-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JU7gCJSEZMN0phTKB5iLb9vHrawBmGFLq3Vivem+iEhFwSdBno2zH2X0ZfcxGTxf BXF+gJQUv0OlYxdHUHd99A== 0000950148-98-002743.txt : 19981216 0000950148-98-002743.hdr.sgml : 19981216 ACCESSION NUMBER: 0000950148-98-002743 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980831 FILED AS OF DATE: 19981215 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIMULATIONS PLUS INC CENTRAL INDEX KEY: 0001023459 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 954595609 FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 333-05600-LA FILM NUMBER: 98770183 BUSINESS ADDRESS: STREET 1: 40015 SIERRA HIGHWAY STREET 2: BLDG B-145 CITY: PALMDALE STATE: CA ZIP: 93550 BUSINESS PHONE: 8052668500 MAIL ADDRESS: STREET 1: 40015 SIERRA HWY BLDG B0-110 STREET 2: 40015 SIERRA HWY BLDG B0-110 CITY: PALMDALE STATE: CA ZIP: 93550 10KSB 1 FORM 10KSB 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-KSB [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended August 31, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1937 For the transition period from _________ to _________ COMMISSION FILE NUMBER: 000-21665 SIMULATIONS PLUS, INC. (Exact name of registrant as specified in its charter) CALIFORNIA (State or other jurisdiction of Incorporation or Organization) 95-4595609 (I.R.S. Employer identification No.) 1220 WEST AVENUE J LANCASTER, CA 93534 (Address of principal executive offices including zip code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (805) 723-7723 40015 SIERRA HIGHWAY, B-110 PALMDALE, CA 93550 (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE. SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, PAR VALUE $0.001 PER SHARE Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] The issuer's revenues for the fiscal year ending August 31, 1998 were approximately $2,645,000. As of December 15, 1998, the aggregate market value of the voting stock held by non-affiliates of the issuer was approximately $1,725,000 based upon the average closing bid and asked price of such stock on such date. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement relating to the 1998 Annual Meeting of shareholders are incorporated herein by reference into Part III. 2 SIMULATIONS PLUS, INC. FORM 10-KSB FOR THE FISCAL YEAR ENDED AUGUST 31, 1998 Table of Contents
Page ---- PART I. Item 1. Description of Business 1 Item 2. Description of Property 13 Item 3. Legal Proceedings 13 Item 4. Submission of Matters to a Vote of Security Holders 13 PART II. Item 5. Market for Common Stock and Related Stockholder Matters 14 Item 6. Management's Discussion and Analysis or Plan of Operation 14 Item 7. Financial Statements 21 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 40 PART III. Item 9. Directors, Executive Officers, Promoters and Control Persons: Compliance with Section 16(a) of the Exchange Act 41 Item 10. Executive Compensation 42 Item 11. Security Ownership of Certain Beneficial Owners and Management 43 Item 12. Certain Relationships and Related Transactions 43 Item 13. Exhibits and Reports on Form 8-K 44
3 Forward-Looking Statements In addition to historical information, this Annual Report contains forward-looking statements. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in the section entitled "Management's Discussion and Analysis or Plan of Operation." Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. Simulations Plus, Inc. undertakes no obligation to publicly revise these forward-looking statements, or to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission. PART I ITEM 1. DESCRIPTION OF BUSINESS GENERAL Simulations Plus, Inc. (the "Company" or "Simulations Plus") and its wholly owned subsidiary, Words+, Inc. ("Words+") produce two types of products: (1) Simulations Plus, formed in 1996, develops and produces simulation software for use in pharmaceutical research and for education. The Company is currently producing and developing simulation software for pharmaceutical research and for science courses for the high school, community college, and university markets. The Company also provides contract research services to the pharmaceutical industry, and (2) Words+, founded in 1981, produces computer software and specialized hardware for use by persons with disabilities, as well as a personal productivity software program for the retail market. DESCRIPTION OF SIMULATION SOFTWARE The type of simulation software under development by the Company is based on the equations of chemistry and physics that describe or "model" the behavior of things in the real world. The Company's GastroPlus(TM) pharmaceutical software simulates the movement, dissolution, absorption, and clearance of drug compounds in the human gastrointestinal tract. The Company's science experiment simulations incorporate the equations of chemistry and physics for each experiment (optics, electrical circuits, gravity, ideal gases, acid/base titration, etc.). For example, a simulation of a ball in a gravity experiment might include the acceleration and deceleration of the ball due to gravity, the deceleration of the ball due to aerodynamic drag, the kinetic energy loss (and resultant slight heat gain by the ball and ground) each time the ball bounces, the rotation of the ball as it spins, and other factors. The development of simulation software involves identifying and understanding the underlying chemistry and physics of the processes to be simulated, breaking those processes down into the lowest practical level of individual sub-processes at which the behaviors can be well-represented mathematically, developing appropriate mathematical relationships/equations, and converting them into computer subroutines. The software subroutines representing these individual processes are then assembled into an overall simulation program, with appropriate coordination between modules and design of user-friendly inputs and outputs. The predictions of this program are 4 then compared to known results in order to determine the validity of the model and to calibrate the simulation to produce a useful tool for predicting new results. PHARMACEUTICAL SIMULATION SOFTWARE PRODUCTS: The Company's pharmaceutical software provides cost-effective solutions to a number of problems in pharmaceutical research as well as in the education of pharmacy and medical students. The Company released the Beta test version of GastroPlus(TM) in early 1998, and after receiving comments from beta testers, such as Parke-Davis, Novartis, and three additional large pharmaceutical firms (who requested anonymity), a number of improvements were added to the program, and an improved version of GastroPlus(TM) was released in August 1998. GastroPlus(TM) incorporates an absorption model developed by the Company that runs under Windows NT(TM), Windows 95(TM), or Windows 98(TM). The program includes a variety of specialized analysis functions in addition to the basic absorption and pharmacokinetics simulation. The Parameter Sensitivity Analysis feature allows researchers to rapidly assess the importance of various physicochemical and formulation variables on the absorption and pharmacokinetic behavior of a drug. The Stochastic Simulation feature allows researchers to model the effects of statistically distributed values for a variety of physiological effects over a large population. Sales of GastroPlus(TM) began in late August and early September 1998, with sales as of November 30, 1998 to Pfizer, Roche, Pharmaceia and Upjohn, Zeneca, and Astra. An additional (extra-cost) Optimization Module was released in November 1998 and is receiving enthusiastic interest from pharmaceutical researchers. A second module, IVIV Correlation, is in advanced development and is expected to be released in early 1999. Two other modules are also in development, and both are expected to be released in early 1999. These extra-cost modules will more than double the average sale price for an annual license. The Company is actively working over 150 leads for additional sales. No assurances can be given, however, that any additional sales will occur as a result of such leads or that any such sales would be profitable to the Company. The Company executed a License Agreement with Therapeutic Systems Research Laboratories, Inc. ("TSRL"), under which the Company was granted exclusive rights to TSRL's proprietary absorption simulation technology, including a database of measurements of drug permeability from nearly 60 laboratory experiments to measure the intestinal permeability of drug compounds in human and/or rat small intestines. The Company is also receiving consulting assistance in the development of the simulation model from TSRL staff, including Dr. Gordon Amidon (current President of the American Association of Pharmaceutical Scientists and world-renowned expert in drug absorption) and Dr. John Crison. The Company believes that the strategic advantage of exclusive access to TSRL's technology in absorption modeling, combined with the Company's developed and growing expertise in pharmacokinetics simulation, have resulted in GastroPlus(TM) becoming recognized as a unique simulation and analysis capability within the pharmaceutical industry. The Company is not aware of any direct competition for GastroPlus(TM), though no assurances can be given that a competitive product will not be developed in the future. The Company has developed a companion program to GastroPlus(TM) called QMPRPlus(TM) (Quantitative Molecular Permeability Relationships). QMPRPlus(TM) takes as inputs the structures of molecules, and provides estimates for human effective permeability, partition coefficient (MlogP), solubility, and diffusivity - all inputs required by GastroPlus(TM). QMPRPlus(TM) thereby extends the utility of GastroPlus(TM) into early drug discovery, during which pharmaceutical companies may not have even made many of the molecules that have been identified as potential drug candidates. By providing estimates of physicochemical properties from structure alone, QMPRPlus(TM) coupled with GastroPlus(TM) will allow researchers to rank order large numbers of candidate 2 5 compounds in terms of human intestinal absorption. Those identified as having good absorption characteristics can be given high priority in the dedication of resources for synthesis and experimental testing, while those with low predicted absorption characteristics can be given lower priority or can be eliminated. Because pharmaceutical companies are dealing with millions of compounds per year, and because the area of absorption and metabolism has become a bottleneck, high throughput screening on the computer ("in silico") is becoming not just a convenience, but a necessity. The Company continues to develop the science of gastrointestinal absorption simulation and to add new and improved features to make GastroPlus(TM) more powerful and more vital to the pharmaceutical industry. Among the Company's goals in this area are to provide comprehensive, highly accurate simulations as well as related software that can save a great deal of time and money in the development of pharmaceutical products, and to reduce the need for animal testing in the future. CONTRACT RESEARCH SERVICES: The Company offers contract research services to the pharmaceutical industry in the area of gastrointestinal absorption and related technologies. The Company received two small study contracts in the first quarter of FY 1999 (the fiscal year ending August 31, 1999) from major pharmaceutical companies. Management believes these contracts mark the beginning of a new source of revenues for the Company, as well as a means to introduce the Company's software products to new customers (both companies purchased GastroPlus(TM) after their respective study contracts were completed). Management expects the number and size of study contracts, which can include custom software development, to continue to increase during the new fiscal year. As of November 30, 1998, the Company had submitted proposals totaling over $200,000 for custom software development and study contracts to three companies, at the request of those companies. No assurances can be given, however, that any additional study contracts will results from the Company's efforts in this area, or that the Company's efforts in this area will be profitable. PRODUCT DEVELOPMENT: In the area of simulation software for pharmaceutical research, the Company is currently pursuing the development of additional modules for GastroPlus(TM) and a companion program called QMPRPlus(TM), as well as HelixGen(TM) -- software to predict the receptor structure of certain transmembrane proteins. Optimization Module The Optimization Module was released in the first quarter of FY 1999 and has generated interest from a large number of pharmaceutical firms. The Optimization Module provides the ability to automatically build new mathematical models from the researcher's own data, to extract information from experimental data, and to design formulations for immediate release and controlled release drugs to achieve target blood concentration-time profiles. IVIV Correlation Module The IVIV Correlation Module, currently in development, provides in vitro-in vivo correlation capabilities to pharmaceutical researchers. In vitro-in vivo correlation refers to the ability to determine the relationship between the concentration-time curve of a drug product in the blood after an oral dose (in vivo) to the rate at which the oral dose is observed to dissolve in a laboratory experiment (in vitro). The IVIV Correlation module will also provide a means for pharmaceutical researchers to solve for the values of certain important pharmacokinetic parameters from blood concentration-time data taken after an intravenous injection or infusion of a drug product. The IVIV Correlation Module is expected to be released during the second quarter of FY 1999. 3 6 QMPRPlus(TM) QMPRPlus(TM) is a program that takes a description of molecular structures as input, and then analyzes the molecules to estimate their permeability, solubility, and diffusivity for input to GastroPlus(TM). This capability is important to the early drug discovery process, wherein many thousands, or even millions, of compounds need to be screened to decide which ones will be good candidates for more expensive synthesis and laboratory experimentation. QMPRPlus(TM) has received considerable interest from the pharmaceutical community at a number of trade shows and conferences attended by Company personnel during calendar year 1998, as well as at numerous seminars presented to researchers at their home sites. QMPRPlus(TM) is expected to be released for sale before the end of December 1998 or in January 1999. One pharmaceutical company in Japan has already licensed QMPRPlus(TM) and has received a beta test version in advance of its official release. The program will be offered both as a stand-alone program and as an optional integrated module for GastroPlus(TM). No assurances can be given, however, that the Company will receive any significant sales or earnings from QMPRPlus(TM). Metabolism and Efflux Module The Metabolism and Efflux Module will extend the simulation within GastroPlus(TM) to include the effects of certain metabolic processes on drug molecules, and the effects of certain proteins in intestinal cells that capture and then return a drug molecule to the intestinal contents. Metabolism refers to the action of certain enzymes, present within the intestinal cells, the blood, and in the liver, that change a drug molecule either by cleaving part of it away or by adding other atoms to it. This effect usually renders a drug molecule ineffective, but sometimes can turn a molecule into a useful drug product after the original molecule (in this case called a "prodrug") has been absorbed. Efflux refers to a process wherein a drug molecule is captured by a protein embedded in the cell wall of the intestine, but is later returned to the interior of the intestine by the protein releasing it. Both metabolism and efflux are important processes for certain types of drug molecules, so there is considerable interest within the pharmaceutical industry in modeling (simulating) the mechanisms by which these processes occur during and subsequent to intestinal absorption of the drug molecules. The Company expects to release the Metabolism and Efflux Module during the second or third quarter of FY 1999. HelixGen(TM) HelixGen(TM) is a program that predicts the 3-dimensional geometry (i.e., the position of each atom) of a special class of proteins known as G-coupled transmembrane proteins. This type of protein serves as a channel for passage of certain molecules through the walls of nerve cells and other cells, and is a target for the majority of neurogenic drugs. Drugs that bind to these sites can prevent the flow of molecules into and out of the cell, and in so doing may relieve pain, reduce tremors, improve memory, or other such nerve-related functions. The ability to predict the geometry of these proteins will enable researchers to identify likely new drug molecules that could bind to these sites in the computer, prior to actually synthesizing the molecule for experimental testing. Development of HelixGen was largely postponed in late 1997 in order to focus on GastroPlus(TM) and QMPRPlus(TM). Full development of the program is expected to resume in early 1999. MARKETING AND DISTRIBUTION: The Company markets its pharmaceutical simulation software products, and research services based on its simulations, to pharmaceutical and bio-tech companies, and to the research companies that serve them, through attendance and presentations at scientific meetings, exhibits at trade shows, seminars at pharmaceutical companies and government agencies, advertising in selected publications, and through its web pages on the Internet. The Company is building an in-house sales and marketing team for its products and services and will also explore sales and marketing agreements with firms that provide research services and equipment that are complementary to the Company's existing and proposed (i.e., in development) pharmaceutical products and services. The 4 7 Company also uses its web pages on the Internet for such activities as providing product information, providing software updates, and as a forum for user feedback and information exchange. The Company will also explore distribution through university bookstores for the Academic version of GastroPlus(TM) for students in pharmacy and medicine. In August 1998, The Company signed a distribution agreement with Teijin Systems Technology Ltd. (TST), a division of Teijin Limited of Tokyo, Japan. Under the terms of the agreement, TST received exclusive distribution rights to Simulations Plus' GastroPlus(TM) and QMPRPlus(TM) software for pharmaceutical research and education in Japan. PRODUCTION: The Company's major products are designed and developed by its development team at its Lancaster, California facility. The chief materials and components used in simulation software products include CD-ROMs and instruction books. CD-ROM production is performed in-house for low-volume products, and is contracted to third parties for high volume products. COMPETITION: In providing simulation-software-based screening, testing and research services to the pharmaceutical industry, and in marketing simulation software for these purposes, the Company competes against a number of established companies that provide screening, testing and research services and products to these industries that are not based on simulation software. The Company's competitors in this field include companies with financial, personnel, research and marketing resources that are greater than those of the Company. While there is currently no competitive product to GastroPlus(TM), QMPRPlus(TM), or HelixGen(TM), competition can be expected at some time in the future. Major pharmaceutical companies conduct these efforts through their internal development staffs and through outsourcing some of this work. Smaller companies need to outsource a greater percentage of this research. The Company is aware of a few other companies that are presently developing simulation software or simulation-software-based services to the pharmaceutical industries for the purposes of screening compounds, but is not aware of the development of any directly competitively software to GastroPlus(TM), QMPRPlus(TM), or HelixGen(TM). The Company is not aware of any significant competition in the area of gastrointestinal absorption simulation. The Company is aware of one company in England that produces animation software for education in pharmacy and medicine, but is not aware of any commercial effort by any company to produce and sell a gastrointestinal absorption simulation program for pharmaceutical research. The Company is aware of one other company called Navicyte that is developing an absorption simulation, but information obtained by the Company indicates that this simulation is not a product for sale, but rather is incorporated into larger development efforts as part of a consortium approach. Information obtained by the company indicates that Navicyte has only three customers. One of those has already licensed GastroPlus(TM), and a second is expected to order before the end of 1998 or in very early 1999. The Company believes the key factors in competing in this field are its ability to develop simulation software and related products and services to effectively predict the absorption and pharmacokinetic behavior of a large number of compounds, its ability to develop and maintain a proprietary database of results of physical experiments that will serve as a basis for simulated studies, and its ability to develop and maintain relationships 5 8 with research and development departments of pharmaceutical companies and government agencies. There can be no assurances that the Company will be successful in providing these key factors. EDUCATIONAL SIMULATION SOFTWARE PRODUCTS: The Company is producing and developing a series of interactive educational simulation software programs for the school and home study markets. The Company's initial products, which have won awards from educational software testers, include simulations of laboratory experiments for Physical Science and Chemistry courses under the umbrella name FutureLab(TM). The Company released its first three FutureLab(TM) titles in May 1997 (Optics for Physical Science, Gravity for Physical Science, and Circuits for Physical Science), and a new title, IdealGas for Chemistry in November 1997, all for Windows-based computers. In August 1998, after a conversion effort that took over one year for some labs, the Company released new versions of all of these titles as well as Universal Gravitation for Physical Science for both Windows and Macintosh computers. Macintosh computers account for 40-50% of the educational market. Additional educational simulation topics to be developed include Titration for Chemistry which is near completion, as well as as future titles for Chemical Equilibria, Genetics for Biology, Heat, Magnetism, Friction, Kinematics and Dynamics, Earth and Space Science, Properties of Matter, Atoms and Bonding, Chemical Reactions, Forces, Forces in Fluids, Waves, Sound, Electric Charges and Currents, Simple Machines, and additional titles for high school Physics, Chemistry and Biology courses. FutureLab(TM) educational software programs simulate science experiments for high school and college level science and engineering classes. These simulations enable students to conduct experiments on a personal computer instead of in a traditional laboratory, thereby increasing safety, decreasing costs, and providing expanded learning opportunities by allowing simulations of situations not possible in a traditional laboratory environment. FutureLab(TM) software has received recognition from Computers in Physics magazine, which declared it a winner in its Eighth Annual Software Contest, as well as from two educational institutions who perform rigorous educational software evaluation. PRODUCT DEVELOPMENT: In the area of educational simulations, the Company's R&D activities include continuing the development of science experiment simulation software for high school and university-level science courses. The level of this effort was reduced in August 1998 in order to conserve resources. This development effort is now at a level of two engineers plus support from marketing and graphic arts personnel as required. Current sales and the National Science Foundation grant provide support for this level of effort. At the high school level, anticipated new titles include simulated experiments for courses in Physical Science, Physics, Chemistry, Biology and Earth Science. At the university level, anticipated titles include more sophisticated simulations for Physics, Chemistry, and Biology, as well as titles for studies in Engineering and Medicine such as Heat Transfer, Fluid Mechanics, Thermodynamics, Gas Dynamics, Kinematics and Dynamics, and Electronic Circuits. In 1996, the Company received a Phase I Small Business Innovation Research (SBIR) grant from the National Science Foundation for Approximately $51,000. In October 1997, the Company was awarded a $300,000 Phase II follow-on grant which will be funded in four equal payments of $75,000 every six months for an eighteen