UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (no fee required)
For the transition period ________ to ________
Commission File No. 0-24374
LUCAS EDUCATIONAL SYSTEMS, INC.
(Name of small business issuer in its charter)
Delaware 62-1690722
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17950 Preston Road, Suite 912, Dallas, Texas 75252
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 267-7250
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $0.001
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and none will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. ?
The registrant's revenues for its most recent fiscal year were: $-0-.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity, as of April 30,
2000 was $1,702,586.
At April 30, 2000, the registrant had outstanding 14,788,619 shares of common
stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part III (except Item 13) will be contained in Registrant's Definitive Proxy
Statement for the Annual Meeting of Stockholders to be heard in November 1999.
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
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TABLE OF CONTENTS
Page
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PART I
Item 1. Description of Business 1
Item 2. Description of Property 4
Item 3. Legal Proceeding 4
Item 4. Submission of Matters to a Vote of Security Holders 4
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 5
Item 6. Management's Discussion and Analysis or Plan of Operations 5
Item 7. Financial Statements 7
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 20
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 20
Item 10. Executive Compensation 20
Item 11. Security Ownership of Certain Beneficial Owners and Management 20
Item 12. Certain Relationships and Related Transactions 20
Item 13. Exhibits and Reports on Form 8-K 21
</TABLE>
<PAGE>
PART I
Item 1. DESCRIPTION OF BUSINESS
-----------------------
General
Founded in 1996 by Jerry R. Lucas to commercialize the learning
techniques developed by Mr. Lucas over 30 years of research and experimentation,
the predecessor of the company was merged into a publicly traded corporation in
1997 and exists today as a development stage company trading on the OTC Bulletin
Board under the symbol LEDS.
Mr. Lucas has devoted his life to cultivating ideas and methods for
memory-retention. The resulting methodology is known as The Lucas Learning
System(TM). His guest appearances on nationally syndicated television shows such
as the Tonight Show and Good Morning America, coupled with his countless live
appearances and seminars earned Mr. Lucas the title of Doctor Memory(TM). He
graduated Phi Beta Kappa from Ohio State University, became the only three-time
recipient of the Big Ten player of the year award, was chosen seven times as an
All-Pro during his career with the New York Knicks, was inducted into the NBA
Hall of Fame in 1979, and was recently named one of the 50 most outstanding NBA
players of all time. In late 1999 Mr. Lucas was chosen as one of five most
outstanding college basketball players of the twentieth century by Sports
Illustrated. In the resulting article he was specifically recognized for his
memory-retention expertise.
Late in 1999, Mr. Lucas retained the consulting services of Jeffrey R.
Gullo to assist with the development and revision of the company's business and
marketing plans, and to assist in securing adequate capital to transition the
company from a development stage into operations. In March 2000, the company
completed a private placement of $1,400,000 of Series A Convertible Preferred
Stock, appointed two directors to fill vacancies, hired Mr. Gullo to become its
President and Chief Executive Officer, and hired a Chief Financial Officer.
The company is now in position to pursue its mission and begin
providing learning systems for users of all ages based on the Lucas Learning
System(TM).
Company Vision and Key Business Strategies
The company's vision is to change the way people learn through Learning
That Lasts(TM). Its mission is to gain recognition as the nation's leading
authority and largest provider of memory training techniques and related
educational products.
The company is establishing itself as a marketing oriented content
provider. Product development will focus on bringing to market highly valued
adaptations of its methodologies that service adult general interests,
children's learning requirements, and the needs of the Christian Bible Study
sector. It will seek to distribute its learning products directly to end
consumers via e-commerce enabled channels, and simultaneously begin leveraging
the more traditional wholesale distribution channels available to the book
publishing industry. By outsourcing low value product duplication and
distribution functions, the company will seek to scale up its operations
significantly without a proportionate increase in fixed costs. In the near-term,
the company seeks to:
o Implement an integrated marketing approach with an emphasis on
targeted selling;
o Create strong brand awareness under the trademarks of Doctor
Memory(TM) and Learning That Lasts(TM);
o Drive traffic to the company's DoctorMemory.com web site;
o Develop wholesale distribution opportunities;
o Implement a continuous improvement program to insure quality in the
rapidly expanding product line.
1
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Once established the company will seek to:
o Create a formal strategic partnering and alliance program;
o Leverage the broadband capabilities of the Internet offering
multi-media streaming and downloadable content that is virtually free
of distribution costs;
o Extend its product line beyond the initial digital, video, audio and
printed materials by adapting the methodologies to public education
courseware and/or television programming.
Product Overview
The company employs a market driven product development strategy. This
strategy focuses on near term selling opportunities while prioritizing resources
to those products projected to create the most value for the company. It seeks
to develop products which are easily and cost effectively reproducible to
penetrate high demand\high value market segments.
Lucas Learning System(TM) products will generally be positioned to
enable delivery through multiple distribution channels. The company intends to
offer numerous products that are scheduled for release in both digital and more
traditional formats during the next twelve months. Future releases of products
are contemplated in which Internet access can allow real-time streaming of data
without significant distribution costs. As broadband deployment progresses, both
leased access and downloadable digital distribution models are expected to
coexist with more traditional video, audio, and printed formats.
Numerous products have been targeted for deployment during the first
year of operations. The majority of these products have adapted the Lucas
Learning System(TM) to specific learning situations. Topics of broad interest to
adult and student learners such as learning to speak Spanish and how to remember
names and faces will be offered in a variety of media. Programs that adapt the
techniques to the unique learning requirements of children aid in the teaching
of reading, writing, grammar, mathematics, and social studies. Still other
contemplated products assist the Christian community in the retention of Bible
materials of interest to bible study groups, Sunday school classes, etc. One
product in particular, a book entitled Doctor Memory's Learning How to Learn,
actually provides the reader with a detailed framework upon which all learning
can be adapted.
The initial products represent the utilization of only a fraction of
the images, scripts, writings, characters, and concepts that make up the
intellectual property exclusively assigned to the company. Significant expansion
into additional product offerings such as the development and production of a
children's educational television series or comprehensive course materials
targeted at the public education sector are consistent with the company's vision
and mission. However, given the significant resource requirements of such
product offerings, the company believes the development and marketing of such
products should be deferred in favor of building brand awareness around more
rapidly deployable products such as those mentioned above.
