive
any further Base Salary or Bonus, or to receive any of the benefits described
in Section 3(c) accruing from and after the date of termination. Further, as
provided in Section 3(c), Executive shall be entitled to receive a Sales
Bonus only if Company enters into a definitive agreement covering the
applicable Sales Event within sixty (60) days following the date of
termination.
(b) TERMINATION WITHOUT CAUSE.
(i) RIGHT TO TERMINATE. Company shall have the right, at
its election, to terminate this Agreement at any time without Cause; provided
that Company has provided Executive with at least thirty (30) days written
notice of such termination.
(ii) EFFECT OF TERMINATION WITHOUT CAUSE. Should this
Agreement be terminated by Company without Cause, Executive shall be entitled
to receive her Base Salary, Bonus and Sales Bonus (if applicable) for a
period of two (2) months following the effective date of such termination,
but Executive shall not be entitled to receive any of the benefits described
in Section
-6-
<PAGE>
3(c) after the date of termination. Further, as provided in Section 3(c),
Executive shall be entitled to receive a Sales Bonus only if Company enters
into a definitive agreement covering the applicable Sales Event within sixty
(60) days following the date of termination.
(c) DEATH OR DISABILITY. This Agreement shall automatically
terminate, without notice, upon the death or permanent disability of
Executive. For purposes of this Section 5(c), Executive shall be deemed to be
permanently disabled if she shall be unable, due to illness or injury, to
perform her duties hereunder for eighty percent (80%) or more of the full
regular business days during any two (2) consecutive month period. Executive
shall be deemed to be permanently disabled on the last day of such two (2)
month period. Executive shall not be entitled to Base Salary, Bonus or Sales
Bonus during any period of disability unless otherwise provided by Company's
standard practices.
(d) MITIGATION. Executive agrees to attempt to mitigate the
damages she may incur in the event of any termination hereunder to the full
extent required by law. Without limiting the foregoing, Company will have
the right to offset any amounts paid, or which might have been paid, to
Executive from any other employment during the remainder of the Employment
Term, including any benefits to which Executive is, or might have been,
entitled under another company's benefit plans and programs. Executive
agrees that she shall give written notice to Company (promptly after
accepting employment or furnishing her services after termination of her
employment with Company) of any amount earned (or to be earned) by Executive
and any benefits provided (or to be provided) to Executive pursuant to her
new employment arrangement.
6. GENERAL
(a) APPLICABLE LAW. This Agreement and the rights and obligations
of the parties hereunder shall be governed by and construed in accordance
with the internal laws of the State of California applicable to the
construction and enforcement of contracts wholly executed in California by
residents of California and wholly performed in California.
(b) CAPTIONS. The section headings and captions contained herein
are for reference purposes only and shall not in any way affect the meaning
or interpretation of this Agreement.
(c) SEVERABILITY. If any provision of this Agreement shall be
unlawful, void, or for any reason, unenforceable, it shall be deemed stricken
from, and shall in no way affect the validity or enforceability of, the
remaining provisions of this Agreement. If any provision of this Agreement
shall be determined, under applicable law, to be overly broad in duration,
geographical coverage or substantive scope, such provision shall be deemed
narrowed to the broadest term permitted by applicable law.
-7-
<PAGE>
(d) WAIVER. The waiver by either party hereto of a breach of any
provision of this Agreement by the other shall not operate or be construed as
a waiver of any subsequent breach of the same provision or any other
provision of this Agreement.
(e) "KEY MAN" INSURANCE. To the extent that Company desires to
obtain insurance on Executive's life and/or health, Executive shall cooperate
and do all acts necessary (including submitting to medical examinations) to
enable Company to obtain said insurance.
(f) REPRESENTATION REGARDING PRIOR CONTRACTS. Executive represents
and warrants that no prior contract or agreement of any kind entered into by
Executive or any prior or other performance by Executive will interfere in
any manner with Executive's complete performance of Executive's duties
hereunder or with Executive's compliance with the other terms and conditions
hereof.
(g) ENTIRE AGREEMENT; AMENDMENTS. This Agreement represents the
entire agreement and understanding between the parties hereto regarding
Executive's employment with Company, and supersedes any and all previous written
or oral agreements or discussions between the parties and any other person or
legal entity concerning said employment. This Agreement shall not be modified,
amended, or in any way altered except by an instrument in writing and signed by
both of the parties hereto.
(h) BINDING AGREEMENT; ASSIGNMENT. The rights and obligations of
the parties under this Agreement shall inure to the benefit of and shall be
binding upon the successors and assigns of such parties. Subject to
Executive's reasonable consent, Company may assign all or part of its rights
hereunder to any subsidiary or parent company of Company, in which case
services of Executive hereunder shall be rendered to such assignee.
Notwithstanding the foregoing, Company may assign its rights hereunder to a
wholly owned subsidiary without Executive's consent. Executive may not
assign her rights or obligations under this Agreement.
(i) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(j) NOTICES. Any notice which Company is required or may desire
to give to Executive hereunder shall be in writing and may be served by
delivering it to Executive, or by sending it to Executive by mail (effective
three (3) days after mailing) or overnight delivery of the same (effective
the next business day), at the address set forth on the last page hereof, or
by telecopy (effective twelve (12) hours after confirmation), or such
substitute address as Executive may from
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<PAGE>
time to time designate by notice to Company. Any notice which Executive is
required or may desire to serve upon Company hereunder shall be served in
writing and may be served by delivering it personally or by sending it by
mail or telecopy to the address set forth on the last page hereof, attention
Mr. Eric Jansen, or such other substitute address as Company may from time to
time designate by notice to Executive.
IN WITNESS WHEREOF, the undersigned have executed the Agreement as of the date
first written above.
SANCTUARY WOODS MULTIMEDIA CORPORATION
By: __________________________________
Lawrence D. Lenihan, Jr., Director
Mailing Address:
Two Stamford Landing
Stamford, Connecticut,06902
Telephone: _________________
Facsimile: _________________
___________________________________
MICHELLE KRAUS
Mailing Address:
1250 45th Street, Suite 350
Emeryville, California 94608-2924
Telephone: (510) 594-3212
Facsimile: (510) 658-1133
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<PAGE>
EXHIBIT A
PROPRIETARY RIGHTS AND CONFIDENTIALITY AGREEMENT
The undersigned is being hired to perform services as an Executive or
independent contractor working for SANCTUARY WOODS MULTIMEDIA CORPORATION, a
Delaware corporation ("Company"). In consideration of the undersigned's
original and continuing employment with or work for Company in a capacity in
which he or she may receive access or contribute to the production of
Confidential Information (as defined below), the undersigned agrees as
follows:
1. For purposes of this Agreement, "Confidential Information" shall
mean information or material proprietary to Company or designated as
Confidential Information by Company and not generally known by non-Company
personnel, which the undersigned develops or of which the undersigned may
obtain knowledge or access through or as a result of the undersigned's
relationship with Company (including information conceived, originated,
discovered or developed in whole or in part by the undersigned). The
Confidential Information includes, but is not limited to, the following types
of information and other information of a similar nature (whether or not
reduced to writing): discoveries, ideas, inventions, concepts, software in
various stages of development, designs, drawings, specifications, techniques,
models, data, source code, object code, documentation, diagrams, flow charts,
research, development, processes, procedures, "know-how", marketing
techniques and materials, marketing and development plans, customer names and
other information related to customers, price lists, pricing policies,
financial information and Executive files. Confidential Information also
includes any information described above which Company obtains from another
party and which Company treats as proprietary or designates as Confidential
Information, whether or not owned or developed by Company. INFORMATION
PUBLICLY KNOWN THAT IS GENERALLY EMPLOYED BY THE TRADE AT OR AFTER THE TIME
THE UNDERSIGNED FIRST LEARNS OF SUCH INFORMATION, OR GENERIC INFORMATION OR
KNOWLEDGE WHICH THE UNDERSIGNED WOULD HAVE LEARNED IN THE COURSE OF SIMILAR
EMPLOYMENT OR WORK ELSEWHERE IN THE TRADE, SHALL NOT BE DEEMED PART OF THE
CONFIDENTIAL INFORMATION.
2. All notes, data, reference materials, sketches, drawings,
memoranda, documentation and records in any way incorporating or reflecting
any of the Confidential Information and all proprietary rights therein,
including copyrights, shall belong exclusively to Company and the undersigned
agrees to turn over all copies of such materials in the undersigned's control
to Company upon request or upon termination of the undersigned's employment
with Company.
3. The undersigned agrees during his or her employment by Company and
thereafter to hold in confidence and not to directly or indirectly reveal,
report, publish, disclose or transfer any of the Confidential Information to
any person or entity, or utilize any of the Confidential Information for any
purpose, except in the course of the undersigned's work for Company.
4. The undersigned agrees that any inventions, ideas or original works of
authorship in whole or in part conceived or made by the undersigned during or
after the term of his or her
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<PAGE>
employment or relationship with Company which are made through the use of any
of the Confidential Information or any of Company's equipment, facilities,
supplies, trade secrets or time, or which relate to the Company's business or
the Company's actual or demonstrably anticipated research and development, or
which result from any work performed by the undersigned for Company, shall
belong exclusively to Company and shall be deemed part of the Confidential
Information for purposes of this Agreement whether or not fixed in a tangible
medium of expression. Without limiting the foregoing, the undersigned agrees
that any such original works of authorship shall be deemed to be "works made
for hire" and that Company shall be deemed the author thereof under the U.S.
Copyright Act (Title 17 of the U.S. Code), provided that in the event and to
the extent such works are determined not to constitute "works made for hire"
as a matter of law, the undersigned hereby irrevocably assigns and transfers
to Company all right, title and interest in such works, including but not
limited to copyrights. This agreement shall be construed in accordance with
the provisions of Section 2870 of the California Labor Code (a copy of which
is attached hereto) relating to inventions made by an Executive, and
accordingly this Agreement is not intended and shall not be interpreted to
assign to or vest in Company any of the undersigned's rights in any
inventions other than those described in the first sentence of this Section 4.
5. Attached is a complete description of all inventions or original
works of authorship made by the undersigned prior to his or her employment
with Company, and it is agreed that these inventions and original works of
authorship shall be excluded from the provisions of Section 4 above.
6. Because of the unique nature of the Confidential Information, the
undersigned understands and agrees that Company will suffer irreparable harm
in the event that the undersigned fails to comply with any of his or her
obligations under Sections 2, 3 or 4 above and that monetary damages will be
inadequate to compensate Company for such breach. Accordingly, the
undersigned agrees that Company will, in addition to any other remedies
available to it at law or in equity, be entitled to injunctive relief to
enforce the terms of Sections 2, 3 and 4 above.
7. This Agreement shall be governed by California law applicable to
contracts between residents of California which are wholly executed and
performed in California. This Agreement contains the full and complete
understanding of the parties with respect to the subject matter hereof and
supersedes all prior representations and understandings, whether oral or
written. In the event that any provision hereof or any obligation or grant
of rights by the undersigned hereunder is found invalid or unenforceable
pursuant to judicial decree or decision, any such provision, obligation or
grant of rights shall be deemed and construed to extend only to the maximum
permitted by law, and the remainder of this Agreement shall remain valid and
enforceable according to its terms.
-11-
<PAGE>
I agree to the above terms and acknowledge receipt of a copy of this
Agreement.
Date: ____________________________
Signature: ________________________
Name (printed): ___________________
Social Security No: _________________
Mailing Address: ___________________
___________________
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<PAGE>
CALIFORNIA LABOR CODE
Section 2870. Employment Agreements; Assignment of Rights
(a) Any provision in an employment agreement which provides
that an employee shall assign or offer to assign any of his or her rights in
an invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the
employer's equipment, supplies, facilities, or trade secret information,
except for those inventions that either:
(1) Relate at the time of conception or reduction to
practice of the invention to the employer's business or actual
or demonstrably anticipated research or development of the
employer; or
(2) Result from any work performed by the employee for the
employer.
(b) To the extent a provision in an employment agreement
purports to require an employee to assign an invention otherwise excluded
from being required to be assigned under subdivision (a), the provision is
against the public policy of this state and is unenforceable.
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<PAGE>
Exhibit 10.33
FORDHAM PROPERTIES INC.
5743 Landregan St.
Emeryville, CA 94608
ARTICLE ONE: BASIC TERMS
This Article One contains the Basic Terms of this Lease between the
Landlord and Tenant named below. Other Articles, Sections and Paragraphs of
the Lease referred to in this Article One explain and define the Basic Terms
and are to be read in conjunction with the Basic Terms.
Section 1.01. DATE OF LEASE: Nov. 14, 1994
------------------------------------------------
Section 1.02. LANDLORD (INCLUDE LEGAL ENTITY): EMERYVILLE BUSINESS CENTRE,
-----------------------------
a California Limited Partnership
- -------------------------------------------------------------------------------
Address of Landlord: 5743 LANDREGAN STREET
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EMERYVILLE, CA 94608
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Section 1.03. TENANT (INCLUDE LEGAL ENTITY): BERKELEY LEARNING
-------------------------------
TECHNOLOGIES, INC. A CALIFORNIA CORPORATION
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Address of Tenant: 1250 - 45TH STREET
------------------------------------------------------------
EMERYVILLE, CA 94605
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Section 1.04. PROPERTY: The Property is part of Landlord's multi-tenant
real property development known as EMERYVILLE BUSINESS CENTRE
-----------------------------------
and described or depicted in Exhibit "A" (the "Project"). The Project
includes the land, the buildings and all other improvements located on the
land, and the common areas described in Paragraph 4.05(a). The Property is
(include street address, approximate square footage and description)
-----------
- -------------------------------------------------------------------------------
1250 - 45TH STREET, SUITE 150
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EMERYVILLE, CA 94608
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APPROXIMATELY 6,500 SQUARE FEET OF OFFICE SPACE
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Section 1.05. LEASE TERM: FIVE (5) years -0- months
--------- -------
See Addendum, Sec. 15
--------------------------------------------------
Section 1.06. PERMITTED USES: (See Article Five) OFFICE AND RESEARCH AND
---------------------------
DEVELOPMENT AND RELATED LEGAL USES
- -------------------------------------------------------------------------------
Section 1.07. TENANT'S GUARANTOR: (If none, so state) NONE
-----------------------
Section 1.08. BROKERS: (See Article Fourteen) (If none, so state)
Landlord's Broker: CB COMMERCIAL
-------------------------------------------------------------
Tenant's Broker: CUSHMAN & WAKEFIELD
-------------------------------------------------------------
Section 1.09. COMMISSION PAYABLE TO LANDLORD'S BROKER: (See Article
Fourteen) $ PER AGREEMENT
---------------------------------------------------------------------
Section 1.10. INITIAL SECURITY DEPOSIT: (See Section 3.03) $ 16,640
----------------
Section 1.11. VEHICLE PARKING SPACES ALLOCATED TO TENANT: (See Section
4.05) NINETEEN (19)
--------------------------------------------------------------------------
Section 1.12. RENT AND OTHER CHARGES PAYABLE BY TENANT:
(a) BASE RENT:
-------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SEE ADDENDUM SEC. 17
- ------------------------------------------------------------------------------.
(If (ii) is completed, then (i) and Section 3.02 are inapplicable)
(b) OTHER PERIODIC PAYMENTS: (i) Real Property Taxes (See Section 4.02);
(ii) Utilities (See Section 4.03); (iii) Insurance Premiums (See Section
4.04); (iv) Tenant's Initial Pro Rata Share of Common Area Expenses 6.13%
(See Section 4.05); (v) Impounds for Insurance Premiums and Property Taxes
(See Section 4.08); (vi) Maintenance, Repairs and Alterations (See Article
Six).
Section 1.13 LANDLORD'S SHARE OF PROFIT ON ASSIGNMENT OR SUBLEASE: (See
Section 9.05) FIFTY
------------------------------------------------------------------
percent ( 50 %) of the Profit (the "Landlord's Share").
----------
Section 1.14. RIDERS: The following riders are attached to and made a
part of this Lease: (If none, so state)
---------------------------------------
- -------------------------------------------------------------------------------
Exhibits A, B and C
- -------------------------------------------------------------------------------
ADDENDUM
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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Section 2.01. LEASE OF PROPERTY FOR LEASE TERM. Landlord leases the
Property to Tenant and Tenant leases the Property from Landlord for the Lease
Term. The Lease Term is for the period stated in Section 1.05 above and shall
begin and end on the dates specified in Section 1.05 above, unless the
beginning or end of the Lease Term is changed under any provision of this
Lease.
Section 2.02. DELAY IN COMMENCEMENT.