month period. The first payment was received in October 1997. The second payment was received in April 1998, and a third payment was received in October 1998. This grant is funded to further develop software to 6 9 allow physically-disabled science students to perform simulated laboratory experiments on a computer with minimal physical input. The Company is using its expertise and technology in designing and building computer access products for the physically-disabled, as well as its expertise in developing scientific educational simulation software, in developing these programs. These programs are also designed to be used by able-bodied students but will incorporate the Company's proprietary technology for physically-disabled persons so that the same programs will be attractive to and used by both physically-disabled and able-bodied persons. Field testing of the switch-activated versions of FutureLab(TM) programs will take place in early 1999. The Company has also developed a 3D robot arm simulation as part of the NSF grant effort, and this will also be field tested in early 1999. MARKETING AND DISTRIBUTION: The Company markets its science experiment simulation software products through a growing list of over 30 software resellers, through exhibits and presentations at conferences and trade shows, through its Internet web page, and through advertising in selected publications. The Company is also investigating forming one or more alliances with major textbook publishers and with additional educational software distributors. As of August 1998, the Company has reduced its marketing efforts in this area in order to concentrate more of its resources on the pharmaceutical software market. The Company is relying on its resellers to provide the majority of the marketing and sales efforts for its educational software products. PRODUCTION: The Company's educational software products are designed and developed by its development team at its Lancaster, California facility. The Company contracts the production of CD-ROMs to third parties. The chief materials and components used in simulation software products include CD-ROMs and instruction books. COMPETITION: The educational software industry in which the Company operates is highly competitive. The Company competes against publishers and suppliers of textbook educational materials that have been, and will continue to be, the primary educational resource used in these markets. The Company also competes against educational software publishers who provide software products that are interactive but most are not true simulation software. Most education software publishers compete in the grades below 9th grade, addressing primarily reading and math skills. The Company competes primarily in the middle school, high school, and college markets addressing primarily science and math subjects. A smaller number of software publishers are addressing these markets, although existing competitors may broaden their product lines to these markets, and additional competitors may enter these markets. The Company is aware of several companies publishing various types of educational simulation software including HyperCube, Glencore, Corel, Logal Educational Software and Systems, and Knowledge Revolution. Logal is the only company of which the Company is currently aware that is producing a range of educational simulation software that competes directly with the Company's current and planned educational simulation software products. The Company expects that high school and college science and math textbook publishers and other companies may also be developing simulation software products and that additional competitors may enter this field. Information gathered by the Company at conferences for science teachers and school administrators indicates that these customers and potential customers prefer the Company's products over those offered by Logal almost unanimously, for those titles which have been released by the Company to date. 7 10 DISABILITY PRODUCTS PRODUCTS: The Company's wholly owned subsidiary, Words+, Inc. has been in business since 1981. Words+ is a technology leader in designing and developing augmentative and alternative communication computer software and hardware devices for persons who cannot speak due to physical disabilities. Words+ also produces computer access products that enable physically disabled persons to operate a computer. Words+ products enable a disabled person to operate a computer and to communicate through a voice synthesizer, through movements as slight as the blink of an eye. Words+ developed and produces the software for the computerized communication system used by the world-famous theoretical physicist, Professor Stephen Hawking, Lucasian Professor of Mathematics at the University of Cambridge in England, and the author of the best-selling book A Brief History of Time. Words+ markets its products throughout the United States and to other countries through a direct sales staff and independent dealers. Words+ introduced a fully integrated, portable, lightweight personal-computer-based communication system that is meeting favorable market acceptance. E Z Keys for Windows(TM) One of the Company's primary software products is E Z Keys for Windows ("E Z Keys(TM)"), which is a program that operates on a Windows-based personal computer. When coupled with specially-designed input devices, E Z Keys enables even severely disabled persons to operate a personal computer, to generate voice messages through a voice synthesizer, and to operate most Windows-based software application programs. Input motion by the user can be as slight as the blink of an eye, or simple eye movement by persons who cannot blink. E Z Keys is one of the two Words+ programs used by Professor Stephen Hawking for computer access and communication. In May 1997, the Company released E Z Keys for Windows 95, the current version of which is also compatible with Windows 98. Talking Screen for Windows(TM) Talking Screen for Windows ("Talking Screen(TM)") is a software program that operates on a Windows-based personal computer and is designed for persons, usually children, who cannot read and write at the level necessary to adequately operate E Z Keys. Talking Screen provides a system of pages of pictographic and photographic symbols by which the user can produce speech output messages through a voice synthesizer, play recorded sounds and video files, and operate controllers for lights, electrical appliances and other equipment. Like E Z Keys, Talking Screen can be operated through a wide range of alternative input devices. PegasusLITE(TM) PegasusLITE(TM) is a fully-integrated, portable, microprocessor-based communication system that weights just four and one-half pounds, which is significantly smaller and lighter in weight, as well as more powerful, than comparable competitive devices. PegasusLITE currently incorporates a 486DX-5 microprocessor running at 133 MHz, Windows 95(TM) operating system, 16 MB RAM, 340 MB hard disk drive, 256 color LCD display with build-in touch window, PCMCIA slot for a floppy disk drive and optional accessories, Windows sound system, and a software voice synthesizer that can provide male, female or child's voices. PegasusLITE measures approximately 8.75" x 12.75" x 1.65". PegasusLITE can operate either E Z Keys for Windows or Talking Screen for Windows, although it is used primarily with Talking Screen. Freedom2000 Words+ released a new communication system called Freedom 2000 in February 1998. It allows persons with disabilities who read at a second-grade level and above to speak and write through alternative input methods 8 11 (rather than traditional keyboard and mouse). Freedom 2000 with E Z Keys gives the users the ability not only to speak and write, but also to play games and control various items in their environment, such as TV's and telephones. High level users are also able to deliver lectures to large groups, use the Internet, and send e-mail. New orders for Words+ products during the last two quarters are at record annualized levels and Freedom 2000 orders constitute a significant portion of these new orders. MessageMate The Company produces a series of products called MessageMates, which are hand-held, dedicated communication devices that store recorded speech or sound on integrated circuit chips. The user plays these recorded sounds by touching one of the keys on the membrane keyboard if they are able to use a keyboard, or by using a switch (such as the IST Switch described below) and scanning to select a position on the keyboard. MessageMates are small, lightweight (1 to 1.75 lbs.), easy-to-use communication devices with up to four minutes of recorded messages. They are known for their extremely rugged design and long battery life. The MessageMate 20 holds twenty messages, the MessageMate 40 holds forty messages, and the Mini-MessageMate holds eight messages. In October 1997, the Company released a new model, the Multi-Level MessageMate 40, which holds up to 144 messages in four levels, and provides up to ten minutes of total recording time. Since MessageMates use recorded messages, they can be used in any language. The Company has significant sales of MessageMate in foreign markets and sales of MessageMates in foreign markets are increasing. Infrared/Sound/Touch (IST) Switch Many Words+ customers cannot operate a keyboard or mouse. For some of these persons, the Company has designed and produces a special device called the Infrared/Sound/Touch Switch ("IST Switch"), that enables the person to operate a personal computer or a dedicated communication device with the slightest movement or pressure, including, for example, eye blink, or just eye movement. The IST is activated by infrared reflection, touch, or sound, and transmits a momentary "on" signal to the computer upon detecting these signals. This switch has been in production since 1983, and thousands of physically disabled persons around the world have used it. Miscellaneous Words+ also sells a number of other miscellaneous and peripheral devices, some of which it designs and produces and others it buys and resells. These include: - - MicroCommPac - Communication hardware package designed for use with a notebook computer that provides switch interface and audio amplification. - - U-Control - Wireless infrared remote control device that allows the user to control functions and appliances in the home and work environment such as lights, stereo and television equipment, and other appliances. - - Simplicity Wheelchair Mount - Company-designed and produced wheelchair mount for portable computers and other devices. PRODUCT DEVELOPMENT: The Company believes it has been an industry technology leader in introducing and improving augmentative and alternative communication and computer access software and devices for disabled persons and intends to continue to be at the forefront of the development of new products. The Company will continue to enhance its major software products, E Z Keys and Talking Screen, as well as its growing line of hardware products. The Company will also consider acquisitions of other products, businesses and companies that are complementary to its existing augmentative and alternative communication and computer access business lines. 9 12 MARKETING AND DISTRIBUTION: The Company markets augmentative and alternative communication products through a network of employee representatives and independent dealers. At the present time the Company has seven independent dealers in the U.S., four in Australia and one each in Canada, England, Norway, The Netherlands, New Zealand, Japan, Finland and Malaysia. The Company also has three salary-commission sales persons in the U.S.: one each in Southern California, Maine, and Maryland, and the Company employs four inside sales/support persons who answer telephone inquiries on the Company's 800 line and who provide technical support. The Company directs its marketing efforts to speech pathologists, occupational therapists, special education teachers, disabled persons and relatives of disabled persons. The Company maintains a mailing list of over 37,000 persons made up of these professionals, consumers and relatives and mails various marketing materials to this list. These materials include the Company's newsletter, its catalog of products and announcements regarding new and enhanced products. The Company participates in industry conferences held throughout the U.S. and in other countries that are attended by speech pathologists, occupational and physical therapists, special education teachers, parents and consumers. The Company and others in the industry demonstrate their products at these conferences and present technical papers that describe the application of their technologies and research studies on the effectiveness of their products. The Communication Aids Manufacturers Association (CAMA) organizes tours of representatives of companies in this field that travel throughout the country providing seminars and workshops for professionals, consumers and parents in the field. The Company advertises in selected publications of interest to persons in this market. The Company estimates that for approximately 50% of its sales of augmentative and alternative communication software and hardware, some or all of the purchase price is provided by third parties such as Medicaid, school special education budgets, private insurance or other governmental or charitable assistance. The Company's personnel provide advice and assistance to customers and prospective customers on obtaining third-party financial assistance for purchasing the Company's products. No assurances can be given that such third party support will continue to be available for the purchase of the Company's products for those in need of them. PRODUCTION: Disability software products are either loaded onto hard drives by the Company or copied to diskettes for sale to customers. Microprocessors that are part of dedicated devices are purchased by the Company and incorporated into its products by the Company. Many software customers buy their notebook personal computers from the Company, which the Company purchases at wholesale prices and resells at a markup. Cases, printed circuit boards, labels and other components of products such as PegasusLITE, MessageMate and CommPac are designed by the Company. The Company outsources the extrusion, machining and manufacturing of certain components. All final assembly and testing is done by the Company at its facility. The Company incorporates a tablet-style computer manufactured by Epson America in its PegasusLITE product. The Company has no written agreements with Epson America other than purchase orders that it submits to Epson America to purchase such computers. The Company and other of Epson America's customers provide projections to Epson America to purchase such computers in order to allow Epson America to estimate the number of units of such computer that it should manufacture in each of its production runs. 10 13 The Company's products are shipped from its Lancaster, California facility either directly to the customer or to the salesperson or dealer. The outside salesperson or dealer either delivers the product or visits the customer after delivery to provide training. COMPETITION: The augmentative and alternative communication industry in which the Company operates is highly competitive and some of the Company's competitors have greater financial and personnel resources than the Company. The industry is made up of six major competitors including the Company, and a number of smaller ones. The Company believes that the five other major competitors each have revenues ranging from $3 Million to $20 Million so that there are no large companies in this industry. Two of these companies primarily produce personal-computer-based software systems for Apple Macintosh and the others produce dedicated communication devices and/or paper products. The Company believes that the competition in this industry is based primarily on the quality of products, quality of customer training and technical support, and quality and size of sales forces. Price is a competitive factor but the Company believes price is not as important to the customer as obtaining the product most suited to the customer along with strong after-sale support. The Company believes that it is a leader in the industry in developing and producing the most technologically-advanced products and in providing quality customer training and technical support. The prices of the Company's products are among the highest in the industry and the Company has one of the smallest sales forces and dealer networks in the industry. The Company believes it is positioned to continue to be a leader in the development and production of the highest quality technology and that it will be able to develop one of the strongest sales forces in the industry by increasing the number of sales representatives. The Company believes that the sales of its products can increase significantly due to these factors and the expected continuing expansion of the size of this market. However, there are few barriers to entry in the form of proprietary or patented technology or trade secrets in this industry. While the Company believes that cost of product development and the need for specialized knowledge and experience in this industry would present some deterrence for new competition, other companies may enter this industry, including companies with substantially greater financial resources than the Company. Further, companies already in this industry may increase their market share through increased technology development and marketing efforts. PERSONAL PRODUCTIVITY SOFTWARE PRODUCT - ABBREVIATE!: Words+ released a new productivity software program called Abbreviate! in November 1997 at COMDEX. The Company took the abbreviation technology incorporated into the E Z Keys for Windows software used by Professor Stephen Hawking and thousands of others around the world, and turned it into a program that can be used by anyone with the ability to use a standard keyboard. While many word processors provide a similar "Quick Correct" feature, the advantage Abbreviate! has over such features is that it runs in the background and works with almost all Windows applications. Thus, Abbreviate! allows the user to create a personal library of frequently-used abbreviations, each with its own special keystroke combination, for use in virtually any Windows-based program, e.g., fax, e-mail, word processing, database, Internet chat rooms, and spreadsheets. The Company is currently pursuing distribution relationships with a number of major software manufacturers for Abbreviate!. No assurances can be given that the Company will successfully complete any such distribution relationships or if completed that they will be on terms that are favorable to the Company. Abbreviate! was 11 14 named PC Week magazine's "Tool of the Week" in their December 1, 1997 issue, and won Win95 magazine's Editor's Choice Award in March 1998. MARKETING AND DISTRIBUTION: The Company's Abbreviate! software program was introduced in November 1997 at COMDEX. The Company is currently selling the program itself through a variety of Internet channels, including its own web site (www.abbreviate.com). The Company is also contacting large software manufacturers and distributors in an effort to secure distribution agreements for Abbreviate!. While sales have been constant at a low level, no assurance can be given as to whether this new product will be successful. Further, no assurances can be given that the Company will successfully complete distribution relationships or if completed that they will be on terms that are favorable to the Company. PRODUCTION AND DISTRIBUTION: The Abbreviate! personal productivity software program is currently manufactured at the Company's Lancaster, California facility. If sales volume warrants and higher volume capacity is required, the Company will investigate outside sources for fulfillment. COMPETITION: A few products compete with Abbreviate! in the retail market; however, the Company is not aware of any other product that works with virtually any software in Windows 95 without the need to create special links to the software. The Company has priced Abbreviate! significantly less than competitor SmarType and InstantText. The Company enlisted the help of several medical transcriptionists as beta testers for the product, and the feedback received from those testers and additional medical transcriptionists, who are familiar with competitive products, has been very favorable. TRAINING AND TECHNICAL SUPPORT The Company believes customer training and technical support are important factors in customer satisfaction for its pharmaceutical and disability products and the Company believes it is an industry leader in providing customer training and technical support. For pharmaceutical software, the Company provides in-house seminars at the customer's site to demonstrate GastroPlus(TM) and QMPRPlus(TM). During FY 1998, the company delivered such seminars in several locations around the U.S. and in Japan. During the first quarter of FY 1999, the Company delivered seven seminars in Japan to over 150 scientists from over 40 different companies. The Company also conducted seminars at approximately 15 pharmaceutical and related research companies in the U.S. These seminars serve as initial training in the event the potential customer decides to license the software. Strong technical support is provided after the sale in the form of telephone, fax, and e-mail assistance to users, as well as an ongoing process of software upgrades to ensure the product remains at the cutting edge of technology. Software licenses are on an annual basis, and include all upgrades to the modules licensed by the customer during the license year. For Disability Products, the Company's salesperson or dealer provides initial training to the customer -- typically two to four hours on major products and one to two hours on certain other products. This training is typically provided not only to the user of the product but also to the person's speech pathologists, teachers, parents and others who will be helping the user. This initial training is provided as a part of the price of the product. The Company and its dealers charge a fee for additional training and service calls. 12 15 Technical support for both Simulation Software and Disability Products is provided by the Company's inside sales and support staff based at its headquarters facilities in Lancaster, California. The Company provides no-charge toll telephone support offering unlimited 800 number and E-mail support for all of its simulation software and disability products. EMPLOYEES As of August 31, 1998, the Company employed 39 full-time and 2 part-time employees, including 8 in research and development, 13 in marketing and sales, 11 in administration and accounting, 8 in production and 1 in repair. Three current employees hold Ph.D.'s in their respective science or engineering disciplines. Four additional employees hold Master's degrees. The Company believes that its future success will depend, in part, on its ability to continue to attract, hire and retain qualified personnel. The competition for such personnel in the augmentative and alternative communication device and computer software industry is intense. None of the Company's employees is represented by a labor union, and the Company has never experienced a work stoppage. The Company believes that its relations with its employees are good. Since the end of FY 1997, Company has hired three additional engineers in research and development to accelerate the development of new educational software titles and the conversion to C++ for both Windows and Macintosh platforms. However, this conversion effort, begun in May 1997, required significantly longer time and greater resources than anticipated. In August 1998 the Company decided to focus on pharmaceutical software and to minimize educational software development. A layoff of a number of educational software developers, as well as temporary salary reductions for senior management were instituted in order to reduce expenses. ITEM 2. DESCRIPTION OF PROPERTIES The Company moved its office location from Palmdale, California to Lancaster, California in July 1998, expanding its office space from approximately 11,800 square feet to approximately 15,600 square feet. Lease on the office space currently occupied by the Company will expire in August 2001. The Company realized a savings of approximately $40,000 per year through the lease it negotiated on this new property. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any litigation and is not aware of any pending or threatened litigation against the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fiscal year ended August 31, 1998. 13 16 PART II ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's Common Stock began trading on the Nasdaq SmallCap Market ("NASDAQ") on June 18, 1997 under the symbol "SIMU". According to records of the Company's transfer agent, the Company had at least 18 stockholders of record and 818 beneficial owners as of August 31, 1998. The following table sets for the low and high sale prices for the Common Stock as reported by Nasdaq.