Marketing Program
The market for the company's products consists of anyone seeking to
learn, memorize or retain any subject matter more thoroughly and effectively
than through traditional repetition-based methods of learning. Persons who
utilize the company's products include those seeking the ability to speak and
understand foreign languages, remember names and faces for building personal
relationships, recall and quote Bible scripture for use in daily life and
instruction of others, remember core educational subject matter, recall
information for test taking, and to memorize basic information for general
reference. While the company will focus its marketing efforts on the United
States market, significant international sales could result from the global
exposure provided via the direct distribution channel (DoctorMemory.com) and
through the development of a wholesale distribution alliance within the
traditional book-publishing and distribution channel.
2
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The company will initially focus on image development and branding. The
primary goal is to gain recognition of Doctor Memory(TM) as the leading
authority in memory training and superior learning techniques. The company will
seek to:
o Implement a marketing approach that leverages the public recognition
of Mr. Lucas seeking cost effective promotional opportunities wherever
appropriate;
o Execute a multi-faceted image campaign, including TV appearances,
radio interviews, speeches, articles, and book reviews;
o Create visibility through product placement in traditional bookstores
and other selected retail outlets;
o Capitalize on the socially responsible aspects of the product line to
seek referrals and endorsements;
o Leverage cost effective e-commerce marketing opportunities to drive
traffic to the DoctorMemory.com web site;
o Seek increased "share of customer" by providing, for example, free
access to value added services available exclusively on the
DoctorMemory.com web site; and implementing other customer loyalty
programs as appropriate;
o Implement a direct sales program with the formation of strategic
alliances with software vendors, learning centers, and other relevant
organizations.
Employees
As of April 30, 2000, the company employed four persons, consisting of
three executives and one product development manager. Product development will
require additional personnel as the product lines increase. Quality assurance
oversight will continue to be provided by Mr. Lucas and through the outsourcing
of the editorial review function. The company intends to add personnel primarily
in the sales and marketing area to focus on top line growth. A quality "total
customer experience" will be assured through back office and administrative
personnel. The company anticipates outsourcing all product duplication and both
the direct and wholesale distribution functions. By implementing this
outsourcing philosophy, the company will seek to scale operations without
proportionate increases in the number of employees.
Intellectual Property Rights
The company holds under license from Jerry R. and Cheryl Lucas the
exclusive right to develop, market and distribute products based upon a
proprietary memory enhancement methodology. The company intends to manage the
intellectual property rights to provide for their protection in the market and
to continue a program of identifying and seeking protection for additional
products as they are developed. It regards the trademarks, copyrights, logos,
methodology and similar intellectual property as vital to its success and the
success of its products. The company relies on the protection afforded them by
the laws of the United States. The company additionally has confidentiality
agreements with its employees/business partners to further protect its
proprietary rights.
Competition
Although various persons and entities are engaged in similar endeavors,
management believes there is no significant competition with the company due to
the unique nature of the learning and memory techniques and related products
developed by Mr. Lucas and the general lack of competition with significant
brand awareness.
The company believes it will be able to compete on the basis of its
brand awareness to be developed based upon Mr. Lucas' name recognition and the
effectiveness and variety of the company's products across broad classes of
users.
3
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Environmental Impact
None of the company's activities utilize any hazardous materials or
result in any discharge of pollutants into the environment. The company believes
it complies fully with all environmental laws and regulations.
Regulation
There are no specific regulatory issues affecting the company not common
to publicly held businesses in general.
Item 2. DESCRIPTION OF PROPERTY
-----------------------
The company's principal executive offices are located at 17950 Preston
Road, Suite 912, Dallas, Texas 75252. The premises, which are leased from an
unaffiliated party, consist of 1,200 square feet. The executive office facility
contains management offices, workstations, computer equipment, and related
software. Monthly rent is $2,200 through the remainder of a 36-month lease term,
which expires on April 30, 2003.
A product development facility is located in Templeton, California. The
premises, which are rented on a month-to-month basis from a related party,
consist of approximately 1,200 square feet. Monthly rent is $1,200.
Product duplication and printing will be performed in outsourced
locations, as well as product warehousing and distribution.
All of the company's properties are covered by property and casualty
insurance the company believes to be adequate.
Item 3. LEGAL PROCEEDINGS
The action filed July 22, 1999, in the Third Judicial District Court of
Salt Lake County, State of Utah, styled Martineau & Company, Plaintiff vs. Lucas
Educational Systems, Inc., Jerry R. Lucas, Cheryl Lucas, William Husa and David
E. Nelson, claiming $23,079 for services rendered, expenses and the balance due
on a loan, together with interest at the rate of 2% per month until paid in full
was settled on April 4, 2000 for a total of $28,143, inclusive of all legal fees
and related settlement charges.
The company was not engaged in any legal proceedings on the date of
this report.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
4
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PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
--------------------------------------------------------
Market Information
The company's common stock is traded in the over-the-counter market on
the OTC Bulletin Board under the symbol LEDS. The following table shows the
price range of the company's common stock as reported by Nasdaq for the last two
fiscal years.
BID ASK
Quarter Ended High Low High Low
------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
6-30-98 7.3125 5.1250 7.3750 5.5000
9-30-98 5.2500 1.2500 5.5000 1.8125
12-31-98 2.1875 0.6250 2.3750 1.0000
3-31-99 1.1875 0.5625 1.3125 0.6563
6-30-99 1.0000 0.2500 1.0313 0.3000
9-30-99 0.2800 0.0625 0.3750 0.1250
12-31-99 0.1250 0.0313 0.1875 0.0938
3-31-00 0.5625 0.0500 0.6875 0.0938
</TABLE>
Holders
As of April 30, 2000, there were 142 record holders of the company's
common stock and 7 holders of the company's Series A Convertible Preferred
Stock.
Dividends
The company does not anticipate any stock or cash dividends on its
common stock in the foreseeable future.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
----------------------------------------------------------
General
In November 1997, the company completed a reorganization whereby it
acquired all of the outstanding voting securities of Lucas Educational Systems,
Inc., a Nevada corporation. During the remainder of fiscal 1998 and continuing
through fiscal 1999 and 2000, the company remained in the developmental stage
and sought funding from various sources to enable it to seek marketing and
distribution channels for its products, which are based upon a proprietary
memory enhancement methodology developed by its founder, Jerry R. Lucas. In the
fiscal year ended March 31, 2000, the company reduced operating expense by
decreasing the number of employees and minimizing professional services.
In March 2000, the company completed a private placement of 89,974
shares of Series A Convertible Preferred Stock to accredited investors as
defined in Regulation D promulgated pursuant to the Securities Act of 1933, as
amended. The capital raised in connection with the private placement will be
used to complete development of its initial product line and commence the
marketing and distribution of its products. See Part I, Item 1, "Product
Overview." The company is now in position to pursue its business of providing a
learning system for users of all ages based on the Lucas learning techniques.