See Addendum, Sec. 16
Section 2.03. EARLY OCCUPANCY. If Tenant occupies the Property prior to
the Commencement Date, Tenant's occupancy of the Property shall be subject to
all of the provisions of this Lease. Early occupancy of the Property shall
not advance the expiration date of this Lease. Tenant shall pay Base Rent and
all other charges specified in this Lease for the early occupancy period.
Section 2.04. HOLDING OVER. Tenant shall vacate the Property upon the
expiration or earlier termination of this Lease. Tenant shall reimburse
Landlord for and indemnify Landlord against all damages which Landlord incurs
from Tenant's delay in vacating the Property. If Tenant does not vacate the
Property upon the expiration or earlier termination of the Lease and Landlord
thereafter accepts rent from Tenant, Tenant's occupancy of the Property shall
be a "month-to-month" tenancy, subject to all of the terms of this Lease
applicable to a month-to-month tenancy, except that the Base Rent then in
effect shall be increased by twenty-five percent (25%).
ARTICLE THREE: BASE RENT
Section 3.01. TIME AND MANNER OF PAYMENT. Upon execution of this Lease,
Tenant shall pay Landlord the Base Rent in the amount stated in Paragraph
1.12(a) above for the first month of the Lease Term. On the first day of the
second month of the Lease Term and each month thereafter, Tenant shall pay
Landlord the Base Rent, in advance, without offset, deduction or prior
demand. The Base Rent shall be payable at Landlord's address or at such other
place as Landlord may designate in writing. See Addendum, Sec. 17
Section 3.03. SECURITY DEPOSIT; INCREASES.
(a) Upon the execution of this Lease, Tenant shall deposit with Landlord a
cash Security Deposit in the amount set forth in Section 1.10 above. Landlord
(1) may apply all or part of the Security Deposit to any unpaid rent or other
charges due from Tenant or to cure any other defaults of Tenant. If Landlord
uses any part of the Security Deposit, Tenant shall restore the Security
Deposit to its full amount within ten (10) days after Landlord's written
request. Tenant's failure to do so shall be a material default under this
Lease. No interest shall be paid on the Security Deposit. Landlord shall not
be required to keep the Security Deposit separate from its other accounts and
no trust relationship is created with respect to the Security Deposit.
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Section 3.04. TERMINATION; ADVANCE PAYMENTS. Upon termination of this
Lease under Article Seven (Damage or Destruction), Article Eight
(Condemnation) or any other termination not resulting from Tenant's default,
and after Tenant has vacated the Property in the manner required by this
Lease, Landlord shall refund or credit to Tenant (or Tenant's successor) the
unused portion of the Security Deposit, any advance rent or other advance
payments made by Tenant to Landlord, and any amounts paid for real property
taxes and other reserves which apply to any time periods after termination of
the Lease.
ARTICLE FOUR: OTHER CHARGES PAYABLE BY TENANT
Section 4.01 ADDITIONAL RENT. All charges payable by Tenant other than
Base Rent are called "Additional Rent." Unless this Lease provides otherwise,
Tenant shall pay all Additional Rent then due with the next monthly
installment of Base Rent. The term "rent" shall mean Base Rent and Additional
Rent.
Section 4.02. PROPERTY TAXES
(a) REAL PROPERTY TAXES. Tenant shall pay all real property taxes on the
Property (including any fees, taxes or assessments against, or as a result
of, any tenant improvements installed on the Property by or for the benefit
of Tenant) during the Lease Term. Subject to Paragraph 4.02(c) and Section
4.08 below, such payment shall be made at least ten (10) days prior to the
delinquency date of the taxes. Within such ten (10)-day period, Tenant shall
furnish Landlord with satisfactory evidence that the real property taxes have
been paid. Landlord shall reimburse Tenant for any real property taxes paid
by Tenant covering any period of time prior to or after the Lease Term. If
Tenant fails to pay the real property taxes when due, Landlord may pay the
taxes and Tenant shall reimburse Landlord for the amount of such tax payment
as Additional Rent.
(b) DEFINITION OF "REAL PROPERTY TAX." "Real property tax" means: (i)
any fee, license fee, license tax, business license fee, commercial rental
tax, levy, charge, assessment, penalty or tax imposed by any taxing authority
against the Property; (ii) any tax on the Landlord's right to receive, or the
receipt of, rent or income from the Property or against Landlord's business
of Leasing the Property; (iii) any tax or charge for fire protection,
streets, sidewalks, road maintenance, refuse or other services provided to
the Property by any governmental agency; (iv) any tax imposed upon this
transaction or based upon a reassessment of the Property due to a change in
ownership, as defined by applicable law, or other transfer of all or part of
Landlord's interest in the Property; and (v) any charge or fee replacing any
tax previously included within the definition of real property tax. "Real
property tax" does not, however, include Landlord's federal or state income,
franchise, inheritance or estate taxes. See Addendum, Sec. 18
(c) JOINT ASSESSMENT. If the Property is not separately assessed,
Landlord shall reasonably determine Tenant's share of the real property tax
payable by Tenant under Paragraph 4.02(a) from the assesser's worksheets or
other reasonably available information. Tenant shall pay such share to
Landlord within fifteen (15) days after receipt of Landlord's written
statement.
(d) PERSONAL PROPERTY TAXES.
(i) Tenant shall pay all taxes charged against trade fixtures,
furnishings, equipment or any other personal property belonging to Tenant.
Tenant shall try to have personal property taxed separately from the
Property.
(ii) If any of Tenant's personal property is taxed with the
Property, Tenant shall pay Landlord the taxes for the personal property
within fifteen (15) days after the Tenant receives a written statement
from Landlord for such personal property taxes.
Section 4.03. UTILITIES. Tenant shall pay, directly to the appropriate
supplier, the cost of all natural gas, heat, light, power, sewer service,
telephone, water, refuse disposal and other utilities and services supplied
to the Property. However, if any services or utilities are jointly metered
with other property, Landlord shall make a reasonable determination of
Tenant's proportionate share of the cost of such utilities and services and
Tenant shall pay such share to Landlord within fifteen (15) days after
receipt of Landlord's written statement.
Section 4.04. INSURANCE POLICIES.
(a) LIABILITY INSURANCE. During the Lease Term, Tenant shall maintain a
policy of commercial general liability insurance (sometimes known as broad
form comprehensive general liability insurance) insuring Tenant against
liability for bodily injury, property damage (including loss of use of
property) and personal injury arising out of the operation, use or occupancy
of the Property. Tenant shall name Landlord as an additional insured under
such policy. The initial amount of such insurance shall be One Million
Dollars ($1,000,000) per occurrence and shall be subject to periodic increase
based upon inflation, increased liability awards, recommendation of
Landlord's professional insurance advisors and other relevant factors. The
liability insurance obtained by Tenant under this Paragraph 4.04(a) shall (i)
be primary and non-contributing; (ii) contain cross-liability endorsements;
and (iii) insure Landlord against Tenant's performance under Section 5.05, if
the matters giving rise to the indemnity under Section 5.05 result from the
negligence of Tenant. The amount and coverage of such insurance shall not
limit Tenant's liability nor relieve Tenant of any other obligation under
this Lease. Landlord may also obtain comprehensive public liability insurance
in an amount and with coverage determined by the Landlord insuring Landlord
against liability arising out of ownership, operation, use or occupancy of
the Property. The policy obtained by Landlord shall not be contributory and
shall not provide primary insurance.
(b) PROPERTY AND RENTAL INCOME INSURANCE. During the Lease Term,
Landlord shall maintain policies of insurance covering loss of or damage to
the Property in the full amount of its replacement value. Such policy shall
contain an Inflation Guard Endorsement and shall provide protection against
all perils included within the classification of fire, extended coverage,
vandalism, malicious mischief, special extended perils (all risk), sprinkler
leakage and any other perils which Landlord deems reasonably necessary.
Landlord shall have the right to obtain flood and earthquake insurance if
required by any lender holding a security interest in the Property. Landlord
shall not obtain insurance for Tenant's fixtures or equipment or building
improvements installed by Tenant on the Property. During the Lease Term,
Landlord shall also maintain a rental income insurance policy, with loss
payable to Landlord, in an amount equal to one year's Base Rent, plus
estimated real property taxes and insurance premiums. Tenant shall be liable
for the payment of any deductible amount under Landlord's or Tenant's
insurance policies maintained pursuant to this Section 4.04, in an amount not
to exceed Ten Thousand Dollars ($10,000). Tenant shall not do or permit
anything to be done which invalidates any such insurance policies.
(c) PAYMENT OF PREMIUMS. Subject to Section 4.08, Tenant shall pay all
premiums for the policies described in Paragraphs 4.04(a) and (b) (whether
obtained by Landlord or Tenant) within fifteen (15) days after Tenant's
receipt of a copy
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of the premium statement or other evidence of the amount due, except Landlord
shall pay all premiums for non-primary comprehensive public liability
insurance which Landlord elects to obtain as provided in Paragraph 4.04(a).
For insurance policies maintained by Landlord which cover improvements on the
entire Project, Tenant shall pay Tenant's prorated share of the premiums, in
accordance with the formula in Paragraph 4.05(e) for determining Tenant's
share of Common Area costs. If insurance policies maintained by Landlord
cover improvements on real property other than the Project, Landlord shall
deliver to Tenant a statement of the premium applicable to the Property
showing in reasonable detail how Tenant's share of the premium was computed.
If the Lease Term expires before the expiration of an insurance policy
maintained by Landlord, Tenant shall be liable for Tenant's prorated share of
the insurance premiums. Before the Commencement Date, Tenant shall deliver to
Landlord a copy of any policy of insurance which Tenant is required to
maintain under this Section 4.04 At least thirty (30) days prior to the
expiration of any such policy, Tenant shall deliver to Landlord a renewal of
such policy. As an alternative to providing a policy of insurance Tenant
shall have the right to provide Landlord a certificate of insurance, executed
by an authorized officer of the insurance company, showing that the insurance
which Tenant is required to maintain under this Section 4.04 is in full force
and effect and containing such other information which Landlord reasonably
requires.
(d) GENERAL INSURANCE PROVISIONS.
(i) Any insurance which Tenant is required to maintain under this
Lease shall include a provision which requires the insurance carrier to
give Landlord not less than thirty (30) days' written notice prior to
any cancellation or(1) modification of such coverage.
(ii) If Tenant fails to deliver any policy, certificate or renewal
to Landlord required under this Lease within the prescribed time period
or if any such policy is cancelled or modified during the Lease Term
without Landlord's consent, Landlord may obtain such insurance, in which
case Tenant shall reimburse Landlord for the cost of such insurance
within fifteen (15) days after receipt of a statement that indicates the
cost of such insurance.
(iii) Tenant shall maintain all insurance required under this Lease
with companies holding a "General Policy Rating" of A-12 or better, as
set forth in the most current issue of "Best Key Rating Guide". Landlord
and Tenant acknowledge the insurance markets are rapidly changing and
that insurance in the form and amounts described in this Section 4.04
may not be available in the future. Tenant acknowledges that the
insurance described in this Section 4.04 is for the primary benefit of
Landlord. If at any time during the Lease Term, Tenant is unable to
maintain the insurance required under the Lease, Tenant shall
nevertheless maintain insurance coverage which is customary and
commercially reasonable in the insurance industry for Tenant's type of
business, as that coverage may change from time to time. Landlord makes
no representation as to the adequacy of such insurance to protect
Landlord's or Tenant's interests. Therefore, Tenant shall obtain any
such additional property or liability insurance which Tenant deems
necessary to protect Landlord and Tenant.
(iv) Unless prohibited under any applicable insurance policies
maintained, Landlord and Tenant each hereby waive any and all rights of
recovery against the other, or against the officers, employees, agents
or representatives of the other, for loss of or damage to its property
or the property of others under its control, if such loss or damage is
covered by any insurance policy in force (whether or not described in
this Lease) at the time of such loss or damage. Upon obtaining the
required policies of insurance, Landlord and Tenant shall give notice to
the insurance carriers of this mutual waiver of subrogation.
Section 4.05. COMMON AREAS; USE, MAINTENANCE AND COSTS.
(a) COMMON AREAS. As used in this Lease, "Common Areas" shall mean all
areas within the Project which are available for the common use of tenants of
the Project and which are not leased or held for the exclusive use of Tenant
or other tenants, including, but not limited to, parking areas, driveways,
sidewalks, loading areas, access roads, corridors, landscaping and planted
areas. Landlord, from time to time, may change the size, location, nature and
use of any of the Common Areas, convert Common Areas into leaseable areas,
construct additional parking facilities (including parking structures) in the
Common Areas, and increase or decrease Common Area land and/or facilities.
Tenant acknowledges that such activities may result in inconvenience to
Tenant. Such activities and changes are permitted if they do not materially
affect Tenant's use of the Property.
(b) USE OF COMMON AREAS. Tenant shall have the nonexclusive right (in
common with other tenants and all others to whom Landlord has granted or may
grant such rights) to use the Common Areas for the purposes intended, subject
to such reasonable rules and regulations as Landlord may establish from time
to time. Tenant shall abide by such rules and regulations and shall use its
best effort to cause others who use the Common Areas with Tenant's express
or implied permission to abide by Landlord's rules and regulations. At any
time, Landlord may close any Common Areas to perform any acts in the Common
Areas as, in Landlord's(2) judgement, are desirable to improve the Project.
Tenant shall not interfere with the rights of Landlord, other tenants or any
other person entitled to use the Common Areas.
(c) SPECIFIC PROVISION RE: VEHICLE PARKING. Tenant shall be entitled to
use the number of vehicle parking spaces in the Project allocated to Tenant
in Section 1.11 of the Lease without paying any additional rent. Tenant's
parking shall not be reserved and shall be limited to vehicles no larger than
standard size automobiles or pickup utility vehicles. Tenant shall not cause
large trucks or other large vehicles to be parked within the Project or on
the adjacent public streets. Temporary parking of large delivery vehicles in
the Project may be permitted by the rules and regulations established by
Landlord. Vehicles shall be parked only in striped parking spaces and not in
driveways, loading areas or other locations not specifically designated for
parking. Handicapped spaces shall only be used by those legally permitted to
use them. If Tenant parks more vehicles in See Addendum, Sec. 19
(d) MAINTENANCE OF COMMON AREAS. Landlord shall maintain the Common
Area in good order, condition and repair and shall operate the Project as a
first-class industrial/commercial real property development. Tenant shall pay
Tenant's pro rata share (as determined below) of all costs incurred by
Landlord for the operation and maintenance of the Common Areas. Common Area
costs include, but are not limited to, costs and expenses for the following:
gardening and landscaping; utilities, water and sewage charges; maintenance
of signs (other than tenants' signs); premiums for liability, property
damage, fire and other types of casualty insurance on the Common Areas and
workers' compensation insurance; all property taxes and assessments levied on
or attributable to the Common Areas and all Common Area improvements; all
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personal property taxes levied on or attributable to personal property used
in connection with the Common Areas; straightline depreciation on personal
property owned by Landlord which is consumed in the operation or maintenance
of the Common Areas; rental or lease payments paid by Landlord for rented or
leased personal property used in the operation or maintenance of the Common
Areas; fees for required licenses and permits; repairing, resurfacing,
repaving, maintaining, painting, lighting, cleaning, refuse removal, security
and similar items; reserves for roof replacement and exterior painting and
other appropriate reserves; and a reasonable allowance to Landlord for
Landlord's supervision of the Common Areas (not to exceed eight percent (8%)
of the gross rents of the Project for the calendar year). Landlord may cause
any or all of such services to be provided by third parties and the cost of
such services shall be included in Common Areas costs. Common Area costs shall
not include depreciation of real property which forms part of the Common
Areas. See Addendum, Sec. 20
(e) TENANT'S SHARE AND PAYMENT. Tenant shall pay Tenant's annual pro
rata share of all Common Area costs (prorated for any fractional month) upon
written notice from Landlord that such costs are due and payable, and in any
event prior to delinquency. Tenant's pro rata share shall be calculated by
dividing the square foot area of the Property, as set forth in Section 1.04
of the Lease, by the aggregate square foot area of the Project which is
leased or held for lease by tenants, as of the date on which the computation
is made. Tenant's initial pro rata share is set out in Paragraph 1.13(b). Any
changes in the Common Area costs and/or the aggregate area of the Project
leased or held for lease during the Lease Term shall be effective on the
first day of the month after such change occurs. Landlord may, at Landlord's
election(1), estimate in advance and charge to Tenant as Common Area costs,
all real property taxes for which Tenant is liable under Section 4.02 of the
Lease, all insurance premiums for which Tenant is liable under Section 4.04
of the Lease, all maintenance and repair costs for which the Tenant is
liable under Section 6.04 of the Lease, and all other Common Area costs
payable by Tenant hereunder. At Landlord's election, such statements of
estimated Common Area costs shall be delivered monthly, quarterly or at any
other periodic intervals to be designated by Landlord(2). Landlord may adjust
such estimates at any time based upon Landlord's experience and reasonable
anticipation of costs. Such adjustments shall be effective as of the next
rent payment date after notice to Tenant. Within sixty (60) days after the
end of each calendar year of the Lease Term. Landlord shall deliver to Tenant
a statement prepared in accordance with generally accepted accounting
principles setting forth, in reasonable detail, the Common Area costs paid or
incurred by Landlord during the preceding calendar year and Tenant's pro rata
share. Upon receipt of such statement, there shall be an adjustment between
Landlord and Tenant, with payment to or credit(3) given by Landlord given by
Landlord (as the case may be) so that Landlord shall receive the entire
amount of Tenant's share of such costs and expenses for such periods.(4)
Section 4.06. LATE CHARGES. Tenant's failure to pay rent promptly may
cause Landlord to incur unanticipated costs. The exact amount of such costs
are impractical or extremely difficult to ascertain. Such costs may include,
but are not limited to, processing and accounting charges and charges which
may be imposed on Landlord by any ground lease, mortgage or trust deed
encumbering the Property. Therefore, if Landlord goes not receive any rent
payment within ten (10) days after it becomes due(5), Tenant shall pay
Landlord a late charge equal to ten percent (10%) of the overdue amount. The
parties agree that such late charge represents a fair and reasonable estimate
of the costs Landlord will incur by reason of such late payment.