LOW HIGH SALES PRICE SALES PRICE ----------- ----------- Fiscal 1998: Quarter ended August 31, 1998 ........... 1.500 5.250 Quarter ended May 31, 1998 .............. 3.500 7.375 Quarter ended February 28, 1998 ......... 4.250 8.500 Quarter ended November 30, 1997 ......... 5.000 5.750 Fiscal 1997: Quarter ended August 31, 1997 (from 6/18/97) ....................... 5.000 6.125
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION RESULTS OF OPERATIONS The following sets forth selected items from the Company's statements of operations (in thousands) and the percentages that such items bear to net sales for the fiscal years ended August 31, 1998 ("FY98"), August 31, 1997 ("FY97") and August 31, 1996 ("FY 96").
Year Ended August 31, ------------------------------------------------------------------------------ 1998 1997 1996 ----------------------- --------------------- ------------------ Net sales $ 2,645 100.0% $ 2,493 100.0% $2,601 100.0% Cost of sales 1,756 66.4 1,252 50.2 1,289 49.6 Selling, general, and administrative 2,683 101.4 2,277 91.3 1,190 45.8 Research and development 390 14.7 133 5.4 108 4.1 Total operating expenses 3,073 116.1 2,410 96.7 1,298 49.9 Income (loss) from operations (2,184) (82.5) (1,169) (46.9) 14 0.5 Income from grant 150 5.7 17 0.7 34 1.3 Interest income 58 2.2 26 1.0 -- -- Interest expense 16 0.6 69 2.8 10 0.4 Financing costs -- -- 280 11.2 -- -- Gain (loss) in investment, at equity (75) 2.8 -- -- -- -- Provision for (benefit from) income taxes 2 0.2 (39) (1.6) 15 0.5 Net income (loss) (2,069) (78.2)% (1,436) (57.6)% 23 0.9%
14 17 FY 98 COMPARED WITH FY 97 Net Sales Net sales for FY98 increased by $152,000 or 6.1%, to $2,645,000 compared to $2,493,000 for FY 97. Management attributes the majority of this increase primarily to two factors: (1) an approximately $40,000 increase in educational software sales, and (2) a $98,000 increase in sales of Freedom 2000, a communication system. Another $14,000 was comprised of an overall increase in IST and Simplicity sales offset by a decrease in MultiVoice and MessageMate sales. Cost of Sales Cost of sales for FY98 increased by $504,000 or 40.2% to $1,756,000 from $1,252,000 in FY97. As a percentage of sales, cost of sales was 66.4% for the FY 98, compared to 50.2% for the FY97, indicating a 16.2% increase. Management attributes this increase in cost of sales primarily to the amortization of capitalized educational software which increased by $452,000 or 1412.5% to $484,000 compared to $32,000 in FY97. The remaining $52,000 increase was due to the increase in net sales. Of the $452,000 increase, $350,000 was a non-cash charge for amortization of capitalized educational software development costs. Without this additional charge, cost of sales as a percentage of net sales would have been 53.2%, compared to 50.2% in FY 97. Management attributes the increase of 3.0% to the higher amortization of capitalized software development costs, without which cost of sales would have been 49.3%, or 0.9% lower than FY 1997. Selling, General and Administrative Expenses Selling, general and administrative expenses for FY 98 increased by $406,000, or 17.8% to $2,683,000, compared to $2,277,000 for FY 97. As a percentage of net sales, selling, general and administrative expenses increased by 10.1% to 101.4% in FY 98 from 91.3% in FY 97. Management attributes this increase primarily to the expansion of sales force in Words+, including salaries, equipment, travel expenses, and tradeshows. Other significant increase in expenses are consultation fees, higher depreciation amounts, business insurance and health insurance, wages and payroll taxes, moving expenses to the new facility, ads and associated printing costs, public relation costs and amortization costs on investments in commercial bonds. Research and Development The Company incurred approximately $1,015,000 of research and development costs for FY98, of which approximately $625,000 was capitalized and $390,000 was expensed. For FY97, the Company incurred approximately $765,000 of research and development costs for FY 97, of which approximately $632,000 was capitalized and approximately $133,000 was expensed. The 32.7% increase in research and development expenditure is due primarily to the unexpectedly long development time for work associated with the conversion of educational software to the C++ programming language necessary for compatibility on both Windows and Macintosh computers. Income from Grant For FY 98, the Company received $150,000, the first two semi-annual payments of a $300,000 Phase II SBIR grant from the National Science Foundation to develop software to allow physically-disabled students to perform simulated laboratory experiments on a computer. For FY 97, the Company received the last one-third of a Phase I SBIR grant in the amount of $17,000. Interest Expense Interest expense for FY 98 decreased $53,000, or 76.8% to $ 16,000. This decrease is primarily due to the interest charges incurred for the Bridge Notes and notes issued in August and September 1996 for which the Company does not have such an obligation in this fiscal year. 15 18 Financing Costs Financing costs for FY 98 were $0 compared to $280,000 for FY97. The $280,000 for FY97 was due to the issuance of 280,000 warrants in connection with notes payable issued in December 1996 and January 1997. This financing cost was being amortized over the term of the notes and the unamortized portion at the time of the completion of the Company's initial public offering was charged to earnings. The warrants entitled the holder to purchase one share of the Company's Common Stock for $2.50 per share. The Company issued these warrants which had an exercise price that the Company estimated to be $1.00 less than the fair value of the Company's Common Stock at the date of grant. Accordingly, the Company recognized an additional financing cost of $280,000 in FY97. Loss on investment in HealthWeb, Inc., at Equity The Company incurred approximately $75,000 of expenses in forming a joint venture called HealthWeb, Inc. to provide health information through its Internet web site HealthData.com. The Company holds 4,500,000 (50%) shares of the 9,000,000 shares issued in HealthWeb, Inc., which is a California corporation. Because of limited resources, the Company discontinued its support of HealthWeb, Inc. and currently HealthWeb, Inc. is in a state of nonoperation. Income Taxes Income taxes were $2 for FY98. For FY97 the Company recorded a tax benefit of $39,000 because the Company received tax refund claims from government agencies. Net Loss Net loss for FY98 increased $633,000, or 44.1%, to the net loss of $2,069,000 compared to the net loss of $1,436,000 for FY97. Management attributes this decline primarily to the non-cash writeoff of $350,000 for capitalized educational software, the increase in selling, general and administrative expenses for aggressive sales expansion and related costs, and the loss incurred on the investment in HealthWeb, Inc. FY 97 COMPARED WITH FY 96 Net Sales Net sales decreased by $108,000 or 4.2%, to $2,493,000 compared to $2,601,000 for FY 96. Management attributes the majority of this reduction to the changeover from the MultiVoice hardware voice synthesizer to the Eloquence software voice synthesizer. MultiVoice sales accounted for $120,000 in the 1996 period, but only $14,000 in the 1997 period. Lower Talking Screen software sales, somewhat offset by higher computer sales, accounted for the majority of the remainder of $2,000 difference in net sales for the two periods. Cost of Sales Cost of sales for FY 97 declined by $37,000 or 2.9% from $1,289,000 in FY 96. As a percentage of sales, cost of sales was 50.2% for the 1997 period, compared to 49.6% for the 1996 period. Management attributes this slight percentage change in gross margin primarily to two factors: (1) an approximately 2% decline in cost from the changeover from the MultiVoice to the Eloquence software voice synthesizer, which somewhat offset by, (2) higher computer sales which has higher percentage in cost. 16 19 Selling, General and Administrative Expenses Selling, general and administrative expenses for FY 97 increased by $1,087,000, or 91.3% to $2,277,000 compared to $1,190,000 for FY 96. As a percentage of net sales, selling, general and administrative expenses increased by 45.5% to 91.3% in FY 97 from 45.8% in FY 96. Management attributes this increase primarily to the expansion of the Company's simulation software efforts as the Company added office space, furniture and equipment, and additional staff, including recruiting and hiring costs, commencing in September 1996 in contemplation of receiving funding from the closing of a public offering that was scheduled to close in November 1996 but which did not close because the underwriter of such offering had failed to reach agreement with its clearing agent regarding the amount of capital that such clearing agent required such underwriter to maintain in connection with such offering. A portion of the increase was also due to higher professional fees, increases in salaries and wages, increased printing and advertising costs. Research and Development The Company incurred approximately $765,000 of research and development costs for FY 97, of which approximately $632,000 was capitalized and approximately $133,000 was expensed. For FY 96, the Company incurred approximately $215,000 of research and development costs, of which approximately $107,000 was capitalized and approximately $108,000 was expensed. The 255.8% increase in research and development expenditures for FY 97 is due to the expanded development work on educational and pharmaceutical simulation software begun in September 1996. Income from Grant For FY 97, the Company received $17,000, the last one-third of a $51,000 Phase I SBIR grant from the National Science Foundation to develop software to allow physically-disabled students to perform simulated laboratory experiments on a computer. For FY 96, the Company received the first two-thirds of this grant. (A follow-on $300,000 Phase II SBIR grant was awarded to the Company in October 1997.) Interest Expense Interest expense for FY 97 increased $59,000, or 590.0%, to $69,000 from $10,000 in FY 96. This increase is primarily due to the interest charges incurred for the Bridge Notes and notes issued in August and September 1996. Financing Costs Financing costs for FY 97 were $280,000 compared to $0 for FY 96. The increase is due to the issuance of 280,000 warrants in connection with notes payable issued in December 1996 and January 1997. This financing cost was being amortized over the term of the notes and the unamortized portion at the time of the completion of the IPO was charged to earnings. The warrants entitled the holder to purchase one share of the Company's Common Stock for $2.50 per share. The Company issued these warrants which had an exercise price that the Company estimated to be $1.00 less than the fair value of the Company's Common Stock at the date of grant. Accordingly, the Company recognized an additional financing cost of $280,000. Income Taxes Income taxes decreased $54,000, or 360.0% to the tax benefit of $39,000 from the provision of $15,000 for FY 96 because of the Company's decreased earnings. 17 20 Net Income Net income for FY 97 declined by $1,459,000, or 6,343.5%, to the net loss of $1,436,000 compared to the net income of $23,000. Management attributes this decline primarily to the decrease in Net Sales, the increase in Selling, General and Administrative expenses incurred by the Company for its research and development efforts, and the increased financing costs and interest expenses compared to FY 96. SEASONALITY Sales of the Company's disability products exhibit relatively mild seasonal fluctuations. The following table sets forth net sales information for each of the Company's last 12 calendar quarters. This unaudited net sales information has been prepared on the same basis as the annual information presented elsewhere in this Form 10-KSB and, in the opinion of management, reflects all adjustments (consisting of normal recurring entries) necessary for a fair presentation of the information presented. Net sales for any quarter are not necessarily indicative of sales for any future period.