5
<PAGE>
Results of Operations
Due to a lack of capital and management, the company was unable to
establish distribution channels and complete development and production of
targeted products. Therefore, meaningful revenues were not created during the
fiscal year ended March 31, 2000. The company, also constrained by capital in
the prior year, received no revenues during the year ended March 31, 1999.
Net loss for the year ended March 31, 2000 was $295,280 as compared to
a net loss of $895,509 for the year ended March 31, 1999. The net loss was
reduced primarily by reducing general and administrative expenses by decreasing
the number of employees and minimizing the professional services that it
utilized as cash declined because of a lack of funding during the year. This
decrease was partially offset by the costs associated with the private placement
of Series A Convertible Preferred Stock in March 2000.
Liquidity
As a development stage company, the company has historically relied on
cash generated through the sale of various equity instruments as its primary
source of liquidity. Available cash at March 31, 2000 of $1,278,924 represents
an increase of $1,189,378 compared to available cash at March 31, 1999. The
increase is primarily related to the company's sale of $1,400,000 of Series A
Convertible Preferred Stock in March, 2000, offset partially by the settlement
of various outstanding liabilities. Additionally, during the fiscal year ended
March 31, 2000 the company issued 2,385,000 shares of common stock for services
(See section entitled "Executive Compensation" appearing in the company's
Definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
or about July 29, 2000).
As of March 31, 2000 the company had no significant credit facilities
available.
Year 2000
With the change to the year 2000, the company experienced no
significant interruptions in its normal business processes as a result of its
own systems or those of companies with which it does business. During the year
ended March 31, 2000 the company did not incur any costs related to the
remediation of the company's systems for the year 2000.
Forward Looking Information
This report contains certain forward-looking statements and information
relating to the company that are based on the beliefs of the company's
management as well as assumptions made by and information currently available to
the company's management. When used in this report, words such as "anticipate,"
"believe," "estimate," "expect," "intend," "should," and similar expressions, as
they relate to the company or its management, identify forward-looking
statements. Such statements reflect the current views of the company with
respect to future events and are subject to certain risks, uncertainties and
assumptions relating to the operations, results of operations, liquidity and
growth strategy of the company, including competitive factors and pricing
pressures, changes in legal and regulatory requirements, interest rate
fluctuations, and general economic conditions, as well as other factors
described in this report. Should one or more of the risks materialize, or should
underlying assumptions prove incorrect, actual results or outcomes may vary
materially from those described herein as anticipated, believed, estimated,
expected or intended.
6
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Item 7. FINANCIAL STATEMENTS
--------------------
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report .............................................. 8
Consolidated Balance Sheets as of March 31, 2000 and 1999 ................. 9
Consolidated Statements of Operations for the years ended
March 31, 2000 and 1999 ................................................... 10
Consolidated Statement of Stockholders' Equity for the years ended ........ 11
March 31, 2000 and 1999
Consolidated Statements of Cash Flows for the years ended
March 31, 2000 and 1999 ................................................... 13
Notes to Consolidated Financial Statements ................................ 14
7
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Lucas Educational Systems, Inc.
We have audited the accompanying consolidated balance sheet of Lucas Educational
Systems, Inc. (a development stage company) as of March 31, 2000 and 1999, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended and the cumulative amounts since December 5, 1996
(date of commencement of development stage). These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Lucas Educational
Systems, Inc. as of March 31, 2000 and 1999, and the results of their operations
and their cash flows for the years then ended and the cumulative amounts since
December 5, 1996 (date of commencement of development stage), in conformity with
generally accepted accounting principles.
/s/ Tanner + Co.
-------------------
Salt Lake City, Utah
May 18, 2000
8
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<TABLE>
<CAPTION>
LUCAS EDUCATIONAL SYSTEMS, INC.
(A Development Stage Company)
Consolidated Balance Sheet
March 31,
--------------------------
Assets 2000 1999
------
<S> <C> <C>
Current assets:
Cash $ 1,278,924 $ 89,546
Related party receivables -- 3,400
Inventory 5,610 5,610
--------------------------
Total current assets 1,284,534 98,556
Property and equipment, net 52,252 60,144
Other 3,045 --
--------------------------
$ 1,339,831 $ 158,700
==========================
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 46,724 $ 11,438
Related party notes payable 2,500 12,000
--------------------------
Total current liabilities 49,224 23,438
Commitments -- --
Stockholders' equity:
Preferred stock; 1,000,000 shares authorized, $.001
par value; 89,974 and 0 shares issued and
outstanding, respectively (aggregate liquidation
preference $1,400,000) 90 --
Common stock 20,000,000 shares authorized,
$.001 par value; 14,788,619 and 12,453,619 shares issued
and outstanding, respectively 14,789 12,454
Additional paid-in capital 3,366,196 1,476,436
Unearned compensation (548,435) (106,875)
Accumulated deficit (1,542,033) (1,246,753)
--------------------------
Total stockholders' equity 1,290,607 135,262
--------------------------
$ 1,339,831 $ 158,700
==========================
</TABLE>
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<CAPTION>
LUCAS EDUCATIONAL SYSTEMS, INC.
(A Development Stage Company)
Consolidated Statement of Operations
Years Ended March 31,
and Cumulative Amounts Since December 5, 1996
(Date of Commencement of Development Stage)
Cumulative
2000 1999 Amounts
--------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ -- $ -- $ --
General and administrative expenses 293,236 893,394 1,537,874
--------------------------------------------
Loss from operations (293,236) (893,394) (1,537,874)
Other income (expense):
Interest income 472 -- 472
Interest expense (2,516) (2,115) (4,631)
--------------------------------------------
Loss before benefit for income taxes (295,280) (895,509) (1,542,033)
Benefit for income taxes -- -- --
--------------------------------------------
Net loss $ (295,280) $ (895,509) $ (1,542,033)
============================================
Loss per common share -
basic and diluted $ (.02) $ (.08) $ (.13)
Weighted average shares -
basic and diluted 12,519,000 11,975,000 11,929,000
</TABLE>
10
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<TABLE>
<CAPTION>
LUCAS EDUCATIONAL SYSTEMS, INC.