Section 4.07. INTEREST ON PAST DUE OBLIGATIONS. Any amount owed by
Tenant to Landlord which is not paid when due shall bear interest at the rate
of fifteen percent (15%) per annum from the due date of such amount. However,
interest shall not be payable on late charges to be paid by Tenant under this
Lease. The payment of interest on such amounts shall not excuse or cure any
default by Tenant under this Lease. If the interest rate specified in this
Lease is higher than the rate permitted by law, the interest rate is hereby
decreased to the maximum legal interest rate permitted by law.
Section 4.08. IMPOUNDS FOR INSURANCE PREMIUMS AND REAL PROPERTY TAXES.
If requested by any ground lessor or lender to whom Landlord has granted a
security interest in the Property, or if Tenant is more than ten (10) days
late in the payment of rent more than once in any consecutive twelve
(12)-month period, Tenant shall pay Landlord a sum equal to one-twelfth
(1/12) of the annual real property taxes and insurance premiums payable by
Tenant under this Lease, together with each payment of Base Rent. Landlord
shall hold such payments in a non-interest bearing impound account. If
unknown, Landlord shall reasonably estimate the amount of real property taxes
and insurance premiums when due. Tenant shall pay any deficiency of funds in
the impound account to Landlord upon written request. If Tenant defaults
under this Lease, Landlord may apply any funds in the impound account to any
obligation then due under this Lease.
ARTICLE FIVE: USE OF PROPERTY
Section 5.01. PERMITTED USES. Tenant may use the Property only for the
Permitted Uses set forth in Section 1.06 above.
Section 5.02. MANNER OF USE. Tenant shall not cause or permit the
Property to be used in any way which constitutes a violation of any law,
ordinance, or governmental regulation or order, which annoys or interferes
with the rights of tenants of the Project, or which constitutes a nuisance or
waste. Tenant shall obtain and pay for all permits, including a Certificate
of Occupancy, required for Tenant's occupancy of the Property and shall
promptly take all actions necessary to comply with all applicable statutes,
ordinances rules, regulations, orders and requirements regulating(6)
including the Occupational Safety and Health Act.
Section 5.03. HAZARDOUS MATERIALS. As used in this Lease, the term
"Hazardous Material" means any flammable items, explosives, radioactive
materials, hazardous or toxic substances, material or waste or related
materials, including any substances defined as or included in the definition
of "hazardous substances", "hazardous waste", "hazardous materials" or "toxic
substances" now or subsequently regulated under any applicable federal, state
or local laws or regulations, including without limitation petroleum-based
products, paints, solvents, lead, cyanide, DDT, printing inks, acids,
pesticides, ammonia compounds and other chemical products, asbestos, PCBs and
similar compounds, and including any different products and materials which
are subsequently found to have adverse effects on the environment or the
health and safety of persons. Tenant shall not cause or permit any Hazardous
Material to be generated, produced, brought upon, used, stored, treated or
disposed of in or about the Property by Tenant, its agents, employees,
contractors, sublessees or invitees without the prior written consent of
Landlord(7). Landlord shall be entitled to take into account such other
factors or facts as Landlord may reasonably determine to be relevant in
determining whether to grant or withhold consent to Tenant's proposed
activity with respect to Hazardous Material. In no event, however, shall
Landlord be required to consent to the installation or use of any storage
tanks on the Property. See Addendum, Sec. 21
Section 5.04. SIGNS AND AUCTIONS. Tenant shall not place any signs on
the Property without Landlord's prior written consent(8). Tenant shall not
conduct or permit any auctions or sheriff's sales at the Property.
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Section 5.05. INDEMNITY. Tenant shall indemnify Landlord against and
hold Landlord harmless from any and all costs, claims or liability arising
from: (a) Tenant's use of the Property; (b) the conduct of Tenant's business
or anything else done or permitted by Tenant to be done in or about the
Property, including any contamination of the Property or any other property
resulting from the presence or use of Hazardous Material caused or permitted
by Tenant; (c) any breach or default in the performance of Tenant's
obligations under this Lease; (d) any misrepresentation or breach of warranty
by Tenant under this Lease; or (e) other acts or omissions of Tenant. Tenant
shall defend Landlord against any such cost, claim or liability at Tenant's
expense with counsel reasonably acceptable to Landlord or, at Landlord's
election, Tenant shall reimburse Landlord for any legal fees or costs(1)
incurred by Landlord in connection with any such claim. As a material part of
the consideration to Landlord, Tenant assumes all risk of damage to property
or injury to persons in or about the Property arising from any cause, and
Tenant hereby waives all claims in respect thereof against Landlord, except
for any claim arising out of Landlord's negligence or willful misconduct. As
used in this Section, the term "Tenant" shall include Tenant's employees,
agents, contractors and invitees, if applicable. See Addendum, Sec. 22
Section 5.06. LANDLORD'S ACCESS. Landlord or its agents may enter the
Property at all reasonable times to show the Property to potential buyers,
investors or tenants(2) or other parties; to do any other act or to inspect
and conduct tests in order to monitor Tenant's compliance with all applicable
environmental laws and all laws governing the presence and use of Hazardous
Material; or for any other purpose Landlords(3) deems necessary. Landlord
shall give Tenant(4) prior notice of such entry, except in the case of an
emergency. Landlord may place customary "For Sale" or "For Lease" signs on
the Property.
Section 5.07. QUIET POSSESSION. If Tenant pays the rent and complies
with all other terms of this Lease, Tenant may occupy and enjoy the Property
for the full Lease Term, subject to the provisions of this Lease.
ARTICLE SIX: CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND ALTERATIONS
Section 6.01. EXISTING CONDITIONS. Tenant accepts the Property in its
condition as of the execution of the Lease, subject to all recorded matters,
laws, ordinances, and governmental regulations and orders. Except as provided
herein, Tenant acknowledges that neither Landlord nor any agent of Landlord
has made any representation as to the condition of the Property or the
suitability of the Property for Tenant's intended use. Tenant represents and
warrants that Tenant has made its own inspection of and inquiry regarding the
condition of the Property and is not relying on any representations of
Landlord or any Broker with respect thereto. If Landlord or Landlord's Broker
has provided a Property Information Sheet or other Disclosure Statement
regarding the Property, a copy is attached as an exhibit to the Lease.
Section 6.02. EXEMPTION OF LANDLORD FROM LIABILITY. Landlord shall not
be liable for any damage or injury to the person, business (or any loss of
income therefrom), goods, wares, merchandise or other property of Tenant,
Tenant's employees, invitees, customers or any other person in or about the
Property, whether such damage or injury is caused by or results from: (a)
fire, steam, electricity, water, gas or rain; (b) the breakage, leakage,
obstruction or other defects of pipes, sprinklers, wires, appliances,
plumbing, air conditioning or lighting fixtures or any other cause; (c)
conditions arising in or about the Property or upon other portions of the
Project, or from other sources or places; or (d) any act or omission of any
other tenant of the Project. Landlord shall not be liable for any such damage
or injury even though the cause of or the means of repairing such damage or
injury are not accessible to Tenant. The provisions of this Section 6.02
shall not, however, exempt Landlord from liability for Landlord's negligence
or willful misconduct.
Section 6.03. LANDLORD'S OBLIGATIONS.
(a) Except as provided in Article Seven (Damage or Destruction) and
Article Eight (Condemnation), Landlord shall keep the following in good
order, condition and repair: the foundations(5), exterior walls and roof of
the Property (including painting the exterior surface of the exterior walls
of the Property not more often than once every five (5) years, if necessary)
and all components of electrical, mechanical, plumbing, heating and air
conditioning systems and facilities located in the Property which are
concealed or used in common by tenants of the Project. However, Landlord
shall not be obligated to maintain or repair windows, doors, plate glass or
the interior surfaces of exterior walls. Landlord shall make repairs under
this Section 6.03 within a reasonable time after receipt of written notice
from Tenant of the need for such repairs.
(b) Tenant shall pay or reimburse Landlord for all costs Landlord incurs
under Paragraph 6.03(a) above as Common Area costs as provided for in Section
4.05 of the Lease. Tenant waives the benefit of any statute in effect now or
in the future which might give Tenant the right to make repairs at Landlord's
expense or to terminate this Lease due to Landlord's failure to keep the
Property in good order, condition and repair.
Section 6.04. TENANT'S OBLIGATIONS.
(a) Except as provided in Section 6.03, Article Seven (Damage or
Destruction) and Article Eight (Condemnation), Tenant shall keep all portions
of the Property (including nonstructural, interior, systems and equipment) in
good order, condition and repair (including interior repainting and
refinishing, as needed). If any portion of the Property or any system or
equipment in the Property which Tenant is obligated to repair cannot be fully
repaired or restored, Tenant shall promptly replace such portion of the
Property or system or equipment, in the Property, regardless of whether the
benefit of such replacement extends beyond the Lease Term; but if the benefit
or useful life of such replacement extends beyond the Lease Term (as such
term may be extended by exercise of any options), the useful life of such
replacement shall be prorated over the remaining portion of the Lease Term
(as extended), and Tenant shall be liable only for that portion of the cost
which is applicable to the Lease Term (as extended). Tenant shall maintain a
preventative maintenance contract providing for the regular inspection and
maintenance of the heating and air conditioning system by a licensed heating
and air conditioning contractor, unless Landlord maintains such equipment
under Section 6.03 above(6). If any part of the Property or the Project is
damaged by any act or omission of Tenant, Tenant shall pay Landlord the cost
of repairing or replacing such damaged property, whether or not Landlord
would otherwise be obligated to pay the cost of maintaining or repairing such
property. It is the intention of Landlord and Tenant that at all times Tenant
shall maintain the portions of the Property which Tenant is obligated to
maintain in an attractive, first-class and fully operative condition(7).
(b) Tenant shall fulfill all of Tenant's obligations under this Section
6.04 at Tenant's sole expense. If Tenant fails to maintain, repair or replace
the Property as required by this Section 6.04, Landlord may, upon ten (10)
days' prior notice to Tenant (except that no notice shall be required in the
case of an emergency), enter the Property and perform such maintenance or
repair (including replacement, as needed) on behalf of Tenant. In such case,
Tenant shall reimburse Landlord for all(8) costs incurred in performing such
maintenance or repair immediately upon demand.
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Section 6.05. ALTERATIONS, ADDITIONS, AND IMPROVEMENTS.
(a) Tenant shall not make any alterations, additions, or improvements to
the Property without Landlord's prior written consent, except for
non-structural alterations which do not exceed Ten Thousand Dollars ($10,000)
in cost(1) and which are not visible from the outside of any building of
which the Property is part. Tenant shall promptly remove any alterations,
additions, or improvements constructed in violation of this Paragraph 6.05(a)
upon Landlord's written request. All alterations, additions, and improvements
shall be done in a good and workmanlike manner, in conformity with all
applicable laws and regulations, and by a contractor approved by Landlord.
Upon completion of any such work, Tenant shall provide Landlord with "as
built" plans, copies of all construction contracts, and proof of payment for
all labor and materials.
(b) Tenant shall pay when due all claims for labor and material
furnished to the Property. Tenant shall give Landlord at least twenty (20)
days' prior written notice of the commencement of any work on the Property,
regardless of whether Landlord's consent to such work is required. Landlord
may elect to record and post notices of non-responsibility on the Property.
Section 6.06. CONDITION UPON TERMINATION. Upon the termination of the
Lease, Tenant shall surrender the Property to Landlord, broom clean and in
the same condition as received except for ordinary wear and tear which Tenant
was not otherwise obligated to remedy under any provision of this Lease.
However, Tenant shall not be obligated to repair any damage which Landlord is
required to repair under Article Seven (Damage or Destruction)(2). All
alterations, additions and improvements which Landlord has not required
Tenant to remove shall become Landlord's property and shall be surrendered to
Landlord upon the expiration or earlier termination of the Lease, except that
Tenant may remove any of Tenant's machinery or equipment which can be removed
without material damage to the Property. Tenant shall repair, at Tenant's
expense, any damage to the Property caused by the removal of any such
machinery or equipment. In no event, however, shall Tenant remove any of the
following materials or equipment (which shall be deemed Landlord's property)
without Landlord's prior written consent: any power wiring or power panels;
lighting or lighting fixtures; wall coverings; drapes, blinds or other window
coverings; carpets or other floor coverings; heaters, air conditioners or any
other heating or air conditioning equipment; fencing or security gates; or
other similar building operating equipment and decorations.
ARTICLE SEVEN: DAMAGE OR DESTRUCTION
Section 7.01. PARTIAL DAMAGE TO PROPERTY.
(a) Tenant shall notify Landlord in writing immediately upon the
occurrence of any damage to the Property. If the Property is only partially
damaged (i.e., less than fifty percent (50%) of the Property is untenantable
as a result of such damage or less than fifty percent (50%) of Tenant's
operations are materially impaired) and if the proceeds received by Landlord
from the insurance policies described in Paragraph 4.04(b)(3) are sufficient
to pay for the necessary repairs, this Lease shall remain in effect and
Landlord shall repair the damage as soon as reasonably possible. Landlord may
elect (but is not required) to repair any damage to Tenant's fixtures,
equipment, or improvements.
(b) If the insurance proceeds received by Landlord(3) are not sufficient
to pay the entire cost of repair, or if the cause of the damage is not
covered by the insurance policies which Landlord(4) maintain under Paragraph
4.04(b), Landlord may elect either to (i) repair the damage as soon as
reasonably possible, in which case this Lease shall remain in full force and
effect, or (ii) terminate this Lease as of the date the damage occurred.
Landlord shall notify Tenant within thirty (30) days after receipt of notice
of the occurrence of the damage whether Landlord elects to repair the damage
or terminate the Lease. If Landlord elects to repair the damage, Tenant shall
pay Landlord the "deductible amount" (if any) under Landlord's insurance
policies and, if the damage was due to an act or omission of Tenant, or
Tenant's employees, agents, contractors or invitees, the difference between
the actual cost of repair and any insurance proceeds received by Landlord. If
Landlord elects to terminate the Lease, Tenant may elect to continue this
Lease in full force and effect, in which case Tenant shall repair any damage
to the Property and any building in which the Property is located. Tenant
shall pay the cost of such repairs, except that upon satisfactory completion
of such repairs, Landlord shall deliver to Tenant any insurance proceeds
received by Landlord for the damage repaired by Tenant. Tenant shall give
Landlord written notice of such election within ten (10) days after receiving
Landlord's termination notice.
(c) If the damage to the Property occurs during the last six (6) months
of the Lease Term and such damage will require more than thirty (30) days to
repair, either Landlord or Tenant may elect to terminate this Lease as of the
date the damage occurred, regardless of the sufficiency of any insurance
proceeds. The party electing to terminate this Lease shall give written
notification to the other party of such election within thirty (30) days
after Tenant's notice to Landlord of the occurrence of the damage.
Section 7.02. SUBSTANTIAL OR TOTAL DESTRUCTION. If the Property is
substantially or totally destroyed by any cause whatsoever (i.e., the damage
to the Property is greater than partial damage as described in Section 7.01),
and regardless of whether Landlord receives any insurance proceeds, this
Lease shall terminate as of the date the destruction occurred.