Net Sales ----------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter Total ------- ------- ------- ------- ----- (in thousands) FY 1996 . . . . . . . . . . . . 733 628 621 619 2,601 1997 . . . . . . . . . . . . 541 679 560 713 2,493 1998 . . . . . . . . . . . . 543 560 730 812 2,645
In general, management believes sales to schools are seasonal, with greater sales to schools during the Company's third and fourth fiscal quarter (March-May and June-August). There is not sufficient historical data at this time to allow a detailed analysis of the seasonality of educational simulation software. Sales of pharmaceutical simulations, which began in the first calendar quarter of 1999, are not expected to show significant seasonal behavior. LIQUIDITY AND CAPITAL RESOURCES The Company's principal sources of capital have been cash flows from its operations, a bank line of credit, a government grant, cash loans from the officers on an as-needed basis, accruing and not paying full salaries to certain executive officers and managers, and the remaining proceeds from the Company's initial public offering. The Company has available a $100,000 revolving line of credit from a bank. Interest is payable on a monthly basis at the bank's prime rate plus 3.0%. The interest rate was 11.50% at both August 31, 1998 and 1997. At August 31, 1998, the outstanding balance under the revolving line of credit was approximately $97,000, and at August 31, 1997, the outstanding balance under the revolving line of credit was $0, with $100,000 available on that date. The revolving line of credit is not secured by any of the assets of the Company but is 18 21 personally guaranteed by Mr. Walter S. Woltosz, the Company's Chief Executive Officer, President and Chairman of the Board of Directors. Beginning in August 1998, certain executive officers and managers accepted reduced salaries on a temporary basis in order to protect the cash assets of the Company. The unpaid portions of salaries are being accrued and will be paid at such future time as management deems the Company's cash flow and cash reserves are sufficient to make such payment without adverse effects to the Company's financial position. As of November 30, 1998 the Company had accrued approximately $52,000 of unpaid salaries. In October 1997, the Company was awarded a follow-on $300,000 Phase II SBIR grant from the National Science Foundation, the purpose of which was to help fund the Company's development of educational simulation software for the school and home study markets. The grant is being paid in four equal payments of $75,000 semi-annually. The first three payments on such grant were received in October 1997, February 1998 and October 1998. The Company believes that existing capital and anticipated funds from operations, cost reductions from downsizing certain segments of operations, and temporary salary reductions for senior management will be sufficient to meet its anticipated cash needs for working capital and capital expenditures for at least the next 13 months. However, if anticipated funds from operations are insufficient to satisfy the Company's capital requirements, the Company may have to sell additional equity or debt securities or obtain expanded credit facilities. In the event such financing is needed in the future, there can be no assurance that such financing will be available to the Company, or, if available, that it will be in amounts and on terms acceptable to the Company. If cash flows from operations are insufficient to continue operations at the current level, and if no additional financing is obtained, then management may restructure the Company in a way to preserve its pharmaceutical and disability businesses while maintaining expenses within operating cash flows. In order to maintain quotation of its securities on the NASDAQ SmallCap Market ("NASDAQ"), the Company has to maintain certain minimum financial requirements. As of August 31, 1998 the Company has ceased to meet one of the requirements for continued listing, namely the Company's net tangible assets as of August 31, 1998 were $1,284,000 which is below the $2,000,000 required by the NASDAQ. Further, as of November 30, 1998 the market value of the Company's public float was below the $4,000,000 required for continued NASDAQ listing. If the Company is unable to increase its net tangible assets and the market value of its public float to meet the NASDAQ's requirements for continued listing, the Company's securities may be delisted from NASDAQ. In such event, trading, if any, in the shares of Common Stock would thereafter be conducted in the over-the-counter markets in the so-called "pink sheets" or on the NASD's "Electronic Bulletin Board". Consequently, the liquidity of the Company's securities could be impaired, not only in the number of securities which could be bought and sold, but also through delays in the timing of the transactions, reductions in security analysts' and the news media's coverage of the Company, and lower prices for the Company's securities than otherwise might be attained. If the Company's securities were to be delisted from NASDAQ, they could become subject to Rule 15g-9 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which imposes additional sales practice requirements on broker-dealers which sell such securities to persons other than established customers and "accredited investors" (generally, individuals with net worths in excess of $1,0000,000 or annual incomes exceeding $200,000, or $300,000 together with their spouses). For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written 19 22 consent to the transaction prior to the sale. Consequently, the rule may adversely affect the ability of broker-dealers to sell the Company's securities acquired in the secondary market. Securities and Exchange Commission ("Commission") regulations define a "penny stock" to be any non-NASDAQ equity security that has a market price (as therein defined) of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in a penny stock, of a disclosure schedule prepared by the Commission relating to the penny stock market. Disclosure is also required to be made about commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. The foregoing required penny stock restrictions will not apply to the Company's securities if such securities are listed on NASDAQ and have certain price and volume information provided on a current and continuing basis or meet certain minimum tangible assets or average revenue criteria. There can be no assurance that the Company's securities will qualify for exemption from these restrictions. In any event, even if the Company's securities were exempt from such restrictions, it would remain subject to Section 15(b)(6) of the Exchange Act, which gives the Commission the authority to prohibit any person that is engaged in unlawful conduct while participating in a distribution of penny stock from associating with a broker-dealer or participating in the distribution of a penny stock, if the Commission finds that such a restriction would be in the public interest. If the Company's securities were subject to the rules on penny stocks, the market liquidity for the Company's securities would be severely adversely affected. YEAR 2000 COMPLIANCE The Company has completed a comprehensive review of its computer systems to identify all software applications that could be affected by the inability of many existing computer systems to process time-sensitive data accurately beyond the year 1999 (referred to as the "Year 2000" issue). The Company is also continuing to monitor its computer systems and the adequacy of the processes and progress of third-party vendors of systems that may be affected by the Year 2000 issue. The Company is dependent on third-party computer systems and applications, particularly with respect to such critical tasks as accounting, billing and buying, and it also relies on its own computer systems. The Company expects to complete its Year 2000 compliance program by mid-1999 and anticipates that its total additional expenditures on such program will not exceed $5,000. However, the Company may experience cost overruns in the future, which could have a material adverse effect on its business, results of operations and financial condition. While management believes the Company's procedures are designed to be successful, because of the complexity of the Year 2000 issue and the interdependence of organizations using computer systems, the Company's efforts, or those of third parties with whom it interacts, may not be satisfactorily completed in a timely fashion. If the Company fails to adequately address the Year 2000 issue, then its business, results of operations and financial condition could be materially adversely affected. 20 23 ITEM 7. FINANCIAL STATEMENTS REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Simulations Plus, Inc. We have audited the accompanying consolidated balance sheet of Simulations Plus, Inc. (a California corporation) and subsidiary as of August 31, 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the two years in the period ended August 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Simulations Plus, Inc. and subsidiary as of August 31, 1998, and the consolidated results of their operations and their consolidated cash flows for each of the two years in the period ended August 31, 1998 in conformity with generally accepted accounting principles. SINGER LEWAK GREENBAUM & GOLDSTEIN LLP Los Angeles, California November 5, 1998 21 24 SIMULATIONS PLUS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET AUGUST 31, 1998
ASSETS CURRENT ASSETS Cash and cash equivalents $ 198,154 Accounts receivable, net of allowance for doubtful accounts of $16,130 375,770 Income tax receivable 28,941 Inventory 348,675 ----------- Total current assets 951,540 CAPITALIZED COMPUTER SOFTWARE DEVELOPMENT COSTS, net of accumulated amortization of $739,713 823,127 FURNITURE AND EQUIPMENT, net 190,203 OTHER ASSETS 45,988 ----------- TOTAL ASSETS $ 2,010,858 =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Line of credit $ 97,128 Accounts payable 334,759 Accrued payroll and other expenses 185,383 Accrued warranty and service costs 48,496 Current portion of capitalized lease obligations 30,365 ----------- Total current liabilities 696,131 CAPITALIZED LEASE OBLIGATIONS, net of current portion 30,935 ----------- Total liabilities 727,066 ----------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Common stock, $0.001 par value 20,000,000 shares authorized 3,350,000 shares issued and outstanding 3,350 Additional paid-in capital 4,595,771 Accumulated deficit (3,315,329) ----------- Total shareholders' equity 1,283,792 ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,010,858 ===========
The accompanying notes are an integral part of these financial statements. 22 25 SIMULATIONS PLUS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED AUGUST 31,
1998 1997 ----------- ----------- NET SALES $ 2,645,159 $ 2,493,101 COST OF SALES 1,755,905 1,252,343 ----------- ---------- GROSS PROFIT 889,254 1,240,758 ----------- ---------- OPERATING EXPENSES Selling, general, and administrative 2,683,282 2,277,022 Research and development 390,446 133,023 ----------- ----------- Total operating expenses 3,073,728 2,410,045 ----------- ----------- LOSS FROM OPERATIONS (2,184,474) (1,169,287) ----------- ----------- OTHER INCOME (EXPENSE) Interest income 58,215 25,709 Income from grant 150,000 17,159 Interest expense (16,447) (68,858) Loss in investment of Healthweb, Inc., at equity (74,933) -- Financing costs -- (280,000) ----------- ----------- Total other income (expense) 116,835 (305,990) ----------- ----------- LOSS BEFORE PROVISION FOR (BENEFIT FROM) INCOME TAXES (2,067,639) (1,475,277) PROVISION FOR (BENEFIT FROM) INCOME TAXES 1,600 (38,800) ----------- ----------- NET LOSS $(2,069,239) $(1,436,477) =========== =========== BASIC LOSS PER SHARE $ (0.62) $ (0.57) =========== =========== DILUTED LOSS PER SHARE $ (0.62) $ (0.57) =========== =========== WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING 3,350,000 2,527,370 =========== ===========
The accompanying notes are an integral part of these financial statements. 23 26 SIMULATIONS PLUS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED AUGUST 31,
Retained Common Stock Additional Earnings ------------------------- Paid-in (Accumulated Shares Amount Capital (Deficit) Total ---------- ---------- ----------- ------------- ----------- BALANCE, AUGUST 31, 1996 2,200,000 $ 2,200 $ -- $ 190,387 $ 192,587 SALE OF COMMON STOCK IN INITIAL PUBLIC OFFERING 1,150,000 1,150 5,748,850 5,750,000 OFFERING COSTS (1,433,079) (1,433,079) ISSUANCE OF WARRANTS FOR FINANCING COSTS 280,000 280,000 NET LOSS (1,436,477) (1,436,477) ---------- ---------- ----------- ----------- ----------- BALANCE, AUGUST 31, 1997 3,350,000 3,350 4,595,771 (1,246,090) 3,353,031 NET LOSS (2,069,239) (2,069,239) ---------- ---------- ----------- ----------- ----------- BALANCE, AUGUST 31, 1998 3,350,000 $ 3,350 $ 4,595,771 $(3,315,329) $ 1,283,792 ========== ========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements. 24 27 SIMULATIONS PLUS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED AUGUST 31,
1998 1997 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (2,069,239) $ (1,436,477) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization of furniture and equipment 67,794 31,777 Amortization of capitalized software development costs 564,299 108,087 Deferred taxes -- 380 Loss in investment of Healthweb, Inc., at equity 74,933 -- Issuance of warrants for financing activities -- 280,000 (Increase) decrease in Accounts receivable (719) (125,637) Income tax receivable 28,485 (22,149) Inventory (172,570) (130,736) Other assets (10,992) (9,057) Increase (decrease) in Accounts payable 194,217 (36,946) Accrued compensation due to officer -- (150,000) Accrued payroll and other expenses 34,674 77,245 Accrued warranty and service costs (3,363) 13,418 ------------ ------------ Net cash used in operating activities (1,292,481) (1,400,095) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchases of furniture and equipment (20,858) (80,409) Capitalized computer software development cost (640,706) (631,865) Advances to Healthweb, Inc., at equity (74,933) -- ------------ ------------ Net cash used in investing activities (736,497) (712,274) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from line of credit -- 201,603 Payments on line of credit 97,128 (295,142) Payments on capitalized lease obligations (26,757) (22,482) Increase in deferred offering costs -- (1,338,949) Proceeds from notes payable -- 1,400,000 Payments on notes payable -- (1,600,000) Payments to officer -- (40,000) Proceeds from officer -- 40,000 Proceeds from the sale of common stock -- 5,750,000 ------------ ------------ Net cash provided by financing activities 70,371 4,095,030 ------------ ------------
The accompanying notes are an integral part of these financial statements. 25 28 SIMULATIONS PLUS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE YEARS ENDED AUGUST 31,
1998 1997 ------------ ------------ Net increase (decrease) in cash and cash equivalents $(1,958,607) $1,982,661 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,156,761 174,100 ----------- ---------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 198,154 $2,156,761 =========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION During the years ended August 31, 1998 and 1997, the Company paid $1,600 and $10,354, respectively, in income taxes and $16,447 and $137,608, respectively, in interest. During the year ended August 31, 1997, the Company received $28,985 in income tax refunds. SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES The Company entered into capital lease obligations of $6,473 and $85,952 during the years ended August 31, 1998 and 1997, respectively, and transferred $46,693 and $7,420 of computer hardware from inventory to furniture and equipment during the years ended August 31, 1998 and 1997, respectively. NOTE 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Organization Simulations Plus, Inc. was incorporated on July 17, 1996. On August 29, 1996, the shareholders of Words+, Inc. exchanged their 2,000 shares of Words+, Inc. common stock for 2,200,000 shares of Simulations Plus, Inc. common stock, and Words+, Inc. became a wholly-owned subsidiary of Simulations Plus, Inc. (collectively, the "Company"). The effect of the stock-for-stock exchange is presented retroactively in the accompanying consolidated financial statements. All intercompany accounts and transactions have been eliminated. Line of Business The Company designs and develops computer software and manufactures augmentative communication devices and computer access products that provide a voice for those who cannot speak and allow physically-disabled persons to operate a standard computer. The Company also designs interactive, educational software programs that simulate science experiments conducted in high school science classes. In addition, the Company is developing pharmaceutical simulation software to promote cost-effective solutions to a number of problems in pharmaceutical research and in the education of pharmacy and medical students. Basis of Presentation The accompanying financial statements have been prepared in accordance with generally The accompanying notes are an integral part of these financial statements. 26 29 accepted accounting principles which contemplate continuation of the Company as a going concern. However, the Company has sustained substantial losses from operations in recent years. In addition, the Company has used, rather than provide, cash in its operations. The Company believes that existing capital and anticipated funds from operations, cost reductions from downsizing certain segments of operations, and temporary salary reductions for senior management will be sufficient to meet its anticipated cash needs for working capital and capital expenditures for at least the next 13 months. Thereafter, if cash generated from operations is insufficient to satisfy the Company's capital requirements, the Company may have to sell additional equity or debt securities or obtain expanded credit facilities. In the event such financing is needed in the future, there can be no assurance that such financing will be available to the Company, or, if available, that it will be in amounts and on terms acceptable to the Company. If cash flows from operations are insufficient to continue operations at the current level, and if no additional financing is obtained, then management will restructure the Company in a way to preserve its pharmaceutical and disability businesses while maintaining expenses within operating cash flows. 27 30 NOTE 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents For purposes of the statements of cash flows, the Company considers all highly-liquid investments purchased with original maturities of three months or less to be cash equivalents. Inventory Inventory is stated at the lower of cost (first-in, first-out basis) or market and consists primarily of computers and peripheral computer equipment. Furniture and Equipment Furniture and equipment, including equipment under capital leases, are recorded at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the estimated useful lives as follows: Equipment 5 years Computer equipment 3 to 7 years Furniture and fixtures 5 to 7 years Leasehold improvements 5 years
Maintenance and minor replacements are charged to expense as incurred. Gains and losses on disposals are included in the results of operations. Advertising The Company expenses advertising costs as incurred. Advertising costs for the years ended August 31, 1998 and 1997 were $66,537 and $88,422, respectively. Research and Development Costs Research and development costs are charged to expense as incurred until technological feasibility has been established. These costs consist primarily of salaries and direct payroll related costs. 28 31 NOTE 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Software Development Costs Software development costs are capitalized in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Cost of Computer Software to be Sold, Leased, or Otherwise Marketed." Capitalization of software development costs begins upon the establishment of technological feasibility and is discontinued when the product is available for sale. The establishment of technological feasibility and the ongoing assessment for recoverability of capitalized software development costs require considerable judgment by management with respect to certain external factors including, but not limited to, technological feasibility, anticipated future gross revenues, estimated economic life, and changes in software and hardware technologies. Capitalized software development costs are comprised primarily of salaries and direct payroll related costs and the purchase of existing software to be used in the Company's software products. Amortization of capitalized software development costs is provided on a product-by-product basis on the straight-line method over the estimated economic life of the products (not to exceed three years). Management periodically compares estimated net realizable value by product with the amount of software development costs capitalized for that product to ensure the amount capitalized is not in excess of the amount to be recovered through revenues. Any such excess of capitalized software development costs to expected net realizable value is expensed at that time. Revenue Recognition The Company recognizes revenues related to software licenses and software maintenance in accordance with the American Institute of Certified Public Accountants ("AICPA") Statements of Position No. 97-2, "Software Revenue Recognition." Product revenue is recorded at the time of shipment, net of estimated allowances and returns. Post-contract customer support ("PCS") obligations are insignificant; therefore, revenue for PCS is recognized at the time of shipment, and the costs of providing such support services are accrued and amortized over the obligation period. The Company provides, for a fee, additional training and service calls to its customers and recognizes revenue at the time the training or service call is provided. 29 32 NOTE 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Income Taxes The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes represents the tax payable for the period and the change during the period in deferred tax assets and liabilities. Fair Value of Financial Instruments The Company measures its financial assets and liabilities in accordance with generally accepted accounting principles. For certain of the Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued payroll and other expenses, and accrued warranty and service costs, the carrying amounts approximate fair value due to their short maturities. The amounts shown for capitalized lease obligations also approximate fair value because current interest rates offered to the Company for leases of similar maturities are substantially the same. Stock Options and Warrants During 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123, "Accounting for Stock-Based Compensation," which defines a fair value based method of accounting for stock-based compensation. However, SFAS No. 123 allows an entity to continue to measure compensation cost related to stock and stock options issued to employees using the intrinsic method of accounting prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees." Entities electing to remain with the accounting method of APB 25 must make pro forma disclosures of net income and earnings per share, as if the fair value method of accounting defined in SFAS No. 123 had been applied. The Company has elected to account for its stock-based compensation to employees under APB 25. 30 33 NOTE 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Net Loss per Share The Company reports earnings per share in accordance with SFAS No. 128, "Earnings per Share." Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Because the Company has incurred net losses, basic and diluted loss per share are the same. Concentrations and Uncertainties International sales accounted for 12% and 17% of net sales for the years ended August 31, 1998 and 1997, respectively. Amounts due from Medicaid represented 25% of the net accounts receivable balance at August 31, 1998. The Company operates in the computer software industry which is highly competitive and changes rapidly. The Company's operating results could be significantly affected by its ability to develop new products and find new distribution channels for new and existing products. The Company does not manufacture certain of its components including the computer that is used in one of the Company's products. Such computer is sourced by the Company from a single vendor. The Company also uses a number of pictographic symbols that are used in its software products which are licensed from a third party. The inability of the Company to obtain computers used in its products or to renew its licensing agreement to use pictographic symbols could negatively impact the Company's financial position, results of operations, and cash flows. Recently Issued Accounting Pronouncements The FASB issued SFAS No. 130, "Reporting Comprehensive Income," which is effective for financial statements with fiscal years beginning after December 15, 1997. Earlier application is permitted. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The Company does not expect adoption of SFAS No. 130 to have a material impact, if any, on its financial position or results of operations. 31 34 NOTE 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Recently Issued Accounting Pronouncements (Continued) The FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," effective for fiscal years beginning after December 15, 1997. SFAS No. 131 requires a company to report certain information about its operating segments including factors used to identify the reportable segments and types of products and services from which each reportable segment derives its revenues. The Company does not anticipate any material change in the manner that it reports its segment information under this new pronouncement. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Post-Retirement Benefits." The Company does not expect adoption of SFAS No. 132 to have a material impact, if any, on its financial position or results of operations. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities and is effective for fiscal years beginning after June 15, 1999. The Company does not expect adoption of SFAS No. 133 to have a material impact, if any, on its financial position or results of operations. In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." The Company does not expect adoption of SFAS No. 134 to have a material impact, if any, on its financial position or results of operations. NOTE 2 - CASH AND CASH EQUIVALENTS The Company maintains cash deposits at banks located in California. Deposits at each bank are insured by the Federal Deposit Insurance Corporation up to $100,000. As of August 31, 1998, uninsured portions of balances held at banks aggregated to $4,230. In addition, the Company also had on deposit with a high-quality financial institution cash and cash equivalents in the amount of $158,357 that are uninsured. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents. 32 35 NOTE 3 - FURNITURE AND EQUIPMENT Furniture and equipment at August 31, 1998 consisted of the following: Equipment $ 44,004 Computer equipment 363,715 Furniture and fixtures 45,036 Leasehold improvements 5,900 ---------- 458,655 Less accumulated depreciation and amortization 268,452 ---------- TOTAL $ 190,203 ==========