(A Development Stage Company)
Consolidated Statement of Stockholders' Equity
For the Period December 5, 1996
(Date of Commencement of Development Stage)
Through March 31, 2000
Treasury Stock Preferred Stock Common Stock
Shares Amount Shares Amount Shares Amount
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 5, 1996 -- $ -- -- $ -- -- $ --
Issuance of common stock for cash -- -- -- -- 8,700,000 8,700
Net loss from inception on December
5, 1996 through March 31, 1997 -- -- -- -- -- --
----------------------------------------------------------------------------
Balance at March 31, 1997 -- -- -- -- 8,700,000 8,700
Common stock issued in
recapitalization -- -- -- -- 1,849,869 1,850
Common stock issued for:
cash and services -- -- -- -- 192,000 192
Debt -- -- -- -- 333,000 333
Services -- -- -- -- 168,750 169
Net loss -- -- -- -- -- --
----------------------------------------------------------------------------
Balance at March 31, 1998 -- -- -- -- 11,243,619 11,244
Proceeds from stock subscription
receivable -- -- -- -- -- --
Common stock issued for:
Cash -- -- -- -- 90,000 90
Debt and payables -- -- -- -- 400,000 400
Services -- -- -- -- 720,000 720
Contributed shares 455,000 -- -- -- -- --
Treasury stock issued for cash (455,000) -- -- -- -- --
Net loss -- -- -- -- -- --
----------------------------------------------------------------------------
Balance at March 31, 1999 -- -- -- -- 12,453,619 12,454
Common stock issued for services -- -- -- -- 2,385,000 2,385
Convertible preferred stock issued
for cash -- -- 89,974 90 -- --
Cancellation of common stock issued
for services -- -- -- -- (50,000) (50)
Stock compensation -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------------------------------------------------------------------------
Balance at March 31, 2000 -- $ -- 89,974 $ 90 14,788,619 $ 14,789
============================================================================
</TABLE>
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<TABLE>
<CAPTION>
LUCAS EDUCATIONAL SYSTEMS, INC.
(A Development Stage Company)
Consolidated Statement of Stockholders' Equity
For the Period December 5, 1996
(Date of Commencement of Development Stage)
Through March 31, 2000
Additional Stock
Paid-in Unearned Subscription Accumulated
Capital Compensation Receivable Deficit Total
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 5, 1996 $ -- $ -- $ -- $ -- $ --
Issuance of common stock for cash (8,600) -- -- -- 100
Net loss from inception on December
5, 1996 through March 31, 1997 -- -- -- (63) (63)
-----------------------------------------------------------------------
Balance at March 31, 1997 (8,600) -- -- (63) 37
Common stock issued in
recapitalization (1,810) -- -- -- 40
Common stock issued for:
Cash and services 114,808 -- (25) -- 114,975
Debt 199,667 -- -- -- 200,000
Services 101,081 -- -- -- 101,250
Net loss -- -- -- (351,181) (351,181)
-----------------------------------------------------------------------
Balance at March 31, 1998 405,146 -- (25) (351,244) 65,121
Proceeds from stock subscription
receivable -- -- 25 -- 25
Common stock issued for:
Cash 179,910 -- -- -- 180,000
Debt and payables 299,600 -- -- -- 300,000
Services 364,280 (106,875) -- -- 258,125
Contributed shares -- -- -- -- --
Treasury stock issued for cash 227,500 -- -- -- 227,500
Net loss (895,509) (895,509)
-----------------------------------------------------------------------
Balance at March 31, 1999 1,476,436 (106,875) -- (1,246,753) 135,262
Common stock issued for services 546,050 (548,435) -- -- --
Convertible preferred stock issued
for cash 1,399,910 -- -- -- 1,400,000
Cancellation of common stock issued
for services (56,200) 56,250 -- -- --
Stock compensation -- 50,625 -- -- 50,625
Net loss -- -- -- (295,280) (295,280)
-----------------------------------------------------------------------
Balance at March 31, 2000 $ 3,366,196 $ (548,435) -- $(1,542,033) $ 1,290,607
=======================================================================
</TABLE>
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<TABLE>
<CAPTION>
LUCAS EDUCATIONAL SYSTEMS, INC.
(A Development Stage Company)
Consolidated Statement of Cash Flows
Years Ended March 31, 2000 and 1999
and Cumulative Amounts Since December 5, 1996
(Date of Commencement of Development Stage)
Cumulative
2000 1999 Amounts
-----------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (295,280) $ (895,509) $(1,542,033)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 28,583 21,903 56,236
Exchange of assets for services 1,262 -- 1,262
Common stock issued for services and payables -- 506,997 844,375
Stock compensation 50,625 -- 50,625
(Increase) decrease in:
Related party receivables 3,400 (3,400) --
Inventories -- -- (5,610)
Deposits -- 3,000 --
Other (3,045) -- (3,045)
Increase (decrease) in:
Accounts payable 35,286 1,530 46,724
Accrued liabilities -- (9,863) --
-----------------------------------------
Net cash used in operating activities (179,169) (375,342) (551,466)
Cash flows from investing activities-
Purchases of property and equipment (21,953) (6,828) (109,750)
-----------------------------------------
Cash flows from financing activities:
Proceeds from related party notes payable 2,500 33,500 36,000
Payments on related party notes payable (12,000) (6,500) (18,500)
Issuance of convertible preferred stock 1,400,000 -- 1,400,000
Issuance of common stock -- 180,000 295,115
Issuance of treasury stock -- 227,500 227,500
Proceeds from stock subscription receivable -- 25 25
-----------------------------------------
Net cash provided by financing activities 1,390,500 434,525 1,940,140
-----------------------------------------
Net increase in cash 1,189,378 52,355 1,278,924
Cash, beginning of period 89,546 37,191 --
-----------------------------------------
Cash, end of period $ 1,278,924 $ 89,546 $ 1,278,924
=========================================
</TABLE>
13
<PAGE>
LUCAS EDUCATIONAL SYSTEMS, INC.
(A Development Stage Company)
Notes to consolidated Financial Statements
March 31, 2000 and 1999
1. Organization and Significant Accounting Policies
Organization and Nature of Activities
Lucas Educational Systems, Inc. (formerly Mirador Equity Partners, Ltd.) (Lucas)
was incorporated in the state of Delaware on June 11, 1992. In November 1997,
Lucas and Lucas Educational Systems, Inc. (Lucas Nevada), a Nevada corporation
completed an Agreement and Plan of Reorganization whereby Lucas issued 8,700,000
shares of its common stock in exchange for all of the outstanding common stock
of Lucas Nevada. Immediately prior to the Agreement and Plan of Reorganization,
Lucas had 1,849,869 shares of common stock issued and outstanding. Mirador
Equity Partners, Ltd. changed its name to Lucas Educational Systems, Inc. in
conjunction with the merger.