Notwithstanding the preceding sentence, if the Property can be rebuilt within
six (6) months after the date of destruction, Landlord may elect to rebuild
the Property at Landlord's own expense, in which case this Lease shall remain
in full force and effect. Landlord shall notify Tenant of such election
within thirty (30) days after Tenant's notice of the occurrence of total or
substantial destruction. If Landlord so elects, Landlord shall rebuild the
Property at Landlord's sole expense, except that if the destruction was
caused by an act or omission of Tenant, Tenant shall pay Landlord the
difference between the actual cost of rebuilding and any insurance proceeds
received by Landlord.
Section 7.03. TEMPORARY REDUCTION OF RENT. If the Property is destroyed
or damaged and Landlord or Tenant repairs or restores the Property pursuant
to the provisions of this Article Seven, any rent payable during the period
of such damage, repair and/or restoration shall be reduced according to the
degree, if any, to which Tenant's use of the Property is impaired. Except for
such possible reduction in Base Rent, insurance premiums and real property
taxes, Tenant shall not be entitled to any compensation, reduction, or
reimbursement from Landlord as a result of an damage, destruction, repair, or
restoration of or to the Property.
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Section 7.04. WAIVER. Tenant waives the protection of any statute, code
or judicial decision which grants a tenant the right to terminate a lease in
the event of the substantial or total destruction of the leased property.
Tenant agrees that the provisions of Section 7.02 above shall govern the
rights and obligations of Landlord and Tenant in the event of any substantial
or total destruction to the Property.
ARTICLE EIGHT: CONDEMNATION
If all or any portion of the Property is taken under the power of
eminent domain or sold under the threat of that power (all of which are
called "Condemnation"), this Lease shall terminate as to the part taken or
sold on the date the condemning authority takes title or possession,
whichever occurs first. If more than twenty percent (20%) of the floor area
of the building in which the Property is located, or which is located on the
Property, is taken, either Landlord or Tenant may terminate this Lease as of
the date the condemning authority takes title or possession, by delivering
written notice to the other within ten (10) days after receipt of written
notice of such taking (or in the absence of such notice, within ten (10) days
after the condemning authority takes title or possession). If neither
Landlord nor Tenant terminates this Lease, this Lease shall remain in effect
as to the portion of the Property not taken, except that the Base Rent and
Additional Rent shall be reduced in proportion to the reduction in the floor
area of the Property. Any Condemnation award or payment shall be distributed
in the following order: (a) first, to any ground lessor, mortgagee or
beneficiary under a deed of trust encumbering the Property, the amount of its
interest in the Property; (b) second, to Tenant, only the amount of any award
specifically designated for loss of or damage to Tenant's trade fixtures or
removable personal property; and (c) third, to Landlord, the remainder of
such award, whether as compensation for reduction in the value of the
leasehold, the taking of the fee, or otherwise. If this Lease is not
terminated, Landlord shall repair any damage to the Property caused by the
Condemnation, except that Landlord shall not be obligated to repair any
damage for which Tenant has been reimbursed by the condemning authority. If
the severance damages received by Landlord are not sufficient to pay for such
repair, Landlord shall have the right to either terminate this Lease or make
such repair at Landlord's expense.
ARTICLE NINE: ASSIGNMENT AND SUBLETTING
Section 9.01. LANDLORD'S CONSENT REQUIRED. No portion of the Property or
of Tenant's interest in this Lease may be acquired by any other person or
entity, whether by sale, assignment, mortgage, sublease, transfer, operation
of law, or act of Tenant, without Landlord's prior written consent, except as
provided in Section 9.02 below. Landlord has the right to grant or withhold
its consent as provided in Section 9.05 below. Any attempted transfer without
consent shall be void and shall constitute a breach of this Lease. If Tenant
is a partnership, any cumulative transfer of more than twenty percent (20%)
of the partnership interests shall require Landlord's consent. If Tenant is a
corporation, any change in the ownership of a controlling interest of the
voting stock of the corporation shall require Landlord's consent.(1)
Section 9.02. TENANT AFFILIATE. Tenant may assign this Lease or sublease
the Property, without Landlord's consent, to any corporation which controls,
is controlled by or is under common control with Tenant, or to any
corporation resulting from the merger of or consolidation with Tenant
("Tenant's Affiliate"). In such case, any Tenant's Affiliate shall assume in
writing all of Tenant's obligations under this Lease.
Section 9.03. NO RELEASE OF TENANT. No transfer permitted by this
Article Nine, whether with or without Landlord's consent, shall release
Tenant or change Tenant's primary liability to pay the rent and to perform
all other obligations of Tenant under this Lease. Landlord's acceptance of
rent from any other person is not a waiver of any provision of this Article
Nine. Consent to one transfer is not a consent to any subsequent transfer. If
Tenant's transferee defaults under this Lease, Landlord may proceed directly
against Tenant without pursuing remedies against the transferee.
Section 9.05. LANDLORD'S CONSENT.
(a) Tenant's request for consent to any transfer described in Section
9.01 shall set forth in writing the details of the proposed transfer,
including the name, business and financial condition of the prospective
transferee, financial details of the proposed transfer (e.g., the term of and
the rent and security deposit payable under any proposed assignment or
sublease), and any other information Landlord deems relevant. Landlord shall
have the right to withhold consent, if reasonable, or to grant consent, based
on the following factors: (i) the business of the proposed assignee or
subtenant and the proposed use of the Property; (ii) the net worth and
financial reputation of the proposed assignee or subtenant; (iii) Tenant's
compliance with all of its obligations under the Lease; and (iv) such other
factors as Landlord may reasonably deem relevant. If Landlord objects to a
proposed assignment solely because of the net worth and/or financial
reputation of the proposed assignee, Tenant may nonetheless sublease (but not
assign), all or a portion of the Property to the proposed transferee, but
only on the other terms of the proposed transfer.
(b) If Tenant assigns or subleases, the following shall apply:
(i) Tenant shall pay to Landlord as Additional Rent under the Lease
the Landlord's Share (stated in Section 1.13) of the Profit (defined
below) on such transaction as and when received by Tenant. The "Profit"
means (A) all amounts paid to Tenant for such assignment or sublease,
including "key" money, monthly rent in excess of the monthly rent
payable under the Lease, and all fees and other consideration paid for
the assignment or sublease, including fees under any collateral
agreements, less (B) costs and expenses directly incurred by Tenant in
connection with the execution and performance of such assignment or
sublease for real estate broker's commissions(2) and costs of renovation
or construction of tenant improvements required under such assignment or
sublease. Tenant is entitled
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to recover such costs and expenses before Tenant is obligated to pay the
Landlord's Share to Landlord. The Profit in the case of a sublease of
less than all the Property is the rent allocable to the subleased space
as a percentage on a square footage basis.
(ii) Tenant shall provide Landlord a written statement certifying
all amounts to be paid from any assignment or sublease of the Property
within thirty (30) days after the transaction documentation is signed,
and Landlord(1) may inspect Tenant's books and records to verify the
accuracy of such statement. On written request, Tenant shall promptly
furnish to Landlord copies of all the transaction documentation, all of
which shall be certified by Tenant to be complete, true and correct.
Landlord's receipt of Landlord's Share shall not be a consent to any
further assignment or subletting. The breach of Tenant's obligation
under this Paragraph 9.05(b) shall be a material default of the Lease.
Section 9.06. NO MERGER. No merger shall result from Tenant's sublease
of the Property under this Article Nine, Tenant's surrender of this Lease
or the termination of this Lease in any other manner. In any such event,
Landlord may terminate any or all subtenancies or succeed to the interest of
Tenant as sublandlord under any or all subtenancies.
ARTICLE TEN: DEFAULTS; REMEDIES
Section 10.01. COVENANTS AND CONDITIONS. Tenant's performance of each of
Tenant's obligations under this Lease is a condition as well as a covenant.
Tenant's right to continue in possession of the Property is conditioned upon
such performance. Time is of the essence in the performance of all covenants
and conditions.
Section 10.02. DEFAULTS. Tenant shall be in material default under this
Lease:
(a) If Tenant's vacation of the Property results in the cancellation of
any insurance described in Section 4.04;
(b) If Tenant fails to pay rent or any other charge(2) due;
(c) If Tenant fails to perform any of Tenant's non-monetary obligations
under this Lease for a period of thirty (30) days after written notice from
Landlord; provided that if more than thirty (30) days are required to
complete such performance, Tenant shall not be in default if Tenant commences
such performance within the thirty (30) -day period and thereafter diligently
pursues its completion. However, Landlord shall not be required to give such
notice if Tenant's failure to perform constitutes a non-curable breach of
this Lease. The notice required by this Paragraph is intended to satisfy any
and all notice requirements imposed by law on Landlord and is not in addition
to any such requirement.
(d) (i) If Tenant makes a general assignment or general arrangement for
the benefit of creditors; (ii) if a petition for adjudication of bankruptcy
or for reorganization or rearrangement is filed by or against Tenant and is
not dismissed within thirty (30) days; (iii) if a trustee or receiver is
appointed to take possession of substantially all of Tenant's assets located
at the Property or of Tenant's interest in this Lease and possession is not
restored to Tenant within thirty (30) days; or (iv) if substantially all of
Tenant's assets located at the Property or of Tenant's interest in this Lease
is subjected to attachment, execution or other judicial seizure which is not
discharged within thirty (30) days. If a court of competent jurisdiction
determines that any of the acts described in this subparagraph (d) is not a
default under this Lease, and a trustee is appointed to take possession (or
if Tenant remains a debtor in possession) and such trustee or Tenant
transfers Tenant's interest hereunder, then Landlord shall receive, as
Additional Rent, the excess, if any, of the rent (or any other consideration)
paid in connection with such assignment or sublease over the rent payable by
Tenant under this Lease.
Section 10.03. REMEDIES. On the occurrence of any material default by
Tenant, Landlord may, at any time thereafter, with or without notice or
demand and without limiting Landlord in the exercise of any right or remedy
which Landlord may have:
(a) Terminate Tenant's right to possession of the Property by any lawful
means, in which case this Lease shall terminate and Tenant shall immediately
surrender possession of the Property to Landlord. In such event, Landlord
shall be entitled to recover from Tenant all damages incurred by Landlord by
reason of Tenant's default, including (i) the worth at the time of the award
of the unpaid Base Rent, Additional Rent and other charges which Landlord had
earned at the time of the termination; (ii) the worth at the time of the
award of the amount by which the unpaid Base Rent, Additional Rent and other
charges which Landlord would have earned after termination until the time of
the award exceeds the amount of such rental loss that Tenant proves Landlord
could have reasonably avoided; (iii) the worth at the time of the award of
the amount by which the unpaid Base Rent, Additional Rent and other charges
which Tenant would have paid for the balance of the Lease Term after the time
of award exceeds the amount of such rental loss that Tenant proves Landlord
could have reasonably avoided; and (iv) any other amount necessary to
compensate Landlord for all the detriment proximately caused by Tenant's
failure to perform its obligations under the Lease or which in the ordinary
course of things would be likely to result therefrom, including, but not
limited to, any costs or expenses Landlord incurs in maintaining or
preserving the Property after such default, the cost of recovering possession
of the Property, expenses of reletting, including necessary renovation or
alteration of the Property, Landlord's reasonable attorneys' fees incurred in
connection therewith, and any real estate commission paid or payable. As used
in subparts (i) and (ii) above, the "worth at the time of the award" is
computed by allowing interest on unpaid amounts at the rate of fifteen
percent (15%) per annum, or such lesser amount as may then be the maximum
lawful rate. As used in subpart (iii) above, the "worth at the time of the
award" is computed by discounting such amount at the discount rate of the
Federal Reserve Bank of San Francisco at the time of the award, plus one
percent (1%). If Tenant has abandoned the Property, Landlord shall have the
option of (i) retaking possession of the Property and recovering from Tenant
the amount specified in this Paragraph 10.03(a), or (ii) proceeding under
Paragraph 10.03(b);
(b) Maintain Tenant's right to possession, in which case this Lease
shall continue in effect whether or not Tenant has abandoned the Property. In
such event, Landlord shall be entitled to enforce all of Landlord's rights
and remedies under this Lease, including the right to recover the rent as it
becomes due;
(c) Pursue any other remedy now or hereafter available to Landlord under
the laws or judicial decisions of the state in which the Property is located.
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Section 10.05. AUTOMATIC TERMINATION. Notwithstanding any other term or
provision hereof to the contrary, the Lease shall terminate on the occurrence
of any act which affirms the Landlord's intention to terminate the Lease as
provided in Section 10.03 hereof, including the filing of an unlawful
detainer action against Tenant. On such termination, Landlord's damages for
default shall include all costs and fees, including reasonable attorneys'
fees that Landlord incurs in connection with the filing, commencement,
pursuing and/or defending of any action in any bankruptcy court or other
court with respect to the Lease; the obtaining of relief from any stay in
bankruptcy restraining any action to evict Tenant; or the pursuing of any
action with respect to Landlord's right to possession of the Property. All
such damages suffered (apart from Base Rent and other rent payable hereunder)
shall constitute pecuniary damages which must be reimbursed to Landlord prior
to assumption of the Lease by Tenant or any successor to Tenant in any
bankruptcy or other proceeding.
Section 10.06. CUMULATIVE REMEDIES. Landlord's exercise of any right or
remedy shall not prevent it from exercising any other right or remedy.
ARTICLE ELEVEN: PROTECTION OF LENDERS
Section 11.01. SUBORDINATION. Landlord shall have the right to
subordinate this Lease to any groundlease, deed of trust or mortgage
encumbering the Property, any advances made on the security thereof and any
renewals, modifications, consolidations, replacements or extensions thereof,
whenever made or recorded(1). Tenant shall cooperate with Landlord and any
lender which is acquiring a security interest in the Property or the Lease.
Tenant shall execute such further documents and assurances as such lender may
require, provided that Tenant's obligations under this Lease shall not be
increased in any material way (the performance of ministerial acts shall not
be deemed material), and Tenant shall not be deprived of its rights under
this Lease. Tenant's right to quiet possession of the Property during the
Lease Term shall not be disturbed if Tenant pays the rent and performs all of
Tenant's obligations under this Lease and is not otherwise in default. If any
ground lessor, beneficiary or mortgagee elects to have this Lease prior to the
lien of its ground lease, deed of trust or mortgage and gives written notice
thereof to Tenant, this Lease shall be deemed prior to such ground lease,
deed of trust or mortgage whether this Lease is dated prior or subsequent to
the date of said ground lease, deed of trust or mortgage or the date of
recording thereof.
Section 11.02. ATTORNMENT. If Landlord's interest in the Property is
acquired by any ground lessor, beneficiary under a deed of trust, mortgagee,
or purchaser at a foreclosure sale, Tenant shall attorn to the transferee of
or successor to Landlord's interest in the Property and recognize such
transferee or successor as Landlord under this Lease. Tenant waives the
protection of any statute or rule of law which gives or purports to give
Tenant any right to terminate this Lease or surrender possession of the
Property upon the transfer of Landlord's interest.
Section 11.03. SIGNING OF DOCUMENTS. Tenant shall sign and deliver any
instrument or documents necessary or appropriate to evidence any such
attornment or subordination or agreement to do so. If Tenant fails to do so
within ten (10) days after written request, Tenant hereby makes, constitutes
and irrevocably appoints Landlord, or any transferee or successor of
Landlord, the attorney-in-fact of Tenant to execute and deliver any such
instrument or document.
Section 11.04. ESTOPPEL CERTIFICATES.
(a) Upon Landlord's written request, Tenant shall execute, acknowledge
and deliver to Landlord a written statement certifying: (i) that none of the
terms or provisions of this Lease have been changed (or if they have been
changed, stating how they have been changed); (ii) that this Lease has not
been cancelled or terminated; (iii) the last date of payment of the Base Rent
and other charges and the time period covered by such payment; (iv) that (2)
Landlord is not in default under this Lease (or, if Landlord is claimed
to be in default, stating why); and (v) such other representations or
information with respect to Tenant or the Lease as Landlord may reasonably
request or which any prospective purchaser or encumbrancer of the Property
may(3) require. Tenant shall deliver such statement to Landlord within ten
(10) days after(4) Landlord's request. Landlord may give any such statement
by Tenant to any prospective purchaser or encumbrancer of the Property. Such
purchaser or encumbrancer may rely conclusively upon such statement as true
and correct.