NOTE 4 - COMMITMENTS AND CONTINGENCIES Leases The Company leases certain facilities for its corporate and operations offices under a non-cancelable operating lease agreement that expires in 2001. The Company also leases certain office and computer equipment under non-cancelable capital lease arrangements. Future minimum lease payments under non-cancelable capital and operating leases with initial or remaining terms of one year or more are as follows:
Year Ending Operating Capital August 31, Leases Leases ----------- ----------- ---------- 1999 $ 120,000 $ 37,319 2000 131,040 31,811 2001 140,400 2,254 ----------- ---------- $ 391,440 71,384 =========== Less amount representing interest 10,084 ---------- 61,300 Less current portion 30,365 ---------- LONG-TERM PORTION $ 30,935 ==========
Included in furniture and equipment is capitalized leased equipment of $142,217 with accumulated amortization of $89,584 at August 31, 1998. 33 36 NOTE 4 - COMMITMENTS AND CONTINGENCIES (CONTINUED) Leases (Continued) Rent expense was $173,209 and $142,195 for the years ended August 31, 1998 and 1997, respectively. Employee Agreement The Company entered into an employment agreement with its president that extends until August 31, 1999. The employment agreement provides for an annual salary of $150,000 and an annual bonus based on the Company's performance not to exceed $150,000. License Agreement The Company entered into an agreement with Therapeutic Systems Research Laboratory ("TSRL") to jointly develop simulation of the absorption of drug compounds in the gastrointestinal tract. Upon execution of a definitive License Agreement, TSRL received a one-time payment of $75,000, plus a royalty of 20% of net sales of the absorption simulation. Listing on Stock Exchange In order to maintain quotation of its securities on the NASDAQ SmallCap Market ("NASDAQ"), the Company has to maintain certain minimum financial requirements. As of August 31, 1998, the Company has ceased to meet one of the requirements for continued listing, namely the Company's net tangible assets as of August 31, 1998 were $1,284,000 which is below the $2,000,000 required by the NASDAQ. Further, as of November 30, 1998, the market value of the Company's public float was below the $4,000,000 required for continued NASDAQ listing. If the Company is unable to increase its net tangible assets and the market value of its public float to meet the NASDAQ's requirements for continued listing, the Company's securities may be delisted from NASDAQ. In such event, trading, if any, in the shares of common stock would thereafter be conducted in the over-the-counter markets in the so-called "peek sheets" or on the NASD's "Electronic Bulletin Board." Consequently, the liquidity of the Company's securities could be impaired, not only in the number of securities which could be bought and sold, but also through delays in the timing of the transactions, reductions in security analysts' and the news media's coverage of the Company, and lower prices for the Company's securities than otherwise might be attained. 34 37 NOTE 5 - INCOME TAXES A reconciliation of the expected income tax (benefit) computed using the federal statutory income tax rate to the Company's effective income tax rate is as follows:
1998 1997 ------ ------ Income tax computed at federal statutory tax rate (34.0)% (34.0)% State taxes, net of federal benefit 0.1 0.1 Change in valuation allowance 34.0 31.1 Other -- 0.2 ------ ------ TOTAL 0.1% (2.6)% ====== ======
Significant components of the Company's deferred tax assets and liabilities for income taxes at August 31 consisted of the following:
1998 1997 ----------- --------- Deferred tax assets Accrued payroll and other expenses $ 40,989 $ 32,715 Accrued warranty and service costs 19,318 20,744 Net operating loss carryforward 1,456,886 625,498 Other 22,667 6,000 ----------- --------- 1,539,860 684,957 Valuation allowance 1,202,018 378,756 ----------- --------- 337,842 306,201 ----------- --------- Deferred tax liabilities Fixed assets (9,958) (7,513) Capitalized computer software development costs (327,884) (298,688) ----------- --------- (337,842) (306,201) ----------- --------- NET DEFERRED TAX ASSET $ -- $ -- =========== =========
The Company's valuation allowance increased $823,262 during the year ended August 31, 1998. At August 31, 1998, the Company had net operating loss carryforwards of approximately $3,900,000 and $2,000,000 for federal and state, respectively, that expire throughout the year 2018. 35 38 NOTE 5 - INCOME TAXES (CONTINUED) The components of the income tax provision (benefit) for the years ended August 31 are as follows:
1998 1997 -------- -------- Current Federal $ -- $(40,780) State 1,600 1,600 -------- -------- 1,600 (39,180) -------- -------- Deferred Federal -- 293 State -- 87 -------- -------- -- 380 -------- -------- TOTAL $ 1,600 $(38,800) ======== ========
NOTE 6 - SHAREHOLDERS' EQUITY Issuance of Common Stock In June 1997, the Company completed a stock offering where it sold 1,150,000 shares of common stock at $5.00 per share. Gross proceeds from the sale were $5,750,000 and the Company incurred offering costs of $1,433,079. Warrants In August and September 1996, the Company entered into two Subscription Agreements whereby the Company issued 100,000 and 150,000 warrants, respectively, to purchase shares of common stock. The warrants are exercisable at $4.00 per share and expire five years from the date of grant. In January 1997, the Company entered into Subscription Agreements whereby the Company issued notes in the amount of $1,100,000 and issued 280,000 warrants to purchase common stock. The warrants are exercisable at $2.50 per share, are subject to a 12-month, lock-up period, and expire five years from the grant date. The notes were repaid upon the completion of the Company's stock offering. The Company determined that the fair value of these warrants at the date of grant was $3.50 per warrant due to the time between grant date and the expected completion of the stock offering based on the condition of the Company on the grant date and the 12-month, lock-up period (from the date of the stock offering) associated with these warrants. Accordingly, the Company has recognized additional financing costs associated with the $1,100,000 notes of $280,000 which was being amortized over the term of the notes. The unamortized portion of this additional financing cost upon the completion of the stock offering was charged to earnings. 36 39 NOTE 6 - SHAREHOLDERS' EQUITY (CONTINUED) Stock Option Plan In September 1996, the board of directors adopted and the shareholders approved the 1996 Stock Option Plan (the "Option Plan") under which a total of 250,000 shares of common stock has been reserved for issuance. As of August 31, 1998, 50,000 shares have been granted. The Option Plan terminates in 2006, subject to earlier termination by the board of directors. The Company has adopted only the disclosure provisions of SFAS No. 123. It applies APB 25 and related interpretations in accounting for its plans and does not recognize compensation expense for its stock-based compensation plans other than for restricted stock and options issued to outside third parties. If the Company had elected to recognize compensation expense based upon the fair value at the grant date for awards under this plan consistent with the methodology prescribed by SFAS No. 123, the Company's net loss and loss per share would be reduced to the pro forma amounts indicated below for the year ended August 31, 1998: Net loss As reported $(2,069,239) Pro forma $(2,069,239) Basic and diluted loss per common share As reported $ (0.62) Pro forma $ (0.62)
The fair value of these options was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for the year ended August 31, 1998: dividend yield of 0%; expected volatility of 65%; risk-free interest rate of 5%; and expected life of 5 years. The weighted-average fair value of options granted during the year ended August 31, 1998 was $4.25, and the weighted-average exercise price was $4.25. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. 37 40 NOTE 6 - SHAREHOLDERS' EQUITY (CONTINUED) Stock Option Plan (Continued)
Weighted- Average Exercise Number Price of Shares Per Share --------- --------- Outstanding, August 31, 1997 -- $ -- Granted 50,000 $4.25 Expired/canceled (6,260) $4.25 ------- OUTSTANDING, AUGUST 31, 1998 43,740 $4.25 ======= EXERCISABLE, AUGUST 31, 1998 -- $ -- =======
The weighted-average remaining contractual life of options outstanding issued under the Plan is seven years at August 31, 1998. NOTE 7 - RELATED PARTY TRANSACTIONS As of August 31, 1996, accrued compensation due to officer was $150,000 which represents accrued salary due to the Company's president. The amount due does not accrue interest and was repaid from proceeds received in connection with the Company's stock offering. In connection with the Company's stock offering, the Company agreed to grant to its president 300,000 warrants to purchase up to 300,000 shares of the Company's common stock. The number of warrants to be granted will be based on net income for the year ended August 31, 1998, but cannot exceed 300,000 warrants. All such warrants granted will be exercisable for a period of five years at an exercise price of $5.00 per share. Any difference between the price of the Company common stock and the exercise price of $5.00 per share on the measurement date will be recorded as an expense in accordance with APB 25. In January 1997, the Company's president borrowed $40,000 from the Company. The amount bears interest at 10% per annum and was repaid upon the completion of the Company's stock offering. 38 41 NOTE 8 - LINE OF CREDIT The Company has available an unsecured $100,000 revolving line of credit from a bank with interest payable on a monthly basis at prime (8.5% at August 31, 1998) plus 3%. The line is personally guaranteed by the Company's president. As of August 31, 1998, the amount drawn against the line of credit was $97,128. NOTE 9 - SUBSEQUENT EVENT In October 1998, the Company granted 212,000 stock options to various employees at an exercise price of $1.31 per share, which was the fair market value at the date of grant. 39 42 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. 40 43 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT The directors, executive officers and key employees of the Company and their ages and positions held with the Company are as follows:
NAME AGE POSITION WITH THE COMPANY ---- --- ------------------------- DIRECTORS AND EXECUTIVE OFFICES: Walter S. Woltosz 53 Chairman of the Board, Chief Executive Officer and President of the Company and Words+. Virginia E. Woltosz 47 Senior Vice President, Secretary and Director of the Company and Words+. Dr. David Z. D'Argenio 48 Director and Consultant to the Company Dr. Richard Weiss 63 Director Ronald F. Creeley 47 Vice President, Marketing and Sales of the Company Momoko A. Beran 46 Chief Financial Officer of the Company and Words+ CERTAIN KEY EMPLOYEES AND CONSULTANTS: Dr. Michael Bolger 47 Director of Life Sciences
Walter S. Woltosz is a co-founder of the Company and has served as its Chief Executive Officer and President and as Chairman of the Board of Directors since its incorporation in July 1996. Mr. Woltosz is also a co-founder of Words+ and has served as its Chief Executive Officer and President since its incorporation in 1981. Virginia E. Woltosz is a co-founder of the Company and has served as its Senior Vice President and Secretary since its incorporation in July 1996. Mrs. Woltosz is also a co-founder of Words+ and has served as its Vice President, Secretary and Treasurer since its incorporation in 1981. Virginia E. Woltosz is the wife of Walter S. Woltosz. Ronald F. Creeley joined the Company in February 1997 as its Vice President, Marketing and Sales. Prior to joining the Company, Mr. Creeley had been Marketing Director at Union Pen Company, Time Resources, and New England Business Services, Inc., with experience in marketing and research. Dr. David Z. D'Argenio started to serve as a Director of the Company in June 1997. He is currently Professor and Chairman of Biomedical Engineering at the University of Southern California 41 44 ("USC"), and has been on the faculty at USC since 1979. He also serves as the Co-Director of the Biomedical Simulations Resource Project at USC, a project funded by the National Institutes of Health since 1985. Dr. Richard R. Weiss started to serve as a Director of the Company in June 1997. From October 1994 to the present, Dr. Weiss has acted as a consultant to a number of aerospace companies and to the U.S. Department of Defense through his own consulting entity, Richard R. Weiss Consulting Services. From June 1993 through July 1994, Dr. Weiss was employed by the U.S. Department of Defense as its Deputy Director, Space Launch & Technology. Momoko A. Beran joined Words+ in June 1993 as Director of Accounting and was named the Company's Chief Financial Officer in July 1996. Certain Key Employees and Consultants: Dr. Michael B. Bolger is the Director, Life Sciences for the Company, having joined the Company in October 1996. Dr. Bolger is also an Associate Professor of Pharmacy at the University of Southern California, and was a co-founder and former director of CoCensys, Inc., a pharmaceutical firm in Irvine, California. He is the author of 16 computer programs related to molecular chemistry, pharmacokinetics, cellular growth, and data reduction in pharmacology and related areas, including the Cyber Patient, drug shelf life, and HelixGen(TM) simulation programs the Company acquired in 1996. COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT: Section 16(a) of the Securities Exchange Act of 1934 as amended (the "Exchange Act") requires the Company's officers and directors, and persons who own more than ten percent of its Common Stock to file reports of ownership and changes of ownership with the Securities and Exchange Commission and NASDAQ. Such persons are also required to furnish the Company with copies of all Section 16(a) forms they file. Based solely on the Company's review of the copies of those forms received by the Company, or written representations from such persons that no Forms 5 were required to be filed, it appears that all reports due were timely filed. ITEM 10. EXECUTIVE COMPENSATION The following table sets forth certain information concerning compensation paid or accrued for the fiscal year ended August 31, 1998, 1997 and 1996 by the Company to or for the benefit of the Company's President. No other executive officers of the Company received total annual compensation for the fiscal year ended August 31, 1998, 1997 and 1996 that exceeded $100,000. As permitted under the rules of the Securities and Exchange Commission, no amounts are shown in the table below with respect to any perquisites paid to named officer because the aggregate amount of such perquisites (e.g., auto allowance) did not exceed the lessor of (i) $50,000 or (ii) 10% of the total annual salary and bonus of a named officer. 42 45
NAME AND FISCAL PRINCIPAL POSITION SALARY YEAR ------------------ -------- ------ Walter S. Woltosz....................................... $ 82,500 1996 President and Chief Executive Officer................... $300,000* 1997 $143,750 1998
- ---------- * Includes $150,000 accrued but unpaid compensation paid from proceeds of the Company's Initial Public Offering. EMPLOYMENT AND OTHER COMPENSATION AGREEMENTS The Company has an employment agreement with Walter Woltosz commencing September 1, 1996 that extends until August 31, 1999. The agreement provides for an annual salary of $150,000. Pursuant to such agreement, Mr. Woltosz is entitled to such health insurance and other benefits that are not inconsistent with that which the Company customarily provides to its other management employees and to reimbursement of customary, ordinary and necessary business expenses incurred in connection with the rendering of services to the Company. The agreement also provides that the Company may terminate the agreement upon 30 days written notice if termination is without cause and that the Company's only obligation to Mr. Woltosz would be for a payment equal to the greater of (i) 12 months of salary or (ii) the remainder of the term of the employment agreement from the date of notice of termination. Further, the agreement provides that the Company may terminate the agreement for cause (as defined) and that the Company's only obligation to Mr. Woltosz would be limited to the payment of Mr. Woltosz' salary and benefits through and until the effective date of any such termination. Commencing with the Company's fiscal year ending 1997 and for each fiscal year thereafter, Walter and Virginia Woltosz are entitled to receive bonuses not to exceed $150,000 and $60,000, respectively, equal to 5% of the Company's net annual income before taxes. In addition, if the closing price of the Company's Common Stock averages in excess of $10 per share for a period of 20 consecutive trading days during any fiscal year, then the Company will grant to each of Mr. and Mrs. Woltosz options under the 1996 Stock Option Plan, exercisable for five years, to purchase 50 shares of Common Stock for each $1,000 of net income before taxes that the Company earns with respect to such fiscal year (up to a Maximum of 60,000 options each until August 31, 1999) at an exercise price equal to the market value per share as of the date of grant. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is incorporated by reference from the Company's definitive proxy statement (the "Proxy Statement") for its 1998 annual stockholders' meeting, which hereby incorporated by reference. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 12 will be contained in the Proxy Statement, which is incorporated by reference. 43 46 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed as part of this report as required by Item 601 of Regulation S-B:
EXHIBIT NUMBER DESCRIPTION - ------- 3.1 Articles of Incorporation of the Registrant(1) 3.2 Amended and Restated Bylaws of the Registrant(1) 4.1 Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 hereof) and Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 hereof) 4.2 Form of Common Stock Certificate(1) 4.3 Share Exchange Agreement(1) 10.1 Simulations Plus, Inc. 1996 Stock Option Plan (the "Option Plan") and terms of agreements relating thereto(1)+ 10.2 Subscription Agreement with Patricia Ann O'Neil(1) 10.3 Security Agreement with Patricia Ann O'Neil(1) 10.4 Promissory Note made by the Registrant in favor of Patricia Ann O'Neil(1) 10.5 Warrants to purchase 150,000 shares of Common Stock of the Registrant issued to Patricia Ann O'Neil(1) 10.6 First Amendment to Agreement with Patricia Ann O'Neil(1) 10.7 Subscription Agreement with Fernando Zamudio(1) 10.8 Security Agreement with Fernando Zamudio(1) 10.9 Promissory Note made by the Registrant in favor of Fernando Zamudio(1) 10.10 Warrant to purchase 100,000 shares of Common Stock of the Registrant issued to Fernando Zamudio(1) 10.11 Employment Agreement by and between the Registrant and Walter S. Woltosz(1)+ 10.12 Performance Warrant Agreement by and between the Registrant and Walter S. Woltosz + Virginia E. Woltosz(2)+ 10.13 Software Acquisition Agreement by and Between the Registrant and Michael B. Bolger(1) 10.14 Sublease Agreement dated May 7, 1993 by and between the Registrant and Westholme Partners (along with Consent to Sublease and master lease agreement)(1) 10.15 Lease Agreements dated August 22, 1996 by and between Words+, Inc. and Abbey-Sierra LLC(1) 10.16 Form of 10% Amended and Restated Promissory Note issued in connection with the Registrant's Private Placement(2) 10.17 Form of Subscription Agreement relative to the Registrant's Private Placement(1) 10.18 Form of Lock-Up Agreement with Bridge Lenders(2) 10.19 Form of Indemnification Agreement(1) 10.20 Form of Lock-Up Agreement with the Woltosz'(2) 10.21 Letter of Intent by and between the Registrant and Therapeutic Systems Research Laboratories(1) 10.22 Form of Representative's Warrant to be issued by the Registrant in favor of the Representative(2) 10.23 Form of Warrant issued to Bridge Lenders(2) 10.24 License Agreement by and between the Registrant and Therapeutic Systems Research Laboratories(3) 10.25 Grant Award Letter from National Science Foundation(4)
44 47 10.26 Distribution Agreement with Teijin Systems Technology LTD.(4) 10.27 Lease Agreements by and between Simulations Plus, Inc. and Martin Properties, Inc.(4) 10.28 Software OEM Agreement for Assistive Market Developer by and between Words+, Inc. and Digital Equipment Corporation.(4) 10.29 Purchase Agreement by and between Words+, Inc. and Epson America, Inc.(4) 27.1 Financial Data Schedule(4)
(1) Incorporated by reference to the Company's Registration Statement on Form SB-2 (Registration No. 333-6680) filed on March 25, 1997 (the "Registration Statement"). (2) Incorporated by reference to Pre-Effective Amendment No. 1 to the Registration Statement filed on May 27, 1997. (3) Incorporated by reference to the Company's Form 10-KSB for the fiscal year ended August 31, 1997. (4) Filed herewith. + Management Contract or Compensatory Plan. (b) Reports on Form 8-K None. 45 48 SIGNATURES Pursuant to the requirements of Section 13or15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Palmdale, State of California, On December 14, 1998. SIMULATIONS PLUS, INC. By /s/ MOMOKO A. BERAN ----------------------------------- Momoko A. Beran Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Registrant and in the capacities indicated on December 14, 1998.