The acquisition was accounted for as a recapitalization of Lucas Nevada because
the shareholders of Lucas Nevada controlled Lucas after the acquisition. Lucas
is the acquiring entity for legal purposes and Lucas Nevada is the surviving
entity for accounting purposes. There was no adjustment to the carrying value of
the assets or liabilities of Lucas Nevada in the exchange.
Lucas' vision is to change the way people learn through Learning That LastsTM.
Its mission is to gain recognition as the nation's leading authority and largest
provider of memory training techniques and related educational products.
Principles of Consolidation
The consolidated financial statements include the financial statements of Lucas
and its wholly owned subsidiary Lucas Nevada, collectively, the Company. All
significant intercompany balances and transactions have been eliminated.
Development Stage Company
Effective December 5, 1996, the Company is considered a development stage
company as defined in SFAS No. 7. The Company has, at the present time, not paid
any dividends and any dividends that may be paid in the future will depend upon
the financial requirements of the Company and other relevant factors.
Concentration of Credit Risk
The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such accounts and believes it is not exposed to any significant credit risk on
cash and cash equivalents.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
Inventory
Inventory consists of books held for resale and are stated at the lower of cost
or market. Cost is determined by the first-in, first-out (FIFO) method.
14
<PAGE>
Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation.
Depreciation and amortization are computed using the straight-line method over
the estimated useful lives of the assets or terms of the lease, which range from
3 to 5 years. Expenditures for maintenance and repairs are expensed when
incurred and betterments are capitalized. Gains and losses on sale of property
and equipment are reflected in the statement of operations.
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and 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.
Income Taxes
The Company accounts for income taxes using the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
15
<PAGE>
<TABLE>
<CAPTION>
Loss Per Share
The computation of basic loss per common share is based on the weighted average
number of shares outstanding during each year.
The computation of diluted loss per common share is based on the weighted
average number of shares outstanding during the year plus the common stock
equivalents, that would arise from the exercise of stock options outstanding,
using the treasury stock method and the average market price per share during
the year. At March 31, 2000 and 1999, options to purchase 7,910,000 and 25,000
shares of common stock, respectively, were outstanding, but were not included in
the diluted loss per share calculation because the effect would have been
antidilutive.
2. Property And Equipment
Property and equipment consist of the following:
March 31,
2000 1999
---------------------------------
Furniture and fixtures $ 4,104 $ 1,931
Leasehold improvements 11,070 11,070
Vehicles 37,382 37,382
Master videos 13,577 13,577
Computer Equipment 41,801 23,837
---------------------------------
107,934 87,797
Accumulated Depreciation and amortization (55,682) (27,653)
---------------------------------
$ 52,252 $ 60,144
=================================
16
<PAGE>
3. Income Taxes
The benefit for income taxes is different than amounts which would be provided
by applying the statutory federal income tax rate to loss before benefit for
income taxes for the following reasons:
Year Ended
March 31,
------------------------------- Cumulative
2000 1999 Amounts
----------------------------------------------------
<S> <C> <C> <C> <C>
Income tax benefit at statutory rate $ 100,000 $ 305,000 $ 524,000
Change in valuation allowance (100,000) (305,000) (524,000)
----------------------------------------------------
$ - $ - $ -
====================================================
Deferred tax assets are comprised of the following:
March 31,
2000 1999
-----------------------------------
Net operating loss carryforwards $ 524,000 $ 424,000
Valuation allowance (524,000) (424,000)
-----------------------------------
$ - $ -
===================================
At March 31, 2000, the Company had net operating loss carryforwards of
approximately $1,542,000. These carryforwards are available to offset future
taxable income and begin to expire in 2017. The amount of the loss carryforwards
which may be used is dependent upon the tax laws in effect at the time the net
operating loss carryforwards can be utilized. The Tax Reform Act of 1986
significantly limits the annual amount that can be utilized for certain of these
carryforwards as a result of the substantial change in ownership that took place
as described in note 1.
A valuation allowance has been established that offsets the net deferred tax
asset because there is uncertainty surrounding its ultimate realization. The
uncertainty is caused by the Company's recurring losses and the annual limits
referred to above.
4. Related Party Transactions
Related party receivables consist of non-interest bearing cash advances due from
employees totaling $0 and $3,400, respectively at March 31, 2000 and 1999. In
addition, the Company has a licensing and royalty agreement with an
officer/shareholders (See note 6).
At March 31, 2000 and 1999, related party notes payable consist of an unsecured
note payable to a shareholder with interest at 10% totaling $-0- and $3,500,
respectively, and an unsecured, non-interest bearing, demand note payable to a
shareholder totaling $2,500 and $8,500, respectively.
</TABLE>
17
<PAGE>
5. Supplemental Cash Flow Information
During the year ended March 31, 1999, the Company reduced related party notes
payable and accounts payable in the amount of $51,128 in exchange for common
stock.
Actual amounts paid for interest and income taxes are as follows:
Year Ended
March 31,
-------------------------- Cumulative
2000 1999 Amounts
---------------------------------------------
Interest $ 2,516 $ 2,115 $ 4,631
---------------------------------------------
Income taxes $ - $ - $ -
---------------------------------------------
6. Commitments
Operating Lease Obligation
The Company leases certain office space under a noncancellable operating lease
agreement. Future minimum lease payments required under the operating lease are
as follows:
Years Ending March 31, Amount
---------------------- -----------------
2001 $ 25,530
2002 26,640
2003 26,640
2004 1,110
-----------------
$ 79,920
=================
Rent expense for the years ended March 31, 2000 and 1999 totaled approximately
$8,000 and $36,000, respectively.
Licensing and Royalty Agreement
On August 13, 1997, the Company entered into a 99-year license agreement with an
officer/shareholders for exclusive worldwide rights to develop and sell products
based on their training system. On March 22, 2000, the agreement was expanded to
include the option to acquire certain items previously excluded. In exchange for
these rights, the Company has agreed to pay royalties totaling 8% of the gross
receipts on applicable sales. In addition, under the agreement, the
officer/shareholders also have, under certain limited conditions, rights to
purchase inventory from the Company at cost plus 25%.
Employment Agreements
During the year ended March 31, 2000, the Company entered into three employment
agreements with officers. The agreements provide for the payment of salaries,
stock and stock options and have terms which shall continue indefinitely.
7. Capital Stock
The Company has established a series of preferred stock with a total of
1,000,000 authorized shares and a par value of $.001, and one series of common
stock with a par value of $.001 and a total of 20,000,000 authorized shares.