(b) If Tenant does not deliver such statement to Landlord within such
ten (10)-day period, Landlord, and any prospective purchaser or encumbrancer,
may conclusively presume and rely upon the following facts: (i) that the
terms and provisions of this Lease have not been changed except as otherwise
represented by Landlord; (ii) that this Lease has not been cancelled or
terminated except as otherwise represented by Landlord; (iii) that not more
than one month's Base Rent or other charges have been paid in advance; and
(iv)that Landlord is not in default under the Lease. In such event, Tenant
shall be estopped from denying the truth of such facts.
Section 11.05. TENANT'S FINANCIAL CONDITION. Within ten (10) days after
written request from Landlord, Tenant shall deliver to Landlord such
financial statements as Landlord reasonably requires to verify the net worth
of Tenant or any assignee, subtenant, or guarantor of Tenant. In addition,
Tenant shall deliver to any lender designated by Landlord any financial
statements(3) required by such lender to facilitate the financing or
refinancing of the Property. Tenant represents and warrants to Landlord that
each such financial statement is a true and accurate statement as of the date
of such statement. All financial statements shall be confidential and shall be
used only for the purposes set forth in this Lease.
10 Initials RJS
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ARTICLE TWELVE: LEGAL COSTS
Section 12.01. LEGAL PROCEEDINGS. If Tenant or Landlord shall be in
breach or default under this Lease, such party (the "Defaulting Party") shall
reimburse the other party (the "Nondefaulting Party") upon demand for any
costs or expenses that the Nondefaulting Party incurs in connection with any
breach or default of the Defaulting Party under this Lease, whether or not
suit is commenced or judgment entered. Such costs shall include (1) legal
fees and costs incurred for the negotiation of a settlement, enforcement of
rights or otherwise. Furthermore, if any action for breach of or to enforce
the provisions of this Lease is commenced, the court in such action shall
award to the party in whose favor a judgment is entered, a reasonable sum as
attorneys' fees and costs. The losing party in such action shall pay such
attorneys' fees and costs. Tenant shall also indemnify Landlord against and
hold Landlord harmless from all costs, expenses, demands and liability
Landlord may incur if Landlord becomes or is made a party to any claim or
action (a) instituted by Tenant against any third party, or by any third
party against Tenant, or by or against any person holding any interest under
or using the Property by license of or agreement with Tenant; (b) for
foreclosure of any lien for labor or material furnished to or for Tenant or
such other person; (c) otherwise arising out of or resulting from any act or
transaction of Tenant or such other person; or (d) necessary to protect
Landlord's interest under this Lease in a bankruptcy proceeding, or other
proceeding under Title 11 of the United States Code, as amended. Tenant shall
defend Landlord against any such claim or action at Tenant's expense with
counsel reasonably acceptable to Landlord or, at Landlord's election, Tenant
shall reimburse Landlord for any legal fees or costs Landlord incurs in any
such claim or action.
Section 12.02. LANDLORD'S CONSENT. Tenant shall pay Landlord's
reasonable attorneys' fees incurred in connection with Tenant's request for
Landlord's consent under Article Nine (Assignment and Subletting), or in
connection with any other act which Tenant proposes to do and which requires
Landlord's consent.
ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS
Section 13.01. NON-DISCRIMINATION. Tenant promises, and it is a
condition to the continuance of this Lease, that there will be no
discrimination against, or segregation of, any person or group of persons on
the basis of race, color, sex, creed, national origin or ancestry in the
leasing, subleasing, transferring, occupancy, tenure or use of the Property
or any portion thereof.
Section 13.02. LANDLORD'S LIABILITY; CERTAIN DUTIES.
(a) As used in this Lease, the term "Landlord" means only the current
owner or owners of the fee title to the Property or Project or the leasehold
estate under a ground lease of the Property or Project at the time in
question. Each Landlord is obligated to perform the obligations of Landlord
under this Lease only during the time such Landlord owns such interest or
title. Any Landlord who transfers its title or interest is relieved of all
liability with respect to the obligations of Landlord under this Lease to be
performed on or after the date of transfer. However, each Landlord shall
deliver to its transferee all funds that Tenant previously paid if such funds
have not yet been applied under the terms of this Lease.
(b) Tenant shall give written notice of any failure by Landlord to
perform any of its obligations under this Lease to Landlord and to any ground
lessor, mortgagee or beneficiary under any deed of trust encumbering the
Property whose name and address have been furnished to Tenant in writing.
Landlord shall not be in default under this Lease unless Landlord (or such
ground lessor, mortgagee or beneficiary) fails to cure non-performance within
thirty (30) days after receipt of Tenant's notice. However, if such
non-performance reasonably requires more than thirty (30) days to cure,
Landlord shall not be in default if such cure is commenced within such thirty
(30)-day period and thereafter diligently pursued to completion.
(c) Notwithstanding any term or provision herein to the contrary, the
liability of Landlord for the performance of its duties and obligations under
this Lease is limited to Landlord's interest in the Property and the Project,
and neither the Landlord nor its partners, shareholders, officers or other
principals shall have any personal liability under this Lease.
Section 13.03. SEVERABILITY. A determination by a court of competent
jurisdiction that any provision of this Lease or any part thereof is illegal
or unenforceable shall not cancel or invalidate the remainder of such
provision or this Lease, which shall remain in full force and effect.
Section 13.04. INTERPRETATION. The captions of the Articles or Sections
of this Lease are to assist the parties in reading this Lease and are not a
part of the terms or provisions of this Lease. Whenever required by the
context of this Lease, the singular shall include the plural the plural shall
include the singular. The masculine, feminine and neuter genders shall each
include the other. In any provision relating to the conduct, acts or
omissions of Tenant, the term "Tenant" shall include Tenant's agents,
employees, contractors, invitees, successors or others using the Property
with Tenant's expressed or implied permission.
Section 13.05. INCORPORATION OF PRIOR AGREEMENTS; MODIFICATIONS. This
Lease is the only agreement between the parties pertaining to the lease of
the Property and no other agreements are effective. All amendments to this
Lease shall be in writing and signed by all parties. Any other attempted
amendment shall be void.
Section 13.06. NOTICES. All notices required or permitted under this
Lease shall be in writing and shall be personally delivered or sent by
certified mail, return receipt requested, postage prepaid. Notices to Tenant
shall be delivered to the address specified in Section 1.03 above, except
that upon Tenant's taking possession of the Property, the Property shall be
Tenant's address for notice purposes. Notices to Landlord shall be delivered
to the address specified in Section 1.02 above. All notices shall be
effective upon delivery. Either party may change its notice address upon
written notice to the other party.
Section 13.07. WAIVERS. All waivers must be in writing and signed by the
waiving party. Landlord's failure to enforce any provision of this Lease or
its acceptance of rent shall not be a waiver and shall not prevent Landlord
from enforcing that provision or any other provision of this Lease in the
future. No statement on a payment check from Tenant or in a letter
accompanying a payment check shall be binding on Landlord. Landlord may, with
or without notice to Tenant, negotiate such check without being bound to the
conditions of such statement.
Section 13.08. NO RECORDATION. Tenant shall not record this Lease
without prior written consent from Landlord. However, either Landlord or
Tenant may require that a "Short Form" memorandum of this Lease executed by
both parties be recorded. The party requiring such recording shall pay all
transfer taxes and recording fees.
Section 13.09. BINDING EFFECT; CHOICE OF LAW. This Lease binds any party
who legally acquires any rights or interest in this Lease from Landlord or
Tenant. However, Landlord shall have no obligation to Tenant's successor
unless the rights or interests of Tenant's successor are acquired in
accordance with the terms of this Lease. The laws of the state in which the
Property is located shall govern this Lease.
11 Initials RJS
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<PAGE>
Landlord and Tenant have signed this Lease at the place and on the dates
specified adjacent to their signatures below and have initialled all Riders
which are attached to or incorporated by reference in this Lease.
"LANDLORD"
Signed on 11- 15, 1994 Emeryville Business Centre, A California
------------------ ----------------------------------------
at Emeryville, CA Limited Partnership
-------------- ----------------------------------------
By: [illegible]
------------------------------------
Its: General Partner
-----------------------------------
By:
-----------------------------------
Its:
-----------------------------------
"TENANT"
Signed on November 14, 1994 Berkeley Learning Technologies, Inc.,
------------------ ----------------------------------------
at Berkeley, CA a California corporation
-------------- ----------------------------------------
By: [illegible]
------------------------------------
Its: CEO
-----------------------------------
By:
-----------------------------------
Its:
-----------------------------------
IN ANY REAL ESTATE TRANSACTION, IT IS RECOMMENDED THAT YOU CONSULT WITH
A PROFESSIONAL, SUCH AS A CIVIL ENGINEER, INDUSTRIAL HYGIENIST OR OTHER
PERSON WITH EXPERIENCE IN EVALUATING THE CONDITION OF THE PROPERTY, INCLUDING
THE POSSIBLE PRESENCE OF ASBESTOS, HAZARDOUS MATERIALS AND UNDERGROUND
STORAGE TANKS.
THIS PRINTED FORM LEASE HAS BEEN DRAFTED BY LEGAL COUNSEL AT THE
DIRECTION OF THE SOUTHERN CALIFORNIA CHAPTER OF THE SOCIETY OF INDUSTRIAL AND
OFFICE REALTORS-Registered Trademark-, INC. NO REPRESENTATION OR
RECOMMENDATION IS MADE BY THE SOUTHERN CALIFORNIA CHAPTER OF THE SOCIETY OF
INDUSTRIAL AND OFFICE REALTORS-Registered Trademark-, INC., ITS LEGAL
COUNSEL, THE REAL ESTATE BROKERS NAMED HEREIN, OR THEIR EMPLOYEES OR AGENTS,
AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT OR TAX CONSEQUENCES OF THIS LEASE
OR OF THIS TRANSACTION. LANDLORD AND TENANT SHOULD RETAIN LEGAL COUNSEL TO
ADVISE THEM ON SUCH MATTERS AND SHOULD RELY UPON THE ADVICE OF SUCH LEGAL
COUNSEL.
13 Initials RJS
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<PAGE>
ENDNOTES
--------
PAGE 2
1/ , after the expiration of any applicable cure period,
PAGE 3
1/ (excluding any deductible under Landlord's comprehensive public liability
insurance policy)
PAGE 4
1/ substantial
2/ reasonable
PAGE 5
1/ reasonably
2/ (but not more often than monthly)
3/ against Tenant's obligation to pay rent
4/ Landlord's statement of Common Area costs shall be certified to be
correct by Landlord. Tenant shall have the right, for a period of one (1)
year after receipt of Landlord's statement, to question the accuracy of any
Common Area cost specified in the statement. If Tenant questions any Common
Area cost within the aforementioned time period, Landlord, after receipt of
written notice from Tenant, shall make Landlord's books and records regarding
the Common Area cost in question available to Tenant in a timely manner for
Tenant to audit. Tenant shall conduct the audit at a place other than
Landlord's office. Tenant shall pay the costs and expenses of any such
audit, unless the audit reveals a discrepancy of at least three percent (3%)
in the Common Area cost, in which event Landlord shall reimburse Tenant for
the costs and expenses of the audit within ten (10) days of Tenant's written
request therefor.
5/ and Landlord notifies Tenant that it has not yet received said rent
6/ any use by Tenant of the Property other than for a Permitted Use
7/ except for routine office and janitorial supplies in usual and customary
quantities stored, used and disposed of in accordance with all applicable
environmental laws
8/ , which consent shall not be unreasonably withheld or delayed
PAGE 6
1/ reasonably
2/ (during the last six (6) months of the Lease Term only)
3/ reasonably
4/ not less than twenty-four (24) hours'
5/ structural components,
6/ or such maintenance is covered under Landlord's warranty for the HVAC unit
1.
<PAGE>
7/ provided, however, that this sentence shall not be construed to require
Tenant to put the Property in better condition than the condition of the
Property as it existed as of the Commencement Date
8/ reasonable
PAGE 7
1/ per year
2/ Within ten (10) days of Landlord's receipt of Tenant's notice to
Landlord informing Landlord of its intent to make any alterations, additions
or improvements to the Premises, Landlord shall notify Tenant in writing as
to whether Tenant is required to remove the proposed alterations at the end
of the Lease Term and restore the Premises to its original condition. If
Landlord fails to notify Tenant in writing of its obligation to remove the
proposed alterations, improvements or additions at the end of the Lease Term
within said ten (10) day period, Tenant shall not be required to remove the
alterations, additions and improvements at the end of the Lease Term.
3/ together with the amount of the deductible
4/ is required to
PAGE 8
1/ Tenant shall not be deemed in violation of this Section 9.01 if a change
in voting control of Tenant's stock, or the stock of any corporate entity
which directly or indirectly controls Tenant, results by virtue of Tenant's
initial public offering of Tenant's stock.
2/ and finders' fees, advertising costs, legal fees
PAGE 9
1/ , upon reasonable notice to Tenant of not less than five (5) days,
2/ within ten (10) days after written notice from Landlord that such amount
is
PAGE 10
1/ ; provided, that in connection with any such subordination, the ground
lessor, beneficiary or mortgagee, as the case may be, executes an agreement
confirming that Tenant's right to quiet possession of the Property during the
Lease Term shall not be disturbed if Tenant pays the Rent and performs all of
Tenant's other obligations under this Lease and is not otherwise in default.
2/ , to Tenant's actual knowledge,
3/ reasonably
4/ Tenant's receipt of
PAGE 11
1/ reasonable
2.
<PAGE>
PAGE 12
1/ Tenant's receipt of Landlord's written request therefor
2/ or Tenant
3/ the non-performing party's
4/ or Tenant's
5/ and Landlord
6/ each other
7/ each Party
Tenant: Landlord:
[illegible] [illegible]
- ------------- -------------
(initial) (initial)
3.
<PAGE>
EXHIBIT "A"
FLOOR PLAN
EMERYVILLE BUSINESS CENTER
1250 45TH STREET - EMERYVILLE, CALIFORNIA
<PAGE>
EXHIBIT B
Reserved Parking
[to be attached]
<PAGE>
EXHIBIT C
Adjacent Space
[to be attached]
<PAGE>
ADDENDUM
--------
This Addendum shall be a part of, and is hereby incorporated into, that
certain lease (the "Lease") by and between Emeryville Business Centre, a
California Limited Partnership ("Landlord"), and Berkeley Learning
Technologies, Inc., a California corporation ("Tenant"), for the property
located at 1250 - 45th Street, Suite 150, Emeryville, California, as more
fully described in Section 1.04 of the Lease. Capitalized terms used herein
shall have the meaning ascribed to them in the Lease, unless otherwise
indicated.
15. COMMENCEMENT DATE. The Lease Term shall commence (the "Commencement
Date") on the date on which the Property is Ready for Occupancy (as
hereinafter defined), and shall end on the date which is five (5) years after
the Commencement Date, plus the number of days necessary to end the Lease
Term on the last day of a month. The Property shall be ready for occupancy
("Ready for Occupancy") when construction of the Tenant Improvements (as
defined in Section 26 herein), excluding the installation of the HVAC unit,
is completed in accordance with the conditions called for in Section 26 of
this Lease. Within ten (10) days of the Commencement Date, Landlord and
Tenant shall execute a "Memorandum of Commencement", stating the Commencement
Date and the expiration date of this Lease.
16. DELAY IN COMMENCEMENT. If the Property is not Ready For Occupancy on or
before December 23, 1994, then Tenant, at its election and without waiving
any rights it may have, may terminate this Lease at any time prior to the
Commencement Date by written notice to Landlord. In addition, if Landlord
has not installed a new HVAC unit in the Property pursuant to Section 26 of
this Lease within one hundred twenty (120) days from the date of this Lease,
Tenant, at its election and without waiving any rights it might have, may
terminate this Lease upon written notice to Landlord.
17. BASE RENT. The Base Rent during the Lease Term is set forth in the
following table:
<TABLE>
<CAPTION>
PERIOD BASE RENT
------ ---------
<S> <C>
Commencement Date through the 3rd
full calendar month of the Lease
Term $0.64 psf
4th full calendar month through
the 36th full calendar month of
the Lease Term $1.28 psf
37th full calendar month through
the 48th full calendar month of
the Lease Term $1.38 psf
49th full calendar month through
the 60th full calendar month of
the Lease Term $1.48 psf
</TABLE>
18. REAL PROPERTY TAXES. Notwithstanding anything to the contrary contained
in Section 4.05 of this Lease, any increases in taxes attributable to change
of ownership (E.G., sale) of all or any part of the Property, building in
which the Property is located ("Building") or Project shall not constitute a
"real property tax" for purposes of this Lease.
19. PARKING. Notwithstanding anything to the contrary contained in this
Lease, Landlord shall reserve three (3) of the nineteen (19) vehicle parking
spaces allocated to Tenant for the exclusive use of Tenant and its agents,
employees, contractors and invitees. Landlord shall designate such parking
spaces as reserved for use by Tenant. The location of the parking spaces
reserved for Tenant's exclusive use are more particularly shown on EXHIBIT A.