SIGNATURE TITLE --------- ----- /s/ WALTER S. WOLTOSZ Chairman of the Board of Directors - ------------------------------------ and Chief Executive Officer Walter S. Woltosz /s/ VIRGINIA E. WOLTOSZ Vice President, Secretary and Director of the - ------------------------------------ Company and Words+ Virginia Woltosz /s/ DR. DAVID Z. D'ARGENIO Director and Consultant to the Company - ------------------------------------ Dr. David Z. D'Argenio Director - ------------------------------------ Dr. Richard Weiss /s/ MOMOKO A. BERAN Chief Financial Officer of the Company - ------------------------------------ Momoko A. Beran
46 EX-10.25 2 EXHIBIT 10.25 1 EXHIBIT 10.25 Return-Path: Date: Wed, 01 Oct 97 13:09:00 EST From: snerlove@nsf gov To: walt@simulations-plus.com Subject: AWARD 9710548, Woltosz, Walter S Award Date September 29,1997 Grant No. DMI-9710548 Proposal No. DMI-9710548 Mr. Walter Woltosz President, CEO Simulations Plus, Inc. 40015 Sierra Highway, B- II0 Palmdale, CA 93550 Dear Mr. Woltosz: The National Science Foundation hereby awards a grant of $300,000 to Simulation Plus, Inc. for support of the project described in the proposal referenced above, as modified by the revised budget and cover page dated June 5, 1997, and the Certificate of Current Cost or Pricing Data dated September 22, 1997. This project, under your directions is entitled: "SBIR PHASE II: Computer Simulation of Science and Technical Laboratory Exercises for Physically-Disabled Students." This award is effective October 15, 1997 and expires March 31, 1999. This grant is awarded pursuant to the authority of the National Science Foundation Act of 1950 (42 U.S.C. 1861 et seq.) and is subject to the following terms and conditions: Payments made under this award will be as follows: $75,000 Advance Payment $75,000 Upon acceptance by NSF SBIR Program Officer of first semiannual report $75,000 Upon acceptance by NSF SBIR Program Officer of second semiannual report $75,000 Upon acceptance by NSF SBIR Program Officer of final report Page 1 2 The attached budget indicates the amounts, by categories, on which NSF has based its support. The cognizant NSF program official for this grant is Sara B. (703) 306-1391 ext. 6375. The cognizant NSF grants official is Alfred W. Wilson (703) 306-1218. Sincerely, Herbert D. Wolff, III Grants Officer SUMMARY PROPOSAL BUDGET PERSON MOS Funds granted cal acad sumr By NSF A. ( 9.00) Total Senior personnel 17.30 0.00 0.00 $90,450 B. Other Personnel 1. ( 4.00) Post doctoral associates 14.50 0.00 0.00 $64,866 2. ( 0.00) Other professionals 0.00 0.00 0.00 $0 3. ( 0.00) Graduate students $0 4. ( 0.00) Secretarial-clerical $0 5. ( 0.00) Undergraduate students $0 6. ( 0.00) Other $0 Total salaries and wages (A+B) $155,316 C. Fringe benefits (if charged as direct cost) $0 Total salaries wages and fringes (A+B+C) $155,316 D. Total permanent equipment $0 E. Travel 1. Domestic $0 2. Foreign $0 F. Total participant support costs $0 G. Other direct costs 1. Materials and supplies $1,959 2. Publication costs/page charges $700 3. Consultant services $0 4. Computer (ADPE) services $0 5. Subcontracts 6. Other $26,124 $0
Page 2 3 Total other direct costs $28,783 H. Total direct costs (A through G) $184,099 I. Total indirect costs $97,075 J. Total direct and indirect costs (H+I) $281,174 K. Residual funds / Small business fee 1. Residual funds (if for further support of current projects GPM 252 and 253) $0 2. Small business fee $18,826 L. Amount of this request (J) or (J - KI + K2) $300,000 M. Cost sharing
Page 3 EX-10.26 3 EXHIBIT 10.26 1 EXHIBIT 10.26 Teijin Systems Technology LTD. Company Distribution Agreement Confidential THIS AGREEMENT is made this 1st day of August, 1998, between SIMULATIONS PLUS, INC. a California corporation with principal place of business at 1220 West Avenue J, Lancaster, CA 93534-2902, United States, hereinafter referred to as the Company, and TEIJIN SYSTEMS TECHNOLOGY LIMITED headquartered at 2-38-16, Hongo, Bunkyo-Ku, Tokyo I 1 3, Japan, hereinafter referred to as the Distributor. WITNESSETH: In consideration of the mutual covenants hereinafter contained and for the purpose of promoting the sale within the country of Japan, hereinafter referred to as the Territory, of GastroPlus(TM) and QMPRPlus(TM), including all corrected or modified versions and up-versions, hereinafter referred to as the Products, as detailed in the price list issued by the Company and attached hereto as Appendix A, it is agreed: 1. APPOINTMENT: The Company appoints the Distributor as the exclusive distributor for the Products within the Territory. This appointment does not include Company's grant to the Distributor of any right to make or sell variations or derivative works of the Products. Sole ownership of copyrights and other intellectual and proprietary rights to the Products shall remain with the Company. Distributor accepts the appointment, in the limited scope provided herein, and agrees to use its best efforts to communicate the features, benefits, pricing, and availability of the Products to potential customers in the Distributor's usual and customary course of business. 2. EXCLUSIVE DISTRIBUTORSHIP: The Company will, during the term of this Agreement, sell to the Distributor, and the Distributor will purchase from the Company, the Products to be redistributed by the Distributor in the Territory. The Distributor shall devote its best reasonable commercial efforts for the adequate exploitation and distribution of the Products within the Territory and shall maintain an organization sufficient therefor. It is understood that during the term of this agreement, the Distributor is to be the sole and exclusive distributor for the Products in the Territory and all inquiries received by the Company for the Products from the Distributor's Territory will be promptly referred to the Distributor. 3. TERRITORY AND COMPETING PRODUCTS: The Distributor shall not, without first obtaining written consent of the Company, sell or distribute (1) Page 1 2 the Products outside of the Territory, nor (2) any products of other manufacturers that may directly compete with the Products of the Company. 4. DISTRIBUTOR PRICING: The Company shall sell the Products to the Distributor at the prices listed on the product price sheets and catalogs currently distributed by the Company from time to time, less the trade discounts as indicated and authorized herein. Said trade discounts are indicated in Appendix A of this agreement. Samples will be provided as further indicated in Appendix A of this Agreement. Any products not included in Appendix A shall be the subject of special written quotation by the Company, on request. 5. SPECIAL TERMS: The Distributor shall promptly advise the Company whenever special prices, shipping promises, terms, or other conditions are required to secure business not otherwise obtainable. In such cases, all elements relating thereto shall be agreed to in writing by the Company and Distributor before the final closing of the order and shall not be used to establish a precedent. 6. TAXES, DUTIES AND OTHER CHARGES: Unless otherwise authorized by the Company, all prices to the Distributor detailed in Appendix A are exclusive of any federal, state, municipal or other governmental taxes, duties, excise taxes or tariffs now or hereafter imposed on the sale of the Products, but are inclusive of any withholding taxes imposed on the prices paid to the Company by the Distributor. Payment obligations stated in Appendix A are also exclusive of any shipping, insurance and handling, freight forwarder or carrier agent charges imposed on the sale of the Products. Shipments requiring special handling may be surcharged to the Distributor for the cost in excess of normal handling cost. Quotations and pro forma invoices for special circumstances are available upon request from the Company. 7. PRICE CHANGES: Pricing decisions and trade discounts are made at the sole reasonable discretion of the Company; however, the Distributor will be given ninety (90) days advanced notice of any price or discount changes. If prior to the receipt of notice of any price change, the Distributor shall have made offerings based on the former price lists, then the Company will accept orders from the Distributor in fulfillment of such tenders, provided such orders are for immediate shipment as available and are received by the Company within 30 (thirty) days: (1) after the date of any special quotations, or (2) after the date of any notice of a change or of any such listed prices or discounts; except that the Company reserves the right to make special quotations binding for a period less than 60 days, but in such event will so advise the Distributor at the time of making said special Page 2 3 quotations. 8. WARRANTIES: The Company warrants that the Products shall substantially conform to the Product's accompanying documentation when used in accordance with such documentation, or documentation submitted with special written quotations or proposals. The Company will replace Products that are, within (1) one year of Distributor's receipt, found to contain a defect in material or workmanship. The Distributor shall assume all responsibility with regard to the sufficiency and suitability of said Products for actual requirements in each instance of a sale to its customers. The Company assumes no contingent liability for failure of the Products to meet any such Distributor guarantees or assurances, stated or implied. All products are carefully inspected and tested during or upon completion of manufacture, but any special tests or changes to the Products required by the Distributor may be charged for by the Company. 9. TRAINING AND SUPPORT: During the term of the agreement, the Company will provide to the Distributor and the Distributor's customers, training and technical support on the application and use of the Products. Training and technical support is limited to employees of the Distributor who are actively engaged in the sales, training or technical support of the Products and to employees of the Distributor's customers who have purchased the Products and are actively involved in the use, training or technical support of the Products. The Company will provide training and technical support, for the application and use of the Products, to the Distributor or Distributor's customers by telephone, e-mail, fax, or other similar means, free of charge, provided the training and support is of a usual and customary nature. The Company will provide training and technical support, for the application and use of the Products, to the Distributor or-Distributor's customers by in-person meetings free of charge, provided the training and support is of a usual and customary nature and the in-person meeting is conducted at the Company's principal place of business in Lancaster, California, United States. Free training and technical support services do not include costs associated with travel and costs associated with travel of Company employees outside a 60-mile radius of its principal place of business in Lancaster, California, United States, unless approved by the Company in writing. The determination of whether or not the Distributor or the Distributor's customer training and support needs are usual and customary are at the reasonable discretion of the Company. 10. INVOICING AND PAYMENT: The Company shall invoice the Distributor separately on the date of shipment. The Distributor shall pay the Company for the correct amount due in United States currency within sixty (60) days of the arrival date of the Products. Page 3 4 11. COMPANY PROMOTIONAL EFFORTS WITHIN DISTRIBUTOR'S TERRITORY: The Company may take such steps as it considers necessary to promote the sale of the Products in the Territory, including the right, at its option, to send Company representatives to spend time in the Territory in cooperation with the Distributor and the Distributor's representatives. The Company will provide adequate advanced notice of such actions to the Distributor. 12. COMPANY NOT LIABLE FOR LOSS: The Company shall not be responsible or liable for any loss, damage, detention or delay caused by fire, strike, civil or military authority, insurrection or riot, common carrier embargoes, lockout, tempest, accidental delay in delivery of the Products by other parties, or by any other cause that is unavoidable or beyond its reasonable control; nor in any consequential damage. 13. DISTRIBUTOR NOT A COMPANY AGENT: The Distributor shall not act as the agent for the Company under this Agreement, nor shall the Distributor have any right or power hereunder to act for or to bind the Company in any respect or to pledge its credit. 14. PATENTS, TRADEMARKS, RIGHTS: No licenses are granted or implied by this agreement under any patents or trademarks owned or controlled by the Company or under which the Company has any rights, except the right to distribute, sell or use the Products furnished by the Company. No rights to reproduce, change, modify or manufacture are granted by this Agreement. 15. DISTRIBUTOR'S USE OF COPYRIGHTS AND TRADEMARKS: The Distributor may use the copyrights and trademarks of the Company and the Products in connection with the advertising and promotion of the Products. GastroPlus(TM) and QMPRPlus(TM) are trademarks of the Company. Nothing herein shall grant the Distributor or its customers any right, title or interest in the Company's trademarks. 16. MINIMUM DISTRIBUTOR PERFORMANCE AND RENEWAL: Both parties understand that maintaining certain minimum levels of valid order activity is of the essence to this agreement and that these minimum standards are set forth in detail in Appendix B of this agreement. Therefore, it is one of the conditions for renewal of this agreement that acceptable orders for the product are tendered to the Company in sufficient unit and aggregate sales quantity to meet the standards set forth in Appendix B of this agreement. In respect to future agreement renewals, minimum acceptable quantities will be agreed upon, based on sales history and reasonable growth projections, but under no circumstance shall they be less than 75% (seventy-five percent) of sales for the preceding one-year term. Page 4 5 Notwithstanding the foregoing, if the Distributor fails to achieve the minimum standards as set forth in Appendix B or as agreed upon between the parties in future, the Company agrees that it shall, at the request of the Distributor, negotiate for renewal of this Agreement with the Distributor in good faith; provided, however, that the period during which the Company shall be obligated to so negotiate with the Distributor and to refrain from granting any distributorship for the Products in the Territory to a third party shall not exceed ninety (90) days after the expiration of the term of this Agreement to which the minimum standards that the Distributor fails to achieve apply. 17. CONFIDENTIALITY: Both Company and Distributor recognize the importance of confidentiality. Accordingly, both parties agree to hold in strict confidence and to protect with at least the same degree of care used to protect its own proprietary information, all information disclosed by or received from the other party and specified as proprietary and confidential by the other part (hereinafter referred to as the Propriety Information), including, but not limited to: strategies and plans, processes, laboratory arrangements, designs, methods and know-how, computer software and embedded technology, software source code, mathematical algorithms, formulas, statistical and operational methods an techniques and data supplied by customers to enhance software performance, marketing and sales data, marketing and business information, financial plans, budgets and forecasts, and personnel matters, whether communicated in oral, written, graphic, physical, or electronic form. The Proprietary Information shall not include any information which the receiving party can show by documentary evidence (a) was in possession prior to the disclosure thereof, (b) was at the time of receipt or thereafter becomes, through no act or failure to act on the part of the receiving party, part of the public domain, or (c) was disclosed to the receiving party by others not under any obligation of confidentiality or restricted use to the disclosing party. The receiving party shall not, without the prior written consent of the disclosing party, disclose any Proprietary Information to any third parties other than the receiving party's directors, officers, employees and agents who need to know such Proprietary Information for carrying out the purpose of this Agreement. This Section 17 shall survive the expiration or termination of this Agreement for five (5) years. 18. TERM AND TERMINATION: This Agreement shall be in force and effect from the 1st day of August, 1 998, until the 1st day of August, 1999. Thereafter, this Agreement shall be automatically extended and renewed from year to year unless: (a) either party has lawfully terminated this Agreement in accordance with the TERMINATION paragraph of this Section 18, below, on or before the expiration of the above initial term, or Page 5 6 any extended one (1) year period, and (b) the Distributor gives the Company written notice of termination at least three (3) months prior to the expiration of the above initial term or any extended one (1) year period; provided that the Company and Distributor shall determine the minimum standards for such renewed one (1) year period on or before the expiration of the above initial term, or any extended one (1) year period, and provided further that such minimum standards for the renewed one (1) year period will be agreed upon, based on sales history and reasonable growth projections, but under no circumstance shall they be less than 75%(seventy five percent) of sales for the preceding one (1) year period. If the Company and the Distributor fail to agree upon the minimum standards for such renewed one (1) year period on or before the expiration of the above initial term, or any extended one (1) year period, this Agreement shall be deemed to have been renewed for one year and the Company and the Distributor will negotiate and determine the minimum standards for such renewed one (1) year period within three (3) months after the renewal date. If the Company and the Distributor fail to determine the minimum standards within such three (3)-month period, then the Distributor has the right to, by giving the Company written notice within thirty (30) days of the expiration of such three (3) month period, exercise the option to initiate an arbitration in accordance with Section 21 for determination of the minimum standards for the renewed one (1) year period to cause this Agreement to be renewed as an EXCLUSIVE distribution agreement. TERMINATION Subject to Section 16, either party shall be entitled to earlier terminate this Agreement by giving the other party notice of termination in writing if the other party breaches any material provision of this Agreement and fails to cure such breach within thirty (30) days after receipt of written notice given by the terminating party. Termination or expiration of this Agreement shall not relieve Distributor of its then accrued payment obligation under this Agreement, and termination or expiration of this Agreement shall be without prejudice to all rights and remedies of either party under this Agreement and at law or in equity. The Company agrees that after termination or expiration of this Agreement, it shall undertake to sell the Products and provide necessary support services to customers and users of the Products in the Territory at the request of such customers or users. 