Series A Preferred Stock
On March 1, 2000, the Company established a series of voting, convertible
preferred shares designated as Series A Convertible Preferred Stock, consisting
of 90,000 shares with $.001 par value. Unconverted shares may be redeemed
18
<PAGE>
by the Company any time after April 1, 2002 at $15.56 per share. Series A
Convertible Preferred Stock is non-transferable and has the following rights and
privileges:
1. The holders of the shares are entitled to non-cumulative dividends, if
declared by the Board of Directors.
2. Upon liquidation of the Company, the holders of the shares are entitled to
receive, prior to any distribution of any assets or surplus funds to the
holders of shares of common stock, an amount equal to $15.56 per share plus
unpaid declared dividends, if any.
3. Provided the Company's certificate of incorporation has been amended to
authorize sufficient common shares, the preferred shares automatically
convert to common stock on March 24, 2001, the first anniversary of the
closing of the offering, or sooner in the event of a transfer of more than
50% of all shares outstanding, a merger in which the Company is not the
surviving company, or liquidation. The shares will convert at the rate of
100 shares of common stock per share of Series A Convertible Preferred
Stock.
4. The holders are entitled to 100 votes per share of Series A Convertible
Preferred Stock and together are entitled to elect one member of the Board
of Directors.
7. Stock Options
The Company has two stock option plans (the Option Plans), which together allow
a maximum of 12,815,000 options to be granted to purchase common stock at prices
generally not less than the fair market value of common stock at the date of
grant. Under the Option Plans, grants of options may be made to selected
officers and key employees without regard to any performance measures. The
options may be immediately exercisable or may vest over time as determined by
the Board of Directors. However, the maximum term of an option may not exceed
ten years.
Information regarding the stock options is summarized below:
Weighted
Number Average
Of Exercise
Options Price
-----------------------
Outstanding at April 1, 1998 - $ -
Granted 625,000 .43
Exercised 600,000 .38
-----------------------
Outstanding at March 31, 1999 25,000 1.50
Granted 7,910,000 .08
Forfeited (25,000) 1.50
-----------------------
Outstanding at March 31, 2000 7,910,000 $ .08
=======================
The Company has adopted the disclosure only provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation expense has been recognized for stock options
granted to employees. Had compensation expense for the Company's stock options
been determined based on the fair value at the grant date and loss per share
consistent with the provisions of SFAS No. 123, the Company's results of
operations would not have changed.
19
<PAGE>
<TABLE>
<CAPTION>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
March 31,
2000 1999
-----------------------
Expected dividend yield $ - -
Expected Stock price volatility 276% 109%
Risk-free interest rate 6.1% 5.0%
Expected life of options 10 years 2 years
-----------------------
The weighted average fair value of options granted during 2000 and 1999 are $.44
and $.66, respectively.
The following table summarizes information about stock options outstanding at
March 31, 2000:
Outstanding Exercisable
-------------------------------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted
Average
Remaining Weighted Weighted
Contractual average Average
Exercise Number Life Exercise Number Exercise
Price Outstanding (Years) Price Exercisable Price
-----------------------------------------------------------------------------------------------------
$ .06 7,430,000 10 $ .06 - $ -
.40 480,000 10 .40 - -
-----------------------------------------------------------------------------------------------------
$ .06-.40 7,910,000 10 $ .08 - $ -
=====================================================================================================
</TABLE>
9. Fair Value of Financial Instruments
The Company's financial instruments consist of cash and payables. The carrying
amount of cash and payables approximates fair value because of the short-term
nature of these items.
10. Recent Accounting Pronouncements
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective date of FASB
Statement No. 133." SFAS 133 establishes accounting and reporting standards for
derivative instruments and requires recognition of all derivatives as assets or
liabilities in the statement of financial position and measurement of those
instruments at fair value. SFAS 133 is now effective for fiscal years beginning
after June 15, 2000. The Company believes that the adoption of SFAS 133 will not
have any material effect on the financial statements of the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements, which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosure related to revenue recognition policies. Though the
Company is currently evaluating the impact (if any) of SAB 101, the Company does
not presently believe it will have a material effect on the financial position
or results of operations of the Company.
20
<PAGE>
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
---------------------------------------------------------------
Not applicable.
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH 16(A) OF THE EXCHANGE ACT
-----------------------------------------
The sections entitled "Directors and Executive Officers" appearing in the
company's Definitive Proxy Statement for the Annual Meeting of Stockholders to
be held on or about July 29, 2000, sets forth certain information with respect
to the directors and executive officers of the company.
Item 10. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" appearing in the company's
Definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
or about July 29, 2000, sets forth certain information with respect to the
compensation of management of the company.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The sections entitled "Securities Ownership of Certain Beneficial owners"
appearing in the company's Definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on or about July 29, 2000, sets forth certain
information with respect to the ownership of the company's Common Stock.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The section entitled "Related Party Transactions" appearing in the company's
Definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
or about July 29, 2000, sets forth certain information with respect to these
matters.
21
<PAGE>
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
Exhibit
Number Description of Exhibits
------ -----------------------
* 2 Agreement and Plan of Reorganization and exhibits thereto
** 3.1.1 Certificate of Incorporation
** 3.1.2 Certificate of Amendment to Certificate of Incorporation
*** 3.1.3 Certificate of Designations, Preferences and Rights
of Series A Convertible Preferred Stock
** 3.2 Bylaws
** 10.1 Licensing and Royalty Agreement
*** 10.2 Amendment to Licensing and Royalty Agreement
*** 10.3.1 Employment Agreement with Jeffrey R. Gullo
*** 10.3.2 Employment Agreement with Jerry R. Lucas
**** 10.3.3 Employment Agreement with Steven R. Crowell
*** 10.4.1 2000 Employee Stock Option Plan
*** 10.4.2 2000 Executive Stock Incentive Plan
**** 21.1 Subsidiaries of the company
**** 27 Financial Data Schedule
---------------------
* Incorporated by reference to company's Form 8K dated November 11, 1997
** Incorporated by reference to the company's Form 10KSB for the year ended
March 31, 1999
*** Incorporated by reference to company's Form 8K dated April 5, 2000
**** Filed herewith
(b) Reports on Form 8-K
A form 8-K was filed on April 5, 2000, disclosing in Item 1 the
issuances of shares in connection with the private placement of
Series A Convertible Preferred Stock.
22
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities and Exchange Act
of 1934, the company has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized this 13th day of June, 2000.
LUCAS EDUCATIONAL SYSTEMS, INC.
By: /s/ Jeffrey R. Gullo
-------------------------
Jeffrey R. Gullo
Chief Executive Officer
and Director
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the company and in the
capacities and on the dates indicated.
Name Office Date
/s/ Jeffrey R. Gullo Chief Executive Officer June 13, 2000
-------------------- and Director (Principal
Jeffrey R. Gullo Executive Officer)
/s/ Jerry R. Lucas Chairman June 13, 2000
------------------
Jerry R. Lucas
/s J. D. Young Director June 13, 2000
--------------
J. D. Young
/s/ Steven R. Crowell Chief Financial Officer June 13, 2000
--------------------- (Principal Financial
Steven R. Crowell Officer and Principal
Accounting Officer)
23
<PAGE>
EXHIBIT 10.3.3
LUCAS EDUCATIONAL SYSTEMS, INC.
EMPLOYMENT AGREEMENT
This Employment Agreement is entered into as of this 31st day of March,
2000, between Lucas Educational Systems, Inc. (hereinafter referred to as
"Employer"), and Steven R. Crowell (hereinafter referred to as "Employee").
In consideration of the mutual promises hereinafter set forth, the
parties hereto agree as follows:
1. Employment. Employer agrees to employ Employee and Employee agrees to serve
Employer to perform such duties as may be appointed from time to time by the
Board of Directors or the Chief Executive Officer of the Employer. The
Employee's employment shall be upon the terms and conditions hereinafter set
forth. If Employee is elected or appointed with the Employee's consent to an
office with any of Employer's subsidiaries or affiliates during the term of this
Agreement, the Employee will serve in such capacity or capacities without
additional compensation.
2. Term. The employment of Employee hereunder and this Employment Agreement
shall commence the date hereof and shall continue in effect indefinitely until
terminated pursuant to Section 7 hereof.
3. Extent of Services. Employee shall devote substantially all of Employee's
productive time, attention, knowledge and skills solely to the business and
interest of Employer. Employee shall not, during the term of this Agreement,
directly or indirectly render any services of a business, commercial or
professional nature to any other person or organization which would be
detrimental to Employer or which would prohibit Employee from performing the
reasonable duties of his position with Employer. Employee shall be free to spend
time during non-business hours on matters of market investment by himself and
members of his family.
4. Conformity to Employer's Systems and Procedures. Employee agrees to follow,
obey and observe all of the rules, regulations, policies, procedures and systems
of Employer, to observe the workdays and hours as specified by Employer, to work
for the best interest of Employer in the business in which it is engaged, and to
strive to further the goodwill and professional standing of Employer with its
clients, customers and the public generally, to attend to the duties of
employment hereunder regularly and not to be absent therefrom except on account
of illness or other conditions beyond the control of Employee.
5. Compensation.
5.1 Base Salary. Employer will pay Employee during the Employee's term
of service hereunder compensation for the Employee's services (sometimes
hereinafter referred to as the "Base Salary"), in the amount of $80,000 per
year. Employee's salary will be reviewed at least annually and adjustments made
as Employer may determine.
5.2 Bonus. An annual bonus of up to 80% of base salary will be paid
within 90 days after the end of Employer's fiscal year, upon achieving the
following targeted amounts of earnings before deduction for interest, taxes,
depreciation and amortization ("EBITDA") during each fiscal year during the term
of this Agreement (or partial year thereof):
Annual Fiscal Bonus Percentage
EBITDA of Base Salary
--------------------- -----------------
Less than $250,000 -0-
$250,000-$749,999 20%
$750,000-$1,249,999 40%
$1,250,000-$1,749,999 60%
more than $1,750,000 80%
24
<PAGE>
The bonus formula shall be subject to review by the Board of Directors
from time to time. In order to be eligible for a bonus payment, Employee must be
employed with the company through the day of distribution; upon termination of
Employment, all unpaid bonus amounts are forfeited.
5.3 Withholding. Employer and Employee each recognize and acknowledge
that Employer is obligated to withhold payroll taxes from the salary of
Employee, and that Employee shall receive compensation after deduction of all
payroll taxes which Employer is required by law to withhold from the
compensation of Employee.
5.4 Benefit Plans. Employer shall provide Employee with full coverage
under all benefit plans maintained by the Employer for its employees.
5.5 Stock Issuance. Employer shall issue to Employee shares of its
common stock on the following dates, assuming Employee is employed by Employer
on such dates:
April 1, 2001 - 40,000 shares
April 1, 2002 - 40,000 shares
5.6. Stock Options. Employer shall grant to Employee the stock options
described in the attached Stock Option Agreement.
6. Expenses. During the term of employment provided for herein, Employer shall
pay or reimburse Employee, in accordance with its standard policy in effect from
time to time, upon submission of vouchers by the Employee for all reasonable
expenses incurred by the Employee in the interest of Employer's business.
7. Termination.
7.1 Termination Events. Subject to the provisions of Paragraph 7.2 of
this Section, this Agreement shall terminate:
7.1.1 Upon death of Employee.
7.1.2 At the option of the Employer if Employee shall become
disabled and remain disabled for a period of six (6) months. Disability
shall be defined as Employee's inability through illness or other cause
to perform his normal workload as measured by the twelve (12) months
preceding the commencement of such disability. During such disability,
Employee shall be compensated in accordance with Employer's standard
policy regarding disability.
7.1.3 Upon mutual agreement.
7.1.4 At any time at the option of Employee.
7.1.5. At the Employer's option for any good cause. For
purposes of this Section, "good cause" for termination shall mean: (a)
the conviction of Employee of any act involving moral turpitude, or (b)
any material breach by Employee of any of the terms of, or the failure
to perform any covenant contained in, this Agreement.
7.1.6. For any reason other than those set forth in Sections
7.1.1., 7.1.2., 7.1.3., 7.1.4, or 7.1.5, upon giving Employee 120 days
advance notice, or, in lieu thereof, 120 days severance pay.
25
<PAGE>
7.2 Consequences of Termination.
7.2.1. Upon termination for any reason the Employee shall be
paid all salary and benefits prorated to the date of termination.
7.2.2 Upon termination under Section 7.1.6., Employee shall be
entitled to receive the severance compensation described in Section
7.1.6.in lieu of any further compensation after the termination date in
a single payment in cash.
The amounts provided for in Section 7.2 shall be paid within five days
after the Employee's Termination Date. The Employee shall not be required to
mitigate the amount of any payment provided for in this Agreement by seeking
other employment or otherwise and no such payment shall be offset or reduced by
the amount of any compensation or benefits provided to the Employee in any
subsequent employment. The severance pay and benefits provided for in Sections
7.2.2 shall be in lieu of any other severance pay to which the Executive may be
entitled under any Company severance plan, program or arrangement.
8. Trade Secrets and Confidential Information. During the term of this
Agreement, Employee will have access to customer lists and compilations of
information and records specific to and regularly used in the operation of the
business of Employer. Employee acknowledges that such information constitutes
valuable and confidential information of the Employer. Employee shall not
disclose any of the aforesaid private company secrets, directly or indirectly,
either during the term of this Agreement or after termination of employment. All
files, records, electronic and magnetic files, documents, specifications,
equipment and similar information relating to the business of Employer, whether
prepared by Employee or otherwise coming into Employee's possession, shall
remain the exclusive property of Employer and shall not be removed from the
premises of Employer except as shall be necessary for Employee to perform
Employee's duties under this Agreement. Upon termination of this Agreement for
any reason, Employee will deliver all such materials in his possession and all
copies thereof to Employer.
9. Work Product. All elements of proprietary products and intellectual property
developed by Employee during the term of this Agreement shall be exclusively
owned by Employer and shall be considered works made for hire by Employee for
Employer. Any copyrights, trademarks, tradenames or service marks relating to
products developed by Employee shall be owned by Employer and registered in the
name of Employer with the exception of pre-existing works. Employee agrees to
assign and herewith assigns to Employer ownership of all copyrights and other
intellectual property for products developed during the term hereof. Employee
agrees to execute any and all assignments presented by Employer to give effect
to this Section.
In the event that any portion of any product developed for Employer constitutes
a preexisting work for which Employee cannot grant to Employer the rights set
forth above, Employee shall specify in writing: (1) the nature of such
pre-existing work; (2) its owner; (3) any restrictions or royalty terms
applicable to Employee's or Employer's use of such pre-existing work, or
Employer's exploitation of the work developed for Employer as derivative work
thereof; and (4) the source of Employee's authority to employ the preexisting
work in the preparation of the work developed for Employer.
10. Restrictive Covenants. In consideration of the provision to Employee of the
Employer's trade secrets and confidential information, and in order to protect
the rights of Employer to its trade secrets, confidential information, and
client relationships, the Employee hereby agrees as follows:
10.1 Employee agrees that during a period of twelve months following
any termination of employment, Employee shall not be an officer, director,
employee, agent or representative, or an owner of more than five percent (5%) of
the outstanding capital stock of any corporation, or an owner of any interest
in, or employee, agent or representative of, any other form of business
association, sole proprietorship or partnership that solicits, hires (whether or
not solicited) or otherwise attempts to induce any employees, agents or
representatives of Employer to terminate their position as employee, agent or
representative therewith.
10.2 Employee agrees that, during the term of this Agreement and for a
period of twelve months following termination for any reason, Employee shall
not, directly or indirectly by being an officer, director, employee, agent,
26
<PAGE>
representative or consultant, or a record or beneficial owner of more than five
percent of the outstanding capital stock of any corporation or an owner of any
interest in, or employee of, any other form of business association, sole
proprietorship or partnership, conduct a business in competition with the
business conducted by Employer on the date of termination anywhere within a 100
mile radius of Employee's place of employment as of the date of termination.
10.3 In the event that any adjudicative body shall finally hold that
this Section 10 constitutes an unreasonable restriction upon Employee, the
parties hereby expressly agree that the provisions of this Section 10 shall not
be rendered void, but shall apply as to time and territory or to such other
extent as such body may indicate constitutes a reasonable restriction under the
circumstances involved.
11. Arbitration. Any controversy between the parties to this Agreement involving
the construction or application of any of the terms, covenants or conditions of
this Agreement or arising out of any section hereof or any condition in
connection with the termination of employment, shall, on the written request of
one party served on the other, be submitted to binding arbitration in Dallas,
Texas, and such arbitration shall comply with and be governed by the Commercial
Arbitration Rules of the American Arbitration Association. Each party hereto
shall appoint one person as an arbitrator within 30 days after service of the
request for arbitration, and the two arbitrators so chosen shall select a third
impartial arbitrator with fifteen days of the date on which the second
arbitrator is selected. The arbitrators shall decide all questions presented to
them by majority vote. The decision of a majority of the arbitrators shall be
final and conclusive on all parties hereto. The expenses of arbitration
conducted pursuant to this Section shall be borne by the parties in such
proportions as the arbitrators may decide. All parties shall be entitled to be
represented by counsel of their choosing throughout the arbitration proceedings.
12. General Provisions.
12.1 Notice. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and sent by certified mail by
Employer to the residence of Employee, or by Employee to Employer's principal
office.
12.2 Assignability. This Agreement and the rights, interests and
benefits hereunder shall not be assignable or in any way alienated by Employee.
Employer shall have the right of assignment and transfer of its rights hereunder
to any successor to the majority of its assets and any such successor shall be
bound by the terms hereof.
12.3 Waiver of Breach. The waiver by Employer or Employee of a breach
of any provisions of this Agreement by the other shall not operate or be
construed as a waiver of any subsequent breach.
12.4 Entire Agreement. This instrument contains the entire agreement of
the parties. It may not be changed orally, but only by an agreement in writing,
signed by the party against whom enforcement of any waiver, change,
modification, extension or discharge is sought.
12.5 Attorneys' Fees. In the event that there shall be any litigation
or court proceeding with respect to this Agreement or the obligations of the
parties hereunder, the prevailing party shall be entitled to recover reasonable
attorneys' fees and costs from the other party.
12.6 Governing Law. This Employment Agreement shall be governed by the
laws of the State of Texas.
12.7 Survival. Sections 8, 9, 10, 11 and 12 shall survive the
termination of this Agreement and remain applicable to and enforceable against
Employer, Employee, and their respective heirs, personal representatives,
successors and assigns.
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IN WITNESS WHEREOF, Employer has caused this Employment Agreement to be
executed in its corporate name by its corporate officer thereunto duly
authorized, and Employee has executed this Employment Agreement.
EMPLOYEE:
/s/ Steven R. Crowell
------------------------------------
Steven R. Crowell
Lucas Educational Systems, Inc.
By: /s/ Jeffrey R. Gullo
-------------------------------
Jeffrey R. Gullo, President
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EXHIBIT 21.1
LUCAS EDUCATIONAL SYSTEMS, INC.
SUBSIDIARIES OF THE COMPANY
Lucas Educational Systems, Inc. A Nevada corporation
29