1.
<PAGE>
20. COMMON AREA COSTS. Notwithstanding anything to the contrary contained
in Section 4.05 of this Lease, Common Area costs shall not include the
following: (1) legal fees, brokerage commissions, advertising costs or other
related expenses incurred in connection with the leasing of the Project; (2)
repairs, alterations, additions, improvements or replacements made to rectify
or correct any defect in the design, materials or workmanship of the Building
or to comply with any requirements of any governmental authority in effect as
of the Commencement Date; (3) any improvements, alterations or expenditures
of a capital nature; (4) depreciation or amortization of the Building; (5)
damage and repairs attributable to fire or other casualty; (6) damage and
repairs covered under any insurance policy required to be carried by Landlord
in connection with the Building or Common Areas; (7) damage and repairs
necessitated by the negligence or wilful misconduct of Landlord or Landlord's
employees, contractors or agents; (8) payments of principal or interest on
any mortgage or other encumbrance; (9) legal fees, accountants' fees and
other expenses incurred in connection with disputes with Tenant, tenants or
other occupants or associated with the enforcement of any leases or defense
of Landlord's title to or interest in the Building and/or Project or any part
thereof; (10) costs incurred in renovating or otherwise improving,
decorating, painting or altering space for other tenants or other occupants
or vacant space in the Building; (11) overhead and profit paid to
subsidiaries or affiliates of Landlord for management or other services for
the Project or Building or for supplies or other materials to the extent that
the costs of the services, supplies or materials exceed the competitive costs
of the services, supplies or materials if they were not provided by a
subsidiary or an affiliate; (12) costs incurred to test, survey, cleanup,
contain, abate, remove or otherwise remedy Hazardous Materials (as defined in
Section 5.03) from the Project unless the Hazardous Materials were in or on
the Project because of Tenant's gross negligence or intentional acts; and
(13) any other expense which, under generally accepted accounting principles
and practice, would not be considered a normal maintenance and operating
expense.
21. HAZARDOUS MATERIALS. Landlord represents and warrants to Tenant that to
the best of Landlord's knowledge there are no Hazardous Materials located
within the Property or Project as of the date of this Lease in violation of
applicable laws.
22. LANDLORD'S INDEMNITY. Landlord shall indemnify, defend (with counsel
reasonably satisfactory to Tenant), protect and hold harmless Tenant and its
officers, directors, employees and shareholders from and against any and all
costs, claims or liability (including without limitation reasonable
attorneys' fees) arising from the injury of any person or persons (including
wrongful death) or the damage or destruction of any property occurring in, on
or about the Common Areas that is due to or caused by the acts or omissions
of Landlord or Landlord's employees, agents, contractors and invitees.
Tenant's and Landlord's obligations under Section 5.05 of this Lease shall
survive the expiration or earlier termination of this Lease.
23. OPTION TO TERMINATE
Tenant shall have an option to terminate this Lease at the end of the
twenty-fourth (24th), thirty-sixth (36th) or forty-eighth (48th) full
calendar month of the Lease Term upon six (6) months prior written notice to
Landlord; provided, however, Tenant may not exercise its option to terminate
this Lease if, prior to Tenant's exercise of its option to terminate this
Lease, (1) Landlord delivers to Tenant Landlord's Notice (as defined in
Section 25 below) pursuant to which Landlord offers to lease to Tenant a
portion of the Adjacent Space (as defined in Section 25 of this Lease)
consisting of 3,500 or more square feet of office space contiguous to the
Property (hereinafter referred to as the "Expansion Space") in accordance
with the provisions set forth in Section 25 of this Lease, AND (ii) Tenant
leases the Expansion
2.
<PAGE>
Space. If Tenant terminates this Lease pursuant to this Section, Tenant
shall pay to Landlord within ten (10) days after the effective date of
termination the unamortized amount of any brokerage fees and improvement
costs incurred by Landlord in connection with this Lease, excluding the cost
incurred by Landlord in installing or repairing the HVAC unit servicing the
Property and constructing the demising walls in the Property. Such costs
shall be amortized on a straight line basis over the original term of this
Lease (i.e., five (5) years).
24. OPTION TO EXTEND.
a. OPTION RIGHT. Tenant shall have the option to extend the Lease Term
for an additional period of three (3) years (the "Extension Term") on all of
the terms and conditions of this Lease, except (i) Tenant shall not have the
option to further extend the Lease Term and (ii) the Base Rent shall be ninety-
five percent (95%) of the "Fair Market Rent" as of the commencement of the
Extension Term. Tenant shall exercise such option, if at all, by written
notice ("Tenant's Extension Notice") to Landlord not later than one hundred
twenty (120) days prior to the expiration of the original Lease Term.
Tenant's failure to give Tenant's Extension Notice in a timely manner shall
be deemed a waiver of Tenant's option to extend the Lease Term.
b. DETERMINATION OF FAIR MARKET RENT.
(i) AGREEMENT ON RENT. For the purposes of this Lease, "Fair
Market Rent" means the fair market monthly rent expected to prevail as of the
commencement of the Extension Term with respect to leases for office space of
comparable size and quality located in same geographical area as the
Property. The parties shall have thirty (30) days after Landlord's receipt
of Tenant's Extension Notice within which to agree on the Fair Market Rent.
(ii) SELECTION OF APPRAISERS. If Landlord and Tenant are unable to
agree on the Fair Market Rent within the aforementioned thirty (30) day
period as evidenced by a written amendment to this Lease executed by them,
then, within ten (10) days after the expiration of the thirty (30) day
period, Landlord and Tenant each, at its cost and by giving notice to the
other party, shall appoint a competent and disinterested real estate
appraiser with at least five (5) years' full-time commercial appraisal
experience in the geographical area of the Property or a broker with at least
five (5) years' brokerage experience in the geographical area of the Property
(each is hereinafter referred to as an "appraiser") to appraise and set the
monthly Base Rent during the Extension Term. If either Landlord or Tenant
does not appoint an appraiser within ten (10) days after the other party has
given notice of the name of its appraiser, the single appraiser appointed
shall be the sole appraiser and shall set the monthly Base Rent during the
Extension Term. If two (2) appraisers are appointed by Landlord and Tenant
as stated in this Section, they shall meet promptly and attempt to set the
monthly Base Rent for the Extension Term. If the two (2) appraisers are
unable to agree within thirty (30) days after the second appraiser has been
appointed, they shall attempt to select a third appraiser meeting the
qualifications stated in this Section within ten (10) days after the last day
the two (2) appraisers are given to set the monthly Base Rent. If they are
unable to agree on the third appraiser, either Landlord or Tenant, by giving
ten (10) days' notice to the other party, can apply to the then president of
the real estate board of the county in which the Property is located, or to
the Presiding Judge of the Superior Court of the county in which the Property
is located, for the selection of a third appraiser who meets the
qualifications stated in this paragraph. Landlord and Tenant each shall bear
one-half (1/2) of the cost of appointing the third appraiser and of paying
the third appraiser's fee. The third appraiser, however selected, shall be a
person who has not previously acted in any capacity for either Landlord or
Tenant.
3.
<PAGE>
(iii) VALUE DETERMINED BY THREE (3) APPRAISERS. Within thirty (30)
days after the selection of the third appraiser, a majority of the appraisers
shall set the monthly Base Rent for the Extension Term. If a majority of the
appraisers is unable to set the monthly Base Rent within the stipulated
period of time, Landlord's appraiser shall arrange for simultaneous exchange
of written appraisals from each of the appraisers and the three (3)
appraisals shall be added together and their total divided by three (3); the
resulting quotient shall be the monthly Base Rent for the Property during the
Extension Term. If, however, the low appraisal and/or the high appraisal
are/is more than ten percent (10%) lower and/or higher than the middle
appraisal, the low appraisal and/or the high appraisal shall be disregarded.
If only one (1) appraisal is disregarded, the remaining two (2) appraisals
shall be added together and their total divided by two (2); the resulting
quotient shall be the monthly Base Rent for the Property during the Extension
Term. If both the low appraisal and the high appraisal are disregarded as
stated in this Section, the middle appraisal shall be the monthly Base Rent
for the Property during the Extension Term.
(iv) NOTICE TO LANDLORD AND TENANT. After the monthly Base Rent for
the Extension Term has been set, the appraisers immediately shall notify
Landlord and Tenant, and Landlord and Tenant immediately shall execute an
amendment to this Lease stating the monthly Base Rent.
25. TENANT'S RIGHT OF FIRST OFFER.
a. RIGHT OF TENANT. Subject to the terms and conditions provided below,
Landlord grants to Tenant a right of first offer ("Right of First Offer") to
lease all or a portion of the adjacent space (the "Adjacent Space") to the
Property, consisting of approximately 9,034 square feet of space and located
within the Building, as such space becomes available for lease. The Adjacent
Space is more particularly described in EXHIBIT A.
b. EXERCISE OF RIGHT. If all or any portion of the Adjacent Space
becomes available for lease during the Term (or any extension thereof),
Landlord shall notify Tenant in writing ("Landlord's Notice") of the
availability of such space. Landlord shall specify in Landlord's Notice the
approximate square footage of the space which is available for lease and the
terms on which Landlord is willing to lease the space to Tenant. Tenant may
exercise Tenant's Right of First Offer to lease all or any portion of the
Adjacent Space by delivering to Landlord written notice of its election to
lease the space described in Landlord's Notice on the terms proposed therein
within fifteen (15) days of Tenant's receipt of Landlord's Notice. If Tenant
does not exercise its Right of First Offer to lease the space described in
Landlord's Notice within said fifteen (15) day period, except as otherwise
provided below, Landlord shall be relieved of its obligation to lease to
Tenant the space described in Landlord's Notice and Tenant's rights under
this Section shall terminate and be of no further force or effect.
c. CONTINUING RIGHT. Notwithstanding anything to the contrary contained
in this Section, Landlord may not lease the Adjacent Space during the Term
(or any extension thereof) for less than ninety-five percent (95%) of the
average annual Base Rent specified in Landlord's Notice unless Landlord first
re-offers to lease the Adjacent Space to Tenant at such lesser Base Rent and
on the same terms and conditions upon which Landlord proposes to lease the
Adjacent Space. Landlord shall offer to lease the Adjacent Space to Tenant
and Tenant shall exercise its Right of First Offer to lease the Adjacent
Space (if at all) in accordance with the procedure set forth in Section 25.b
above.
26. TENANT IMPROVEMENTS. Prior to the Commencement Date, Landlord shall
complete the following improvements to the
4.
<PAGE>
Property (the "Tenant Improvements"), in accordance with plans and
specifications approved by Tenant:
(i) install a new pad and carpet;
(ii) paint the interior of the Property;
(iii) install a new HVAC unit; and
(iv) to the extent a kitchen has not been installed in the Premises,
install a kitchen (including a counter and sink) in the Premises.
Landlord shall commence construction and/or installation of the Tenant
Improvements immediately following the execution of this Lease and shall
diligently proceed with the construction and/or installation of the Tenant
Improvements.
Landlord represents and warrants to Tenant, as of the Commencement Date, that
the Property is and shall be in compliance with all applicable municipal,
county, state and federal statutes, laws, ordinances, including, but not
limited to, zoning ordinances, and regulations governing and relating to the
use, construction, condition and occupancy of the Property.
27. IMPROVEMENT ALLOWANCE. Landlord shall pay to Tenant upon the terms and
conditions set forth below an improvement allowance (the "Improvement
Allowance") in an amount not to exceed Three Thousand Dollars ($3,000.00).
The amount paid by Landlord to Tenant shall not exceed Tenant's actual
expenses for work performed and materials furnished in connection with the
Property, including, without limitation, costs incurred by Tenant in
demolishing certain walls and installing new electrical lighting in the
Property. Landlord shall pay the Improvement Allowance to Tenant within ten
(10) days after Landlord receives from Tenant its written request therefor,
provided that Tenant's written request is accompanied by copies of invoices
paid by Tenant in an amount equal to the amount requested by Tenant.
28. EARLY ENTRY. Notwithstanding anything to the contrary contained in this
Lease, Tenant, upon written notice to Landlord, may occupy the Property prior
to the Commencement Date. Tenant's occupancy of the Property during said
early occupancy period shall be subject to all of the provisions of this
Lease, except that Tenant shall only be obligated to pay to Landlord
seventy-five (75%) of the Base Rent (I.E., $0.48 psf) and all other changes
specified in this Lease for the early occupancy period.
29. REIMBURSEMENT UPON TERMINATION. If Landlord fails to deliver the
Premises to Tenant Ready for Occupancy on or prior to December 23, 1994 and
Tenant terminates this Lease in accordance with the terms of Section 16 of
this Lease, Tenant shall reimburse Landlord an amount equal to any
expenditure incurred by Landlord prior to Tenant's termination of this Lease
and actually paid by Landlord with respect to Landlord's purchase and
installation of carpet and padding in the Premises. Notwithstanding the
foregoing, if Landlord fails to deliver the Premises to Tenant Ready for
Occupancy within sixty (60) days after the execution of this Lease, Tenant
may terminate this Lease as provided in Section 16 of this Lease at no cost
to Tenant.
[ILLEGIBLE] RJS
----------- -----------
5.
<PAGE>
[logo]
24 February 1998
Michelle Kraus
Theatrix/Sanctuary Woods
1250 45th Street, Suite 350
Emeryville, CA 94608
Re: Rent Increase Suite 350
Dear Michelle,
Your present rent on Suite 350 is being increased per addendum #3 of your
Lease dated 11/14/94:
YOUR NEW RENT ON SUITE 350 IS $5745.00 PER MONTH. EFFECTIVE DATE OF INCREASE
4/15/98.
The rent breakdown for April is as follows:
1/2 Present Rent $5381.00 = $2690.50
1/2 New Rent $5745.00 = $2872.50
--------
TOTAL APRIL RENT FOR SUITE 350 IS $5563.00
TOTAL RENT DUE PER MONTH FOR THE EMERYVILLE BUSINESS CENTRE
Suite 150 $ 2094.00
Suite 325 $ 4463.00
Suite 350 $ 5745.00
----------
TOTAL MONTHLY RENT $12,302.00
On January 14,1998, I had a telephone conversation with Marge and she took
all the information down as to what to pay in March, April, and May 1998.
If you have any questions, please give me a call.
Thank you,
/s/ Elayne M. Pieri
- -------------------
Elayne M. Pieri
Property Manager
sent via fax: 658-2827
Fordham Properties Inc.
5835 Doyle St.
Suite 101
Emeryville, CA 94608
510 547-7177
<PAGE>
Exhibit 10.34
SANCTUARY WOODS MULTIMEDIA CORPORATION
1996 STOCK PLAN
(AMENDED TO REFLECT THE SHARE CONSOLIDATION EFFECTED ON APRIL 15, 1997)
1. PURPOSES OF THE PLAN. The purposes of this Stock Plan are to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees, Directors and
Consultants to promote the success of the Company's business. Options
granted under the Plan may be Incentive Stock Options or Nonstatutory Stock
Options, as determined by the Administrator at the time of grant. Stock
Purchase Rights may also be granted under the Plan.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "ADMINISTRATOR" means the Board or any of its Committees as
shall be administering the Plan in accordance with Section 4 hereof.
(b) "APPLICABLE LAWS" means the requirements relating to the
administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws
of any other country or jurisdiction where Options or Stock Purchase Rights
are granted under the Plan.
(c) "BOARD" means the Board of Directors of the Company.
(d) "CODE" means the Internal Revenue Code of 1986, as amended.
(e) "COMMITTEE" means a committee of Directors appointed by the
Board in accordance with Section 4 hereof.
(f) "COMMON STOCK" means the Common Stock of the Company.
(g) "COMPANY" means Sanctuary Woods Multimedia Corporation, a
corporation organized under the laws of Delaware.
(h) "CONSULTANT" means any person who is engaged by the Company or
any Parent or Subsidiary to render consulting or advisory services to such
entity.
(i) "DIRECTOR" means a member of the Board of Directors of the
Company.
(j) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Parent or Subsidiary of the Company. A
Service Provider (defined below) shall not cease to be an Employee in the
case of (i) any leave of absence approved by the Company or (ii) transfers
between locations of the Company or between the Company, its Parent, any
Subsidiary, or any successor.
<PAGE>
For purposes of Incentive Stock Options, no such leave may exceed ninety
days, unless reemployment upon expiration of such leave is guaranteed by
statute or contract. If reemployment upon expiration of a leave of absence
approved by the Company is not so guaranteed, on the 181st day of such leave
any Incentive Stock Option held by the Optionee shall cease to be treated as
an Incentive Stock Option and shall be treated for tax purposes as a
Nonstatutory Stock Option. Neither service as a Director nor payment of a
director's fee by the Company shall be sufficient to constitute "employment"
by the Company.
(k) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(l) "FAIR MARKET VALUE" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system
for the last market trading day prior to the time of determination, as
reported in THE WALL STREET JOURNAL or such other source as the Administrator
deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common
Stock on the last market trading day prior to the day of determination; or
(iii) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in good faith
by the Administrator.
(m) "INCENTIVE STOCK OPTION" means an Option intended to qualify
as an incentive stock option within the meaning of Section 422 of the Code.
(n) "NONSTATUTORY STOCK OPTION" means an Option not intended to
qualify as an Incentive Stock Option.
(o) "OFFICER" means a person who is an officer of the Company
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(p) "OPTION" means a stock option granted pursuant to the Plan.
(q) "OPTION AGREEMENT" means a written or electronic agreement
between the Company and an Optionee evidencing the terms and conditions of an
individual Option grant. The Option Agreement is subject to the terms and
conditions of the Plan.
(r) "OPTION EXCHANGE PROGRAM" means a program whereby outstanding
Options are exchanged for Options with a lower exercise price.
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<PAGE>
(s) "OPTIONED STOCK" means the Common Stock subject to an Option
or a Stock Purchase Right.
(t) "OPTIONEE" means the holder of an outstanding Option or Stock
Purchase Right granted under the Plan.
(u) "PARENT" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(v) "PLAN" means this 1996 Stock Option Plan.
(w) "RESTRICTED STOCK" means shares of Common Stock acquired
pursuant to a grant of a Stock Purchase Right under Section 11 below.
(x) "SECTION 16(b)" means Section 16(b) of the Securities Exchange
Act of 1934, as amended.
(y) "SERVICE PROVIDER" means an Employee, Director or Consultant.
(z) "SHARE" means a share of the Common Stock, as adjusted in
accordance with Section 12 below.
(aa) "STOCK PURCHASE RIGHT" means a right to purchase Common Stock
pursuant to Section 11 below.
(bb) "SUBSIDIARY" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 12
of the Plan, the maximum aggregate number of Shares which may be subject to
option and sold under the Plan is 400,000 Shares. The Shares may be
authorized but unissued, or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes
unexercisable without having been exercised in full, or is surrendered
pursuant to an Option Exchange Program, the unpurchased Shares which were
subject thereto shall become available for future grant or sale under the
Plan (unless the Plan has terminated). However, Shares that have actually
been issued under the Plan, upon exercise of either an Option or Stock
Purchase Right, shall not be returned to the Plan and shall not become
available for future distribution under the Plan, except that if Shares of
Restricted Stock are repurchased by the Company at their original purchase
price, such Shares shall become available for future grant under the Plan.
-3-
<PAGE>
4. ADMINISTRATION OF THE PLAN.
(a) The Plan shall be administered by the Board or a Committee
appointed by the Board, which Committee shall be constituted to comply with
Applicable Laws.
(b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the
Plan and, in the case of a Committee, the specific duties delegated by the
Board to such Committee, and subject to the approval of any relevant
authorities, the Administrator shall have the authority in its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and
Stock Purchase Rights may from time to time be granted hereunder;
(iii) to determine the number of Shares to be covered by each
such award granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions of any Option or
Stock Purchase Right granted hereunder. Such terms and conditions include,
but are not limited to, the exercise price, the time or times when Options or
Stock Purchase Rights may be exercised (which may be based on performance
criteria), any vesting acceleration or waiver of forfeiture restrictions, and
any restriction or limitation regarding any Option or Stock Purchase Right or
the Common Stock relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;
(vi) to determine whether and under what circumstances an
Option may be settled in cash under subsection 9(e) instead of Common Stock;
(vii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock
covered by such Option has declined since the date the Option was granted;
(viii) to initiate an Option Exchange Program;
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(x) to allow Optionees to satisfy withholding tax
obligations by electing to have the Company withhold from the Shares to be
issued upon exercise of an Option or Stock Purchase Right that number of
Shares having a Fair Market Value equal to the amount required to be
withheld. The Fair Market Value of the Shares to be withheld shall be
determined on the date that the amount of tax to be withheld is to be
determined. All elections by Optionees to have Shares withheld for this
purpose shall
-4-
<PAGE>
be made in such form and under such conditions as the Administrator may deem
necessary or advisable; and
(xi) to construe and interpret the terms of the Plan and
awards granted pursuant to the Plan.
(c) EFFECT OF ADMINISTRATOR'S DECISION. All decisions,
determinations and interpretations of the Administrator shall be final and
binding on all Optionees.
5. ELIGIBILITY.
(a) Nonstatutory Stock Options and Stock Purchase Rights may be
granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
(b) Each Option shall be designated in the Option Agreement as
either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair
Market Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year
(under all plans of the Company and any Parent or Subsidiary) exceeds
$100,000, such Options shall be treated as Nonstatutory Stock Options. For
purposes of this Section 5(b), Incentive Stock Options shall be taken into
account in the order in which they were granted. The Fair Market Value of
the Shares shall be determined as of the time the Option with respect to such
Shares is granted.
(c) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon any Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall it interfere
in any way with his or her right or the Company's right to terminate such
relationship at any time, with or without cause.
6. TERM OF PLAN. The Plan shall become effective upon its adoption by
the Board. It shall continue in effect for a term of ten (10) years unless
sooner terminated under Section 14 of the Plan.
7. TERM OF OPTION. The term of each Option shall be stated in the
Option Agreement; provided, however, that the term shall be no more than ten
(10) years from the date of grant thereof. In the case of an Incentive Stock
Option granted to an Optionee who, at the time the Option is granted, owns
stock representing more than ten percent (10%) of the voting power of all
classes of stock of the Company or any Parent or Subsidiary, the term of the
Option shall be five (5) years from the date of grant or such shorter term as
may be provided in the Option Agreement.
8. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) The per share exercise price for the Shares to be issued upon
exercise of an Option shall be such price as is determined by the
Administrator, but shall be subject to the following:
(i) In the case of an Incentive Stock Option:
-5-
<PAGE>
(A) granted to an Employee who, at the time of grant of
such Option, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or
Subsidiary, the exercise price shall be no less than 110% of the Fair Market
Value per Share on the date of grant.
(B) granted to any other Employee, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share
on the date of grant.
(ii) In the case of a Nonstatutory Stock Option:
(A) granted to a Service Provider who, at the time of
grant of such Option, owns stock representing more than ten percent (10%) of
the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the exercise price shall be no less than 110% of the Fair Market
Value per Share on the date of the grant.
(B) granted to any other Service Provider, the per Share
exercise price shall be no less than 85% of the Fair Market Value per Share
on the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted
with a per Share exercise price other than as required above pursuant to a
merger or other corporate transaction.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined
by the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant). Such consideration may consist of (1)
cash, (2) check, (3) promissory note, (4) other Shares which (x) in the case
of Shares acquired upon exercise of an Option, have been owned by the
Optionee for more than six months on the date of surrender, and (y) have a
Fair Market Value on the date of surrender equal to the aggregate exercise
price of the Shares as to which such Option shall be exercised, (5)
consideration received by the Company under a cashless exercise program
implemented by the Company in connection with the Plan, or (6) any
combination of the foregoing methods of payment. In making its determination
as to the type of consideration to accept, the Administrator shall consider
if acceptance of such consideration may be reasonably expected to benefit the
Company.
9. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option
granted hereunder shall be exercisable according to the terms hereof at such
times and under such conditions as determined by the Administrator and set
forth in the Option Agreement, but in no case at a rate of less than 20% per
year over five (5) years from the date the Option is granted. Unless the
Administrator provides otherwise, vesting of Options granted hereunder shall
be suspended during any unpaid leave of absence. An Option may not be
exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives:
(i) written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to
-6-
<PAGE>
exercise the Option, and (ii) full payment for the Shares with respect to
which the Option is exercised plus any amount required to be withheld by the
Company for income or employment tax purposes in connection with such option
exercise. Full payment may consist of any consideration and method of
payment authorized by the Administrator and permitted by the Option Agreement
and the Plan. Shares issued upon exercise of an Option shall be issued in
the name of the Optionee or, if requested by the Optionee, in the name of the
Optionee and his or her spouse or a trust for his, her or their benefit.
Until the Shares are issued (as evidenced by the appropriate entry on the
books of the Company or of a duly authorized transfer agent of the Company),
no right to vote or receive dividends or any other rights as a shareholder
shall exist with respect to the Shares, notwithstanding the exercise of the
Option. The Company shall issue (or cause to be issued) such Shares promptly
after the Option is exercised. No adjustment will be made for a dividend or
other right for which the record date is prior to the date the Shares are
issued, except as provided in Section 12 of the Plan.
Exercise of an Option in any manner shall result in a decrease
in the number of Shares thereafter available, both for purposes of the Plan
and for sale under the Option, by the number of Shares as to which the Option
is exercised.
(b) TERMINATION OF RELATIONSHIP AS A SERVICE PROVIDER. If an
Optionee ceases to be a Service Provider, such Optionee may exercise his or
her Option within thirty (30) days after the date of such termination or such
longer period of time as is specified in the Option Agreement to the extent
that the Option is vested on the date of termination (but in no event later
than the expiration of the term of the Option as set forth in the Option
Agreement). In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for one (1) month following the Optionee's
termination. If, on the date of termination, the Optionee is not vested as
to his or her entire Option, the Shares covered by the unvested portion of
the Option shall revert to the Plan. If, after termination, the Optionee
does not exercise his or her Option within the time specified by the
Administrator, the Option shall terminate, and the Shares covered by such
Option shall revert to the Plan.
(c) DEATH OR DISABILITY OF OPTIONEE. If an Optionee ceases to be
a Service Provider as a result of the Optionee's Death or Disability, the
Optionee may exercise his or her Option within such period of time as is
specified in the Option Agreement to the extent the Option is vested on the
date of termination (but in no event later than the expiration of the term of
such Option as set forth in the Option Agreement). In the absence of a
specified time in the Option Agreement, the Option shall remain exercisable
for twelve (12) months following the Optionee's termination. If such
disability is not a "disability" as such term is defined in Section 22(e)(3)
of the Code, in the case of an Incentive Stock Option such Incentive Stock
Option shall automatically cease to be treated as an Incentive Stock Option
and shall be treated for tax purposes as a Nonstatutory Stock Option on the
day three months and one day following such termination. If, on the date of
termination, the Optionee is not vested as to his or her entire Option, the
Shares covered by the unvested portion of the Option shall revert to the
Plan. If, after termination, the Option is not exercised within the time
specified herein, the Option shall terminate, and the Shares covered by such
Option shall revert to the Plan. In the event of an Optionee's death while a
Service Provider or during the exercise period provided in the event of an
Optionee's Disability or Retirement, the Option may be exercised by the
Optionee's estate or by a person who acquires the right to exercise the
Option by bequest or inheritance; the Option may be exercised by the executor
or
-7-
<PAGE>
administrator of the Optionee's estate or, if none, by the person(s) entitled
to exercise the Option under the Optionee's will or the laws of descent or
distribution.
(d) BUYOUT PROVISIONS. The Administrator may at any time offer to
buy out for a payment in cash or Shares, an Option previously granted, based
on such terms and conditions as the Administrator shall establish and
communicate to the Optionee at the time that such offer is made.
10. NON-TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS. Options
and Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws
of descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee.
11. STOCK PURCHASE RIGHTS.
(a) RIGHTS TO PURCHASE. Stock Purchase Rights may be issued
either alone, in addition to, or in tandem with other awards granted under
the Plan and/or cash awards made outside of the Plan. After the
Administrator determines that it will offer Stock Purchase Rights under the
Plan, it shall advise the offeree in writing or electronically of the terms,
conditions and restrictions related to the offer, including the number of
Shares that such person shall be entitled to purchase, the price to be paid,
and the time within which such person must accept such offer. The terms of
the offer shall comply in all respects with Section 260.140.42 of Title 10 of
the California Code of Regulations. The offer shall be accepted by execution
of a Restricted Stock purchase agreement in the form determined by the
Administrator.
(b) REPURCHASE OPTION. Unless the Administrator determines
otherwise, the Restricted Stock purchase agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination
of the purchaser's service with the Company for any reason (including death
or disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the
purchaser to the Company. The repurchase option shall lapse at such rate as
the Administrator may determine, but in no case at a rate of less than 20%
per year over five years from the date of purchase.
(c) OTHER PROVISIONS. The Restricted Stock purchase agreement
shall contain such other terms, provisions and conditions not inconsistent
with the Plan as may be determined by the Administrator in its sole
discretion.
(d) RIGHTS AS A SHAREHOLDER. Once the Stock Purchase Right is
exercised, the purchaser shall have rights equivalent to those of a
shareholder and shall be a shareholder when his or her purchase is entered
upon the records of the duly authorized transfer agent of the Company. No
adjustment shall be made for a dividend or other right for which the record
date is prior to the date the Stock Purchase Right is exercised, except as
provided in Section 12 of the Plan.
-8-
<PAGE>
12. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, MERGER OR ASSET SALE.
(a) CHANGES IN CAPITALIZATION. Subject to any required action by
the shareholders of the Company, the number of shares of Common Stock covered
by each outstanding Option or Stock Purchase Right, and the number of shares
of Common Stock which have been authorized for issuance under the Plan but as
to which no Options or Stock Purchase Rights have yet been granted or which
have been returned to the Plan upon cancellation or expiration of an Option
or Stock Purchase Right, as well as the price per share of Common Stock
covered by each such outstanding Option or Stock Purchase Right, shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split, reverse stock split,
stock dividend, combination or reclassification of the Common Stock, or any
other increase or decrease in the number of issued shares of Common Stock
effected without receipt of consideration by the Company. The conversion of
any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made
by the Administrator, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issuance by
the Company of shares of stock of any class, or securities convertible into
shares of stock of any class, shall affect, and no adjustment by reason
thereof shall be made with respect to, the number or price of shares of
Common Stock subject to an Option or Stock Purchase Right.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify
each Optionee as soon as practicable prior to the effective date of such
proposed transaction. The Administrator in its discretion may provide for an
Optionee to have the right to exercise his or her Option until fifteen (15)
days prior to such transaction as to all of the Optioned Stock covered
thereby, including Shares as to which the Option would not otherwise be
exercisable. In addition, the Administrator may provide that any Company
repurchase option applicable to any Shares purchased upon exercise of an
Option or Stock Purchase Right shall lapse as to all such Shares, provided
the proposed dissolution or liquidation takes place at the time and in the
manner contemplated. To the extent it has not been previously exercised, an
Option or Stock Purchase Right will terminate immediately prior to the
consummation of such proposed action.
(c) MERGER OR ASSET SALE. In the event of a merger of the Company
with or into another corporation, or the sale of substantially all of the
assets of the Company, each outstanding Option and Stock Purchase Right shall
be assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation. In the
event that the successor corporation refuses to assume or substitute for the
Option or Stock Purchase Right, the Optionee shall fully vest in and have the
right to exercise the Option or Stock Purchase Right as to all of the
Optioned Stock, including Shares as to which it would not otherwise be vested
or exercisable. If an Option or Stock Purchase Right becomes fully vested
and exercisable in lieu of assumption or substitution in the event of a
merger or sale of assets, the Administrator shall notify the Optionee in
writing or electronically that the Option or Stock Purchase Right shall be
fully exercisable for a period of fifteen (15) days from the date of such
notice, and the Option or Stock Purchase Right shall terminate upon the
expiration of such period. For the purposes of this paragraph, the Option or
Stock Purchase Right shall be considered assumed if, following the merger or
sale of assets, the option or right confers the right to
-9-
<PAGE>
purchase or receive, for each Share of Optioned Stock subject to the Option
or Stock Purchase Right immediately prior to the merger or sale of assets,
the consideration (whether stock, cash, or other securities or property)
received in the merger or sale of assets by holders of Common Stock for each
Share held on the effective date of the transaction (and if holders were
offered a choice of consideration, the type of consideration chosen by the
holders of a majority of the outstanding Shares); provided, however, that if
such consideration received in the merger or sale of assets is not solely
common stock of the successor corporation or its Parent, the Administrator
may, with the consent of the successor corporation, provide for the
consideration to be received upon the exercise of the Option or Stock
Purchase Right, for each Share of Optioned Stock subject to the Option or
Stock Purchase Right, to be solely common stock of the successor corporation
or its Parent equal in fair market value to the per share consideration
received by holders of Common Stock in the merger or sale of assets.
13. TIME OF GRANTING OPTIONS AND STOCK PURCHASE RIGHTS. The date of
grant of an Option or Stock Purchase Right shall, for all purposes, be the
date on which the Administrator makes the determination granting such Option
or Stock Purchase Right, or such other date as is determined by the
Administrator. Notice of the determination shall be given to each Employee or
Consultant to whom an Option or Stock Purchase Right is so granted within a
reasonable time after the date of such grant.
14. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may at any time amend,
alter, suspend or terminate the Plan.
(b) SHAREHOLDER APPROVAL. The Board shall obtain shareholder
approval of any Plan amendment to the extent necessary and desirable to
comply with Applicable Laws.
(c) EFFECT OF AMENDMENT OR TERMINATION. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any
Optionee, unless mutually agreed otherwise between the Optionee and the
Administrator, which agreement must be in writing and signed by the Optionee
and the Company. Termination of the Plan shall not affect the Administrator's
ability to exercise the powers granted to it hereunder with respect to
Options granted under the Plan prior to the date of such termination.
15. CONDITIONS UPON ISSUANCE OF SHARES.
(a) LEGAL COMPLIANCE. Shares shall not be issued pursuant to the
exercise of an Option or Stock Purchase Right unless the exercise of such
Option or Stock Purchase Right and the issuance and delivery of such Shares
shall comply with Applicable Laws and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
(b) INVESTMENT REPRESENTATIONS. As a condition to the exercise of
an Option or Stock Purchase Right, the Administrator may require the person
exercising such Option or Stock Purchase Right to represent and warrant at
the time of any such exercise that the Shares are being purchased only
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<PAGE>
for investment and without any present intention to sell or distribute such
Shares if, in the opinion of counsel for the Company, such a representation
is required.
16. INABILITY TO OBTAIN AUTHORITY. The inability of the Company to
obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
17. RESERVATION OF SHARES. The Company, during the term of this Plan,
shall at all times reserve and keep available such number of Shares as shall
be sufficient to satisfy the requirements of the Plan.
18. SHAREHOLDER APPROVAL. The Plan shall be subject to approval by the
shareholders of the Company within twelve (12) months after the date the Plan
is adopted. Such shareholder approval shall be obtained in the degree and
manner required under Applicable Laws.
19. INFORMATION TO OPTIONEES AND PURCHASERS. The Company shall provide
to each Optionee or holder of Stock Purchase Rights and to each individual
who acquires Shares pursuant to the Plan, not less frequently than annually
during the period such Optionee or purchaser or holder of Stock Purchase
Rights has one or more Options or Stock Purchase Rights outstanding, and, in
the case of an individual who acquires Shares pursuant to the Plan, during
the period such individual owns such Shares, copies of annual financial
statements. The Company shall not be required to provide such statements to
key employees whose duties in connection with the Company assure their access
to equivalent information.
-11
<PAGE>
1996 STOCK PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall
have the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
The undersigned Optionee has been granted an Option to purchase Common
Stock of the Company, subject to the terms and conditions of the Plan and
this Option Agreement, as follows:
Date of Grant
Vesting Commencement Date
Exercise Price per Share $0.09
Total Number of Shares Granted
Total Exercise Price $
Type of Option: X Incentive Stock Option
___ Nonstatutory Stock Option
Term/Expiration Date:
VESTING SCHEDULE:
This Option shall be exercisable, in whole or in part, according to the
following vesting schedule:
-1-
<PAGE>
TERMINATION PERIOD:
This Option shall be exercisable for [___________] months after Optionee
ceases to be a Service Provider. Upon Optionee's death or disability, this
Option may be exercised for such longer period as provided in the Plan. In
no event may Optionee exercise this Option after the Term/Expiration Date as
provided above.
II. AGREEMENT
1. GRANT OF OPTION. The Plan Administrator of the Company hereby
grants to the Optionee named in the Notice of Grant (the "Optionee"), an
option (the "Option") to purchase the number of Shares set forth in the
Notice of Grant, at the exercise price per Share set forth in the Notice of
Grant (the "Exercise Price"), and subject to the terms and conditions of the
Plan, which is incorporated herein by reference. Subject to Section 14(c) of
the Plan, in the event of a conflict between the terms and conditions of the
Plan and this Option Agreement, the terms and conditions of the Plan shall
prevail.
If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option as
defined in Section 422 of the Code. Nevertheless, to the extent that it
exceeds the $100,000 rule of Code Section 422(d), this Option shall be
treated as a Nonstatutory Stock Option ("NSO").
2. EXERCISE OF OPTION.
a. RIGHT TO EXERCISE. This Option shall be exercisable during
its term in accordance with the Vesting Schedule set out in the Notice of
Grant and with the applicable provisions of the Plan and this Option
Agreement.
b. METHOD OF EXERCISE. This Option shall be exercisable by
delivery of an exercise notice in the form attached as Exhibit A (the
"Exercise Notice") which shall state the election to exercise the Option, the
number of Shares with respect to which the Option is being exercised, and
such other representations and agreements as may be required by the Company.
The Exercise Notice shall be accompanied by payment of the aggregate Exercise
Price as to all Exercised Shares and the amount of any amount required to be
withheld by the Company for income or employment tax purposes. This Option
shall be deemed to be exercised upon receipt by the Company of such fully
executed Exercise Notice accompanied by the aggregate Exercise Price and the
amount of any required withholding.
No Shares shall be issued pursuant to the exercise of an Option
unless such issuance and such exercise complies with Applicable laws.
Assuming such compliance, for income tax purposes the Shares shall be
considered transferred to the Optionee on the date on which the Option is
exercised with respect to such Shares.
3. OPTIONEE'S REPRESENTATIONS. In the event the Shares have not been
registered under the Securities Act of 1933, as amended, at the time this
Option is exercised, the Optionee shall, if required
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<PAGE>
by the Company, concurrently with the exercise of all or any portion of this
Option, deliver to the Company his or her Investment Representation Statement
in the form attached hereto as Exhibit B, and shall read the applicable rules
of the Commissioner of Corporations attached to such Investment
Representation Statement.
4. METHOD OF PAYMENT. Payment of the aggregate Exercise Price shall
be by any of the following, or a combination thereof, at the election of the
Optionee:
a. cash or check;
b. consideration received by the Company under a formal cashless
exercise program adopted by the Company in connection with the Plan; or
c. surrender of other Shares which, (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, and (ii) have a Fair Market
Value on the date of surrender equal to the aggregate Exercise Price of the
Exercised Shares.
5. RESTRICTIONS ON EXERCISE. This Option may not be exercised until
such time as the Plan has been approved by the shareholders of the Company,
or if the issuance of such Shares upon such exercise or the method of payment
of consideration for such shares would constitute a violation of any
Applicable Law.
6. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred
in any manner otherwise than by will or by the laws of descent or
distribution and may be exercised during the lifetime of Optionee only by
Optionee. The terms of the Plan and this Option Agreement shall be binding
upon the executors, administrators, heirs, successors and assigns of the
Optionee.
7. TERM OF OPTION. This Option may be exercised only within the term
set out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option.
8. TAX CONSEQUENCES. Set forth below is a brief summary as of the
date of this Option of some of the United States federal tax consequences of
exercise of this Option and disposition of the Shares. THIS SUMMARY IS
NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO
CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS
OPTION OR DISPOSING OF THE SHARES.
a. EXERCISE OF ISO. If this Option qualifies as an ISO, there
will be no ordinary federal income tax liability upon the exercise of the
Option, although the excess, if any, of the Fair Market Value of the Shares
on the date of exercise over the Exercise Price will be treated as an
adjustment to the alternative minimum tax for federal tax purposes and may
subject the Optionee to the alternative minimum tax in the year of exercise.
-3-
<PAGE>
b. EXERCISE OF ISO FOLLOWING DISABILITY. If the Optionee ceases
to be an Employee as a result of a disability that is not a total and
permanent disability as defined in Section 22(e)(3) of the Code, to the
extent permitted on the date of termination, the Optionee must exercise an
ISO within three months of such termination for the ISO to remain qualified
as an ISO.
c. EXERCISE OF NONSTATUTORY STOCK OPTION. There may be an
ordinary federal income tax liability upon the exercise of a Nonstatutory
Stock Option. The Optionee will be treated as having received compensation
income (taxable at ordinary income tax rates) equal to the excess, if any, of
the Fair Market Value of the Shares on the date of exercise over the Exercise
Price. If Optionee is an Employee or a former Employee, the Company will be
required to withhold from Optionee's compensation or collect from Optionee
and pay to the applicable taxing authorities an amount in cash equal to a
percentage of this compensation income at the time of exercise, and may
refuse to honor the exercise and refuse to deliver Shares if such withholding
amounts are not delivered by the Optionee at the time of exercise.
d. DISPOSITION OF SHARES. In the case of an NSO, if Shares are
held for at least one year, any gain realized on disposition of the Shares
will be treated as long-term capital gain for federal income tax purposes.
In the case of an ISO, if Shares transferred pursuant to the Option are held
for at least one year after exercise and at least two years after the Date of
Grant, any gain realized on disposition of the Shares will also be treated as
long-term capital gain for federal income tax purposes. If Shares purchased
under an ISO are disposed of within one year after exercise or two years
after the Date of Grant, any gain realized on such disposition will be
treated as compensation income (taxable at ordinary income rates) to the
extent of the difference between the Exercise Price and the lesser of (1) the
Fair Market Value of the Shares on the date of exercise, or (2) the sale
price of the Shares. Any additional gain will be taxed as capital gain,
short-term or long-term depending on the period that the ISO Shares were held.
e. NOTICE OF DISQUALIFYING DISPOSITION OF ISO SHARES. If the
Option granted to Optionee herein is an ISO, and if Optionee sells or
otherwise disposes of any of the Shares acquired pursuant to the ISO on or
before the later of (1) the date two years after the Date of Grant, or (2)
the date one year after the date of exercise, the Optionee shall immediately
notify the Company in writing of such disposition. Optionee agrees that
Optionee may be subject to income tax withholding by the Company on the
compensation income recognized by the Optionee and agrees to pay the Company
(as a condition to its permitting the transfer of Optionee's shares) the
amount of income or employment tax required to be withheld by the Company
immediately upon such disqualifying disposition.
9. ENTIRE AGREEMENT; GOVERNING LAW. The Plan is incorporated herein
by reference. The Plan and this Option Agreement constitute the entire
agreement of the parties with respect to the subject matter hereof and
supersede in their entirety all prior undertakings and agreements of the
Company and Optionee with respect to the subject matter hereof, and may not
be modified adversely to the Optionee's interest except by means of a writing
signed by the Company and Optionee. This agreement is governed by the
internal substantive laws but not the choice of law rules of California.
-4-
<PAGE>
10. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND
AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS
EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY
(NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING
SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS
AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE
SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED
ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR
AT ALL, AND SHALL NOT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE
COMPANY'S RIGHT TO TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT
ANY TIME, WITH OR WITHOUT CAUSE.
Optionee acknowledges receipt of a copy of the Plan and represents that
he or she is familiar with the terms and provisions thereof, and hereby
accepts this Option subject to all of the terms and provisions thereof.
Optionee has reviewed the Plan and this Option in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option
and fully understands all provisions of the Option Agreement and 1996 Stock
Plan. Optionee hereby agrees to accept as binding, conclusive and final all
decisions or interpretations of the Administrator upon any questions arising
under the Plan or this Option. Optionee further agrees to notify the Company
upon any change in the residence address indicated below.
OPTIONEE: SANCTUARY WOODS MULTIMEDIA
CORPORATION
___________________________________ _______________________________________
Signature By
______________________________________
Title
-5-
<PAGE>
EXHIBIT A
1996 STOCK PLAN
EXERCISE NOTICE
Sanctuary Woods Multimedia Corporation
1825 South Grant Street
San Mateo, CA 94402
Attention: Chief Executive Officer
1. EXERCISE OF OPTION. Effective as of today, ___________, 19__, the
undersigned ("Optionee") hereby elects to exercise Optionee's option to
purchase _________ shares of the Common Stock (the "Shares") of Sanctuary
Woods Multimedia Corporation (the "Company") under and pursuant to the 1996
Stock Option Plan (the "Plan") and the Stock Option Agreement dated ________,
19__ (the "Option Agreement").
2. DELIVERY OF PAYMENT. Purchaser herewith delivers to the Company
the full purchase price of the Shares, as set forth in the Option Agreement,
and the amount of any income or employment taxes required to be withheld by
the Company with respect to such exercise.
3. REPRESENTATIONS OF OPTIONEE. Optionee acknowledges that Optionee
has received, read and understood the Plan and the Option Agreement and
agrees to abide by and be bound by their terms and conditions.
4. RIGHTS AS SHAREHOLDER. Until the issuance of the Shares (as
evidenced by the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company), no right to vote or receive
dividends or any other rights as a shareholder shall exist with respect to
the Optioned Stock, notwithstanding the exercise of the Option. The Shares
shall be issued to the Optionee as soon as practicable after the Option is
exercised. No adjustment shall be made for a dividend or other right for
which the record date is prior to the date of issuance except as provided in
Section 11 of the Plan.
5. TAX CONSULTATION. Optionee understands that Optionee may suffer
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.
6. SUCCESSORS AND ASSIGNS. The Company may assign any of its rights
under this Agreement to single or multiple assignees, and this Agreement
shall inure to the benefit of the successors and assigns of the Company.
Subject to the restrictions on transfer herein set forth, this
-1-
<PAGE>
Agreement shall be binding upon Optionee and his or her heirs, executors,
administrators, successors and assigns.
7. INTERPRETATION. Any dispute regarding the interpretation of this
Agreement shall be submitted by Optionee or by the Company forthwith to the
Administrator which shall review such dispute at its next regular meeting.
The resolution of such a dispute by the Administrator shall be final and
binding on all parties.
8. GOVERNING LAW; SEVERABILITY. This Agreement is governed by the
internal substantive laws, but not the choice of law rules, of California.
-2-
<PAGE>
9. ENTIRE AGREEMENT. The Plan and Option Agreement are incorporated
herein by reference. This Agreement, the Plan, the Option Agreement and the
Investment Representation Statement constitute the entire agreement of the
parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee
with respect to the subject matter hereof, and may not be modified adversely
to the Optionee's interest except by means of a writing signed by the Company
and Optionee.
Submitted by: Accepted by:
OPTIONEE: SANCTUARY WOODS MULTIMEDIA
CORPORATION
_______________________________ __________________________________
Signature By
__________________________________
Its
ADDRESS: ADDRESS:
1250 45th Street, Suite 350
Emeryville, CA 94608-2924
__________________________________
Date Received
-3-
<PAGE>
Exhibit 21.1 Subsidiaries
Theatrix Interactive, Inc., a Delaware Corporation
MagicQuest, Inc., a California Corporation
Sanctuary Woods Multimedia, Inc., a Nevada Corporation
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-96212) and in the Registration Statement on
Form S-3 (No. 33-95464) of Sanctuary Woods Multimedia Corporation of our
report dated September 21, 1998 appearing on page F-1 of this Form 10-K.
/s/ PricewaterhouseCoopers
- --------------------------
PRICEWATERHOUSECOOPERS
San Jose, California
October 2, 1998
-2-
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No. 33-
96212 on Form S-8 and Registration Statement No. 33-95464 on Form S-3 of
Sanctuary Woods Multimedia Corporation (the "Company") of our report dated June
20, 1997, which includes a going concern uncertainty explanatory paragraph,
appearing in this Annual Report on Form 10-K of the Company for the year
ended March 31, 1998.
/s/ Deloitte & Touche LLP
- -------------------------
DELOITTE & TOUCHE LLP
San Francisco, California
October 5, 1998
-3-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 21,000
<SECURITIES> 0
<RECEIVABLES> 821,000
<ALLOWANCES> (631,000)
<INVENTORY> 259,000
<CURRENT-ASSETS> 470,000
<PP&E> 854,000
<DEPRECIATION> (647,000)
<TOTAL-ASSETS> 691,000
<CURRENT-LIABILITIES> 5,074,000
<BONDS> 869,000
0
0
<COMMON> 5,000
<OTHER-SE> (5,252,000)
<TOTAL-LIABILITY-AND-EQUITY> 691,000
<SALES> 2,010,000
<TOTAL-REVENUES> 2,010,000
<CGS> 1,487,000
<TOTAL-COSTS> 16,288,000
<OTHER-EXPENSES> 724,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 90,000
<INCOME-PRETAX> (16,579,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (16,579,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,579,000)
<EPS-PRIMARY> (4.15)
<EPS-DILUTED> (4.15)
</TABLE>