19. LIABILITY OF PARTIES FOR DAMAGES: Neither party shall be liable for indirect, incidental, special, consequential or punitive damages under this agreement. 20. TRANSFER OF DISTRIBUTOR'S RIGHTS: The rights conferred on the Distributor by this Agreement cannot be assigned or transferred without the written consent of the Company. The Company shall not assign, transfer Page 6 7 or otherwise dispose of in any manner the whole or any portion of this Agreement, including, but not limited to, any rights or obligations under this Agreement, and any and all copyrights, patents, designs, trademarks and other intellectual property rights pertaining to the Products, without the prior written consent of the Distributor. 21. BINDING ARBITRATION: In the event of any dispute between the parties hereto in any way arising out of this agreement, the same shall be referred to three arbitrators, one to be appointed by the Distributor, one to be appointed by the Company, and a third to be mutually agreed upon by the two arbitrators so appointed. In the case of disputes involving an aggregate sum less than $50,000, a sole arbitrator will be appointed by the Company; said arbitrator must be reasonably acceptable to both the Distributor and the Company. The arbitration will be conducted under the rules of the American Arbitration Associate (AAA) of New York (United States). The decision of a majority of the three Arbitrators, including the apportionment of the expenses of the arbitration, shall be final and binding upon the parties hereto. The meeting of arbitrators shall be held in the County of Los Angeles, California, unless it shall be mutually agreed to hold such meeting elsewhere. 22. GOVERNING LAW: This agreement shall be governed by and construed under the laws of the State of California in the United States of America. IN WITNESS WHEREOF, the parties hereto have caused this agreement to be duly executed: "Company" By: Walter Woltosz Authorized Signature Title: Chairman & CEO Date: August 7, 1998 "Distributor" By: Authorized Signature Title: President Date: August 7, 1998 Appendix A Page 7 8 Pricing and Discount Schedule GastroPlus US$ 15,555 QMPRPlus US$ 3,888 Gastro/QMEPR Pack US$ 17,500 2nd Purchase and Renewal 10% Discount Multi-Year Renewal and Multi Purchase at the same time 20% Discount Appendix B Order and Sales Forecast Minimum Standard First Year 2 Units GastroPlus Second Year 10 Units GastroPlus Third and subsequent years per Section 18 Page 8 EX-10.27 4 EXHIBIT 10.27 1 EXHIBIT 10.27 STANDARD OFFICE LEASE-NET AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION 1. Basic Lease Provisions ("Basic Lease Provisions") 1.1 Parties: This Lease, dated, for reference purposes only, May 14, 1998 Is made by and between Martin Properties, Inc. (herein called "Lessor") and Simulations Plus, Inc. Doing business under the name of Simulations Plus, Inc. (herein called "Lessee") 1.2 Premises: Suite Number(s) N/A, 2 floors, consisting of approximately 15,600 square feet, more or less as defined In paragraph 2 and as shown on Exhibit "A" hereto (the "Premises"). 1.3 Building: Commonly described as being located at 1220 West Avenue J In the City of Lancaster, County of Los Angeles, State of California as more particularly described in Exhibit_____ hereto, and as defined in paragraph 2. 1.4 Use: Professional Office/Incidental Assembly of Electronic Components subject to paragraph 6. 1.5 Term: 3 years commencing September 1 1998("Delivery Date") and ending August 31, as defined In paragraph 3. 1.6 Base Rent: _______ See addendum per month, payable on the first day of each month, per paragraph 4.1 1.7 Base Rent increase: On (See addendum) the monthly Base Rent payable under paragraph 1.6 above shall be adjusted as provided in paragraph 4.3 below. 1.8 Rent Paid Upon Execution: $13,588 see addendum for $10,000 1.9 Security Deposit: $10,000 see addendum 1.10 Lessee's Share of Operating Expenses: 100% as defined in paragraph 4.2. 2. Premises, Parking and Common Areas. 2.1 Premises: The Premises herein sometimes referred to as the "Building" identified in paragraph 1.3 of the Basic Lease Provisions. "Building" shall include adjacent parking structures used in connection therewith. The Premises, the Building, the Common Areas, the land upon which the same are located, along with all other buildings and improvements thereon or thereunder, are herein collectively referred to as the "Office Building Project" Lessor hereby leases to Lessee and Lessee leases from Lessor for the term, at the rental, and upon all of the conditions set forth herein, the real property referred to in the Basic Lease Provisions, paragraph 1.2, as the "Premises": including rights to the Common Areas as hereinafter specified. 2.2 Deleted 2.2.1 If Leessee commits, permits or allows any of the prohibited activities described in the Lease or the rules then in effect, then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may 2 have, to remove or tow away the vehicle involved and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.2.2 Deleted 2.3 Common Areas-Definition. The term "Common Areas" is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Office Building Project that are provided and designated by the Lessor from time to time for the general non-exclusive use of Lessor, Lessee and of other lessees of the Office Building Project and their respective employees, suppliers, shippers, customers and invitees, including but not limited to common entrances, lobbies, corridors, stairways and stairwells, public restrooms, elevators, escalators, parking areas to the extent not otherwise prohibited by this Lease, loading and unloading areas, trash areas, roadways, sidewalks, walkways parkways, ramps, driveways, landscaped areas and decorative walls. 2.4 Common Areas-Rules and Regulations. Lessee agrees to abide by and conform to the rules and regulations attached hereto as Exhibit B with respect to the Office Building Project and Common Areas, and to cause its employees, suppliers, shippers, customers, and invitees to so abide and conform. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to modify amend and enforce said rules and regulations. Lessor shall not be responsible to Lessee for the non-compliance with said rules and regulations by other lessees, their agents, employees and invitees of the Office Building Project. 2.5 Common Areas-Changes. Lessor shall have the right, in Lessor's sole discretion, from time to time: (a) To make changes to the Building interior and exterior and Common Areas, including, without limitation, changes in the location, size, shape, number, and appearance thereof, including but not limited to the lobbies, windows, stairways, air shafts, elevators, escalators, restrooms, driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, decorative walls, landscaped areas and walkways; provided, however, Lessor shall at all times provide the parking facilities required by applicable law; (b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available; (c) Deleted (d) To add additional buildings and improvements to the Common Areas; (e) To use the Common Areas while engaged in making additional Improvements, repairs or alterations to the Office Building Project, or an portion thereof; (f) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Office Building Project as Lessor may, in the exercise of sound business judgment deem to be appropriate. 3. Term 3 3.1 Term. The term and Commencement Date of this Lease shall be as specified in paragraph 1.5 of the Basic Lease Provisions. 3.2 Delay in Possession. Notwithstanding said delivery Date if for any reason Lessor cannot deliver possession of the Premises to Lessee on said delivery date and subject to paragraph 3.2.2, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease or the obligations of Lessee hereunder or extend the term hereof; but in such case, Lessee shall not be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease, except as may be otherwise provided in this Lease, until possession of the premises is tendered to Lessee, as hereinafter defined; provided, however, that it Lessor shall not have delivered possession of the Premises within thirty (30) days following said delivery Date, as the same may be extended under the terms of a Work Letter executed by Lessor and Lessee, Lessee may, at Lessee's option. by notice in writing to Lessor within ten (10) days thereafter, cancel this Lease, in which event the parties shall be discharged from all obligations hereunder; provided, however, that, as to Lessee's obligations, Lessee first reimburses Lessor for all costs incurred for Non-Standard Improvements and, as to Lessor's obligations, Lessor shall return any money previously deposited by Lessee (less any offsets due Lessor for Non-Standard Improvements); and provided further, that it such written notice by Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease hereunder shall terminate and be of no further force or effect. 3.2.1 Possession Tendered-Defined. Possession of the Premises shall be deemed tendered to Lessee ("Tender of Possession") when (1) the improvements to be provided by Lessor under this Lease are substantially completed, (2) the Building utilities are ready for use in the Premises, (3) Lessee has reasonable access to the Premises, and (4) ten (10) days shall have expired following advance written notice to Lessee of the occurrence of the matters described in (1), (2) and (3), above of this paragraph 3.2.1. 3.2.2 Delays Caused by Lessee. There shall be no abatement of rent, and the sixty (60) day period following the Commencement Date before which Lessee's right to cancel this Lease accrues under paragraph 3.2, shall be deemed extended to the extent of any delays caused by acts or omissions of Lessee, its agents, employees and contractors. 3.3 Early Possession. If Lessee occupies the Premises prior to said Commencement Date, such occupancy shall be subject to all provisions of this Lease, such occupancy shall not change the termination date. 3.4 Deleted 4. Rent 4.1 Base Rent. Subject to adjustment as hereinafter provided In paragraph 4.3, and except as may be otherwise expressly provided in this Lease, Lessee shall pay to Lessor the Base Rent for the Premises set forth in paragraph 1.6 of the 4 Basic Lease Provisions, without offset or deduction. Lessee shall pay Lessor upon execution hereof the advance Base Rent described in paragraph 1.8 of the Basic Lease Provisions. Rent for any period during the term hereof which is for less than one month shall be prorated based upon the actual number of days of the calendar month involved. Rent shall be payable in lawful money of the United States to Lessor at the address stated herein or to such other persons or at such other places as Lessor may designate in writing. 4.2 Operating Expenses. Lessee shall pay to Lessor during the term hereof, In addition to the Base Rent, Lessee's Share, as hereinafter defined, of all Operating Expenses, as hereinafter defined, during each calendar year of the term of this Lease, in accordance with the following provisions: (a) "Lessee's Share" is defined, for purposes of this Lease, as the percentage set forth In paragraph 1.10 of the Basic Lease Provisions, which percentage has been determined by dividing the approximate square footage of the Premises by the total approximate square footage of the rentable space contained in the Office Building Project. It is understood and agreed that the square footage figures set forth in the Basic Lease Provisions are approximations which Lessor and Lessee agree are reasonable and shall not be subject to revision except in connection with an actual change in the size of the Premises or a change in the space available for lease in the Office Building Project. (b) "Operating Expenses" is defined, for purposes of this Lease, to include all costs, if any, incurred by Lessor in the exercise of its reasonable discretion. for: (I) The operation, repair, maintenance, and replacement, in neat, clean, safe, good order and condition, of the Office Building Project, including but not limited to, the following: (aa) The Common Areas, Including their surfaces, coverings, decorative items, and including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, stairways, parkways, driveways, landscaped areas, striping,bumpers, irrigation systems, Common area lighting facilities, building exteriors, fences and gates; (bb) All heating, air conditioning, plumbing, electrical systems, life safety equipment, telecommunication and other equipment used in common by, or for the benefit of Lessee including elevators and escalators, tenant directories, fire detection systems including sprinkler system maintenance and repair. (ii) Trash disposal, janitorial and security services; (iii) Any other service to be provided by Lessor that is elsewhere in this Lease stated to be an "Operating Expense"; (iv) The cost of the premiums for the liability and property insurance policies to be maintained by Lessor under paragraph 8 hereof; (v) The amount of the real property taxes to be paid by Lessor under paragraph 10.1 hereof; (vi) The cost of water, sewer, gas, electricity, and other publicly mandated services to the Office Building Project; 5 (vii) Labor, salaries and applicable fringe benefits and costs, materials, supplies and tools used in maintaining and/or cleaning the Office Building Project and accounting and a management fee attributable to the operation of the office Building Project; no management fee shall be charged on taxes and insurance. (viii) Replacing and/or adding improvements mandated by any governmental agency and any repairs or removals necessitated thereby amortized over its useful life according to Federal income tax regulations or guidelines for depreciation thereof (including interest on the unamortized balance as is then reasonable in the judgment of Lessor's accountants); (ix) Replacements of equipment or improvements that have a useful life for depreciation purposes according to Federal income tax guidelines of five (5) years or less, as amortized over such life. (c) Operating Expenses shall not include the costs of replacements of equipment or improvements that have a useful life for Federal Income tax purposes in excess of five (5) years unless it is of the type described in paragraph 4.2(b)(viii), in which case their cost shall be included as above provided. (d) Operating Expenses shall not Include any expenses paid by any lessee directly to third parties, or as to which Lessor is otherwise reimbursed by any third party, other tenant, or by insurance proceeds. (e) Lessee's Share of Operating Expenses shall be payable by Lessee within ten (10) days after a reasonably detailed statement of actual expenses is presented to Lessee by Lessor At Lessor's option, however, an amount may be estimated by Lessor from time to time of Lessee's Share of annual Operating Expenses and the same shall be payable monthly or quarterly, as Lessor shall designate, during each calendar year of the Lease term, on the same day as the Base Rent is due hereunder. In the event that Lessee pays Lessor's estimate of Lessee's Share of Operating Expenses as aforesaid, Lessor shall deliver to Lessee within sixty (60) days after the expiration of each calendar year a reasonably detailed statement showing Lessee's Share of the actual Operating Expenses incurred during the preceding year. It Lessee's payments under this paragraph 4.2(e) during said preceding calendar year exceed Lessee's Share as indicated Qn said statement, Lessee shall be entitled to credit the amount of such overpayment against Lessee's Share of Operating Expenses next falling due or refund of overpayment at Lessee's option. If Lessee's payments under this paragraph during said preceding calendar year were less than Lessee's Share as indicated on said statement, Lessee shall pay to Lessor the amount of the deficiency within ten (10) days after delivery by Lessor to Lessee of said statement. or refund of overpayment at Lessee's option 4.3 Rent Increase. "See Addendum" 5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof the security deposit set forth in paragraph 1.9 of the Basic Lease Provisions as security for Lessee's faithful performance of Lessee's obligations hereunder If Lessee fails to pay rent or other charges due hereunder, or otherwise defaults with respect to any provision of this Lease, Lessor may use, apply or retain all or any portion of said deposit for the payment of any rent or other charge in default for the payment of any other sum to which Lessor may become obligated by reason of Lessee's default, or to compensate Lessor 6 for any loss or damage which Lessor may suffer thereby It Lessor so uses or applies all or any portion of said deposit, Lessee shall within ten (10) days after written demand therefor deposit cash with Lessor in an amount sufficient to restore said deposit to the full amount then required of Lessee. Lessor shall not be required to keep said security deposit separate from its general accounts. If Lessee performs all of Lessee's obligations hereunder, said deposit, or so much thereof as has not heretofore b een applied by Lessor, shall be returned, without payment of interest or other increment for its use, to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest hereunder) at the expiration of the term hereof, and no more than ten (10) days after Lessee has vacated the Premises. No trust relationship is created herein between Lessor and Lessee with respect to said Security Deposit. 6. Use. 6.1 Use. The Premises shall be used and occupied only for the purpose set forth in paragraph l.4 of the Basic Lease Provisions or any other use which is reasonably comparable to that use and for no other purpose. 6.2 Compliance with Law. (a) Lessor warrants to Lessee that the Premises, in the state existing on the date that the Lease term commences, but without regard to alterations or improvements made by Lessee or the use for which Lessee will occupy the Premises, does not violate any covenants or restrictions of record, or any applicable building code, regulation or ordinance in effect an such Lease term Commencement Date. In the event it is determined that this warranty has been violated, then it shall be the obligation of the Lessor, after written notice from Lessee, to promptly, at Lessor's sole cost and expense, rectify any such violation. (b) Except as provided In paragraph 6.2(a) Lessee shall, at Lessee's expense, promptly comply with all applicable statutes, ordinances, rules, regulations, orders, covenants and restrictions of record, and requirements of any fire insurance underwriters or rating bureaus, now in effect or which may hereafter come into effect, whether or not they reflect a change in policy from that now existing, during the term or any part of the term hereof, relating in any manner to the Premises and the occupation and use by Lessee of the Premises. Lessee shall conduct its business in a lawful manner and shall not use or permit the use of the Premises or the Common Areas in any manner that will tend to create waste or a nuisance or shall tend to disturb other occupants of the Office Building Project. 6.3 Condition of Premises. (a) Lessor shall deliver the Premises to Lessee in a clean condition on the Lease Delivery Date (unless Lessee is already in possession) and Lessor warrants to Lessee that the plumbing, lighting, air conditioning, and heating system in the Premises shall be in good operating condition. In the event that it is determined that this warranty has been violated, then it shall be the obligation of Lessor, after receipt of written notice from Lessee setting forth with 7 specificity the nature of the violation, to promptly, at Lessor's sole cost, rectify such violation. (b) Except as otherwise provided in this Lease, Lessee hereby accepts the Premises and the Office Building Project in their condition existing as of the Lease Commencement Date or the date that Lessee takes possession of the Premises, whichever is earlier, subject to all applicable zoning, municipal, county and state laws, ordinances and regulations governing and regulating the use of the Premises, and any easements, covenants or restrictions of record, and accepts this Lease subject thereto and to all matters disclosed thereby and by any exhibits attached hereto. Lessee acknowledges that it has satisfied itself by its own independent investigation that the Premises are suitable for its intended use, and that neither Lessor nor Lessor's agent or agents has made any representation or warranty as to the present or future suitability of the Premises, Common Areas, or Office Building Project for the conduct of Lessee's business. 7. Maintenance, Repairs, Alterations and Common Area Services. 7.1 Lessor's Obligations. Lessor shall keep the Office Building Project, including the Premises interior and exterior walls, roof, and common areas, and the equipment whether used exclusively for the Premises or in common with other premises, in good condition and repair; provided, however, Lessor shall not be obligated to paint, repair or replace wall coverings, or to repair or replace any improvements that are not ordinarily a part of the Building or are above then Building standards. Except as provided in paragraph 9.5, there shall be no abatement of rent or liability of Lessee on account of any injury or interference with Lessee's business with respect to any improvements, alterations or repairs made by Lessor to the Office Building Project or any part thereof. 7.2 Lessee's Obligations. (a) Notwithstanding Lessor's obligation to keep the Premises in good condition and repair, Lessee shall be responsible for payment of the cost thereof to Lessor as additional rent for that portion of the cost of any maintenance and repair of the Premises, or any equipment (wherever located) that serves only Lessee or the Premises, to the extent such cost is attributable to causes beyond normal wear and tear. Lessee shall be responsible for the cost of painting, repairing or replacing wall coverings, and to repair or replace any Premises improvements that are not ordinarily a part of the Building or that are above then Building standards. Lessor may, at its option, upon reasonable notice, elect to have Lessee perform any particular such maintenance or repairs the cost of which is otherwise Lessee's responsibility hereunder. (b) On the last day of the term hereof, or on any sooner termination, Lessee shall surrender the Premises to Lessor in the same condition as received, ordinary wear and tear excepted, clean and free of debris. Any damage or deterioration of the Premises shall not be deemed ordinary wear and tear if the same could have been prevented by good maintenance practices by Lessee. Lessee shall repair any damage to the Premises occasioned by the installation or removal of Lessee's trade fixtures, alterations, furnishings and equipment. Except as otherwise stated in this Lease, Lessee shall leave the air lines, power panels, electrical distribution systems, lighting fixtures, air 8 conditioning, window coverings, wall coverings, carpets, wall panelling, ceilings and plumbing on the Premises and in good operating condition. 7.3 Alterations and Additions. (a) Lessee shall not, without Lessor's prior written consent make any alterations, improvements, additions, Utility Installations or repairs in, on or about the Premises, or the Office Building Project. As used in this paragraph 7.3 the term "Utility Installation" shall mean carpeting, window and wall coverings, power panels, electrical distribution systems, lighting fixtures, air conditioning, plumbing, and telephone and telecommunication wiring and equipment. At the expiration of the term, Lessor may require the removal of any or all of said alterations, improvements, additions or Utility Installations, and the restoration of the Premises and the Office Building Project to their prior condition, at Lessee's expense. Should Lessor permit Lessee to make its own alterations, improvements, additions or Utility Installations, Lessee shall use only such contractor as has been expressly approved by Lessor, and Lessor may require Lessee to provide Lessor, at Lessee's sole cost and expense, a lien and completion bond in an amount equal to one and one-half times the estimated cost of such improvements, to insure Lessor against any liability for mechanic's and materialmen's liens and to insure completion of the work. Should Lessee make any alterations, improvements, additions or Utility Installations without the prior approval of Lessor, or use a contractor not expressly approved by Lessor, Lessor may, at any time during the term of this Lease, require that Lessee remove any part or all of the same. (b) Any alterations, improvements, additions or Utility Installations in or about the Premises or the Office Building Project that Lessee shall desire to make shall be presented to Lessor in written form, with proposed detailed plans. If Lessor shall give its consent to Lessee's making such alteration, improvement, addition or Utility Installation, the consent shall be deemed conditioned upon Lessee acquiring a permit to do so from the applicable governmental agencies, furnishing a copy thereof to Lessor prior to the commencement of the work, and compliance by Lessee with all conditions of said permit in a prompt and expeditious manner. (c) Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use in the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises, the Building or the Office Building Project, or any interest therein. (d) Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in the Premises by Lessee, and Lessor shall have the right to post notices of non-responsibility in or on the Premises or the Building as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend itself and Lessor against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon be fore the enforcement thereof against the Lessor or the Premises, the Building or the, Office Building Project, upon the condition that if Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to such contested lien claim or demand indemnifying Lessor against liability for the same and holding the Premises, the Building and the Office Building Project free from the effect of such lien or claim. In addition, Lessor may require Lessee 9 to pay Lessor's reasonable attorneys fees and costs in participating in such action if Lessor shall decide it is to Lessor's best interest so to do. (e) All alterations, improvements, additions and Utility Installations (whether or not such Utility Installations constitute trade fixtures of Lessee), which may be made to the Premises by Lessee, including but not limited to, floor coverings, panellings, doors, drapes, built-ins, moldings, sound attenuation, and lighting and telephone or communication conduit, wiring and outlets, shall be made and done in a good and workmanlike manner and of good and sufficient quality and materials and shall be the property of Lessor and remain upon and be surrendered with the Premises at the expiration of the Lease term. unless Lessor requires their removal pursuant to paragraph 7.3(a). Provided Lessee is not in default, notwithstanding the provisions of this paragraph 7.3(e), Lessee's personal. property and equipment, other than that which is affixed to the Premises so that it cannot be removed without material damage to the Premises or the Building, and other than Utility Installations, shall remain the property of Lessee and may be removed by Lessee subject to the provisions of paragraph 7.2. (f) Lessee shall provide Lessor with as-built plans and specifications for any alterations, improvements, additions or Utility Installations. 7.4 Utility Additions. Lessor reserves the right to Install new or additional utility facilities throughout the Office Building Project for the benefit of Lessor or Lessee, or any other lessee of the Office Building Project, including, but not by way of limitation, such utilities as plumbing, electrical systems, security systems, communication systems. and fire protection and detection systems, so long as such installations do not unreasonably interfere with Lessee's use of the Premises. 8. Insurance; Indemnity. 8.1 Liability Insurance-Lessee. Lessee shall, at Lessee's expense, obtain and keep in force during the term of this Lease a policy of Comprehensive General Liability insurance utilizing an Insurance Services Office standard form with Broad Form General Liability Endorsement (GLO404), or equivalent, in an amount of not less than $1,000,000 per occurrence of bodily injury and property damage combined or in a greater amount a reasonably determined by Lessor and shall insure Lessee with Lessor as an additional insured against liability arising out of the use, occupancy or maintenance of the Premises. Compliance with the above requirement shall not, however, limit the liability of Lessee hereunder. 8.2 Liability Insurance-Lessor. Lessor shall obtain and keep in force during the term of this Lease a policy of Combined Single Limit Bodily Injury and Broad Form Property Damage Insurance, plus coverage against such other risks Lessor deems advisable from time to time, insuring Lessor, but not Lessee, against liability arising out of the ownership, use, occupancy or maintenance of the Office Building Project in an amount not less than $5,000,000.00 per occurrence. 10 8.3 Property insurance-Lessee. Lessee shall, at Lessee's expense, obtain and keep in force during the term of this Lease for the benefit of Lessee, replacement cost fire and extended coverage insurance, with vandalism and malicious mischief, sprinkler leakage and earthquake sprinkler leakage endorsements, in an amount sufficient to cover not less than 100% of the full replacement cost, as the same may exist from time to time, of all of Lessee's personal property, fixtures, equipment and tenant improvements . 8.4 Property Insurance-Lessor. Lessor shall obtain and keep in force during the term of this Lease a policy or policies of insurance covering loss or damage to the Office Building Project improvements, but not Lessee's personal property, fixtures, equipment or tenant improvements, in the amount of the full replacement cost thereof, as the same may exist from time to time, utilizing Insurance Services Office standard form, or equivalent, providing protection against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, plate glass, and such other perils as Lessor deems advisable or may be required by a lender having a lien on the Office Building Project. In addition, Lessor shall obtain and keep in force, during the term of this Lease, a policy of rental value insurance covering a period of one year, with loss payable to Lessor, which insurance shall also cover all Operating Expenses for said period. Lessee will not be named in any such policies carried by Lessor and shall have no right to any proceeds therefrom. The policies required by these paragraphs 8.2 and 8.4 shall contain such deductibles as Lessor or the aforesaid lender may determine. In the event that the Premises shall suffer an insured loss as defined in paragraph 9.1(f) hereof, the deductible amounts under the applicable insurance policies shall be deemed an Operating Expense. Lessee shall not do or permit to be done anything which shall invalidate the insurance policies carried by Lessor. Lessee shall pay the entirety of any increase in the property insurance premium for the Building over what it was Immediately prior to the commencement of the term of this Lease if the increase is specified by Lessor's insurance carrier as being caused by the nature of Lessee's occupancy or any act or omission of Lessee. 8.5 Insurance Policies. Lessee shall deliver to Lessor copies of liability insurance policies required under paragraph 8.1 or certificates evidencing the existence and amounts of such Insurance within seven (7) days after the Commencement Date of this Lease. No such policy shall be cancellable or subject to reduction of coverage or other modification except after thirty (30) days prior written notice to Lessor. Lessee shall, at least thirty (30) days prior to the expiration of such policies, furnish Lessor with renewals thereof. 8.6 Waiver of Subrogation. Lessee and Lessor each hereby release and relieve the other and waive their entire right of recovery against the other, for direct or consequential loss or damage arising out of or incident to the perils covered by property insurance carried by such party, whether due to the negligence of Lessor or Lessee or their agents, employees, contractors and/or invitees. If necessary all property insurance policies required under this Lease shall be endorsed to so provide. 8.7 Indemnity. Lessee shall indemnity and hold harmless Lessor and its agents, Lessor's master or ground lessor partners and lenders, from and against any and all claims for damage to the person or property of anyone or any entity arising from Lessee's use of the Office Building Project, or from the conduct of 11 Lessee's business or from any activity, work or things done, permitted or suffered by Lessee in or about the Premises or else-where and shall further indemnify and hold harmless Lessor from and against any and all claims, costs and expenses arising from any breach or default in the performance of any obligation on Lessee's part to be performed under the terms of this Lease, or arising from any act or omission of Lessee, or any of Lessee's agents, contractors, employees or invitees and from and against all costs, attorney's fees, expenses and liabilities incurred by Lessor as the result of any such use, conduct, activity, work, things done, permitted or suffered, breach, default or negligence, and in dealing reasonably therewith, including but not limited to the defense or pursuit of any claim or any action or proceeding involved therein; and in case any action or proceeding be brought against Lessor by reason of any such matter. Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. Lessee, as a material part of the consideration to Lessor, hereby assumes all risk of damage to property of Lessee or injury to persons, in, upon or about the Office Building Project arising from any cause and Lessee hereby waives all claims in respect thereof against Lessor. 8.8 Exemption of Lessor from Liability. Lessee hereby agrees that Lessor shall not be liable for injury to Lessee's business or any loss of income therefrom or for loss of or damage to the goods, wares, merchandise or other property of Lessee, Lessee's employees, invitees, customers, in or about the Premises or the Office Building Project, nor shall Lessor be liable for injury to the person of Lessee, Lessee's employees, agents or contractors, whether such damage or injury is caused by or results from theft, fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, whether said damage or injury results from conditions arising upon the Premises or upon other portions of the Office Building Project, or from other sources or places, or from new construction or the repair, alteration or improvement of any part of the Office Building Project, or of the equipment, fixtures or appurtenances applicable thereto, and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible, Lessor shall not be liable for any damages arising from any act or neglect of any other lessee, occupant or user of the Office Building Project, nor from the failure of Lessor to enforce the provisions of any other lease of any other lessee of the Office Building Project. 8.9 No Representation of Adequate Coverage. Lessor makes no representation that the limits or forms of coverage of insurance specified in this paragraph 8 are adequate to cover Lessee's property or obligations under this Lease. 9. Damage or Destruction. 9.1 Definitions. (a) "Premises Damage" shall mean if the Premises are damaged or destroyed to any extent. (b) "Premises Building Partial Damage" shall mean if the Building of which the Premises are a part is damaged or destroyed to the extent that the cost to 12 repair is less than fifty percent (50%) of the then Replacement Cost of the Building. (c) "Premises Building Total Destruction" shall mean if the Building of which the Premises are a part is damaged or destroyed to the extent that the cost to repair is fifty percent (50%) or more of the then Replacement Cost of the Building. (d) "Office Building Project Buildings" shall mean all of the buildings on the Office Building Project site. (e) "Office Building Project Buildings Total Destruction" shall mean it the Office Building Project Buildings are damaged or destroyed to the extent that the cost of repair is fifty percent (50%) or more of the then Replacement Cost of the Office Building Project Buildings. (f) "Insured Loss" shall mean damage or destruction which was caused by an event required to be covered by the insurance described in paragraph 8. The fact that an Insured Loss has a deductible amount shall not make the loss an uninsured loss. (g) "Replacement Cost" shall mean the amount of money necessary to be spent in order to repair or rebuild the damaged area to the condition that existed immediately prior to the damage occurring, excluding all improvements made by lessees, other than those installed by Lessor at Lessee's expense. 9.2 Premises Damage; Premises Building Partial Damage. (a) Insured Loss: Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage which is an Insured Loss and which falls into the classification of either Premises Damage or Premises Building Partial Damage, then Lessor shall, as soon as reasonably possible and to the extent the required materials and labor are readily available through usual commercial channels, at Lessor's expense, repair such damage (but not Lessee's fixtures, equipment or tenant improvements originally paid for by Lessee) to its condition existing at the time of the damage, and this Lease shall continue in full force and effect. (b) Uninsured Loss: Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage which is not an Insured Loss and which falls within the classification of Premises Damage or Premises Building Partial Damage, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense), which damage prevents Lessee from making any substantial use of the Premises, Lessor may at Lessor's option either (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after the date of the occurrence of such damage of Lessor's intention to cancel and terminate this Lease as of the date of the occurrence of such damage, in which event this Lease shall terminate as of the date of the occurrence of such damage. 9.3 Premises Building Total Destruction; Office Building Project Total Destruction. Subject to the provisions of paragraphs 9.4 and 9.5, it at any 13 time during the term of this Lease there is damage, whether or not it is an Insured Loss, which falls into the classifications of either (i) Premises. Building Total Destruction, or (ii) Office Building Project Total Destruction, then Lessor may at Lessor's option either (i) repair such damage or destruction as soon as reasonably possible at Lessor's expense (to the extent the required materials are readily available through usual commercial channels) to its condition existing at the time of the damage, but not Lessee's fixtures. equipment or tenant improvements, and this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after the date of occurrence of such damage of Lessor's intention to cancel and terminate this Lease, in which case this Lease shall terminate as of the date of the occurrence of such damage. 9.4 Damage Near End of Term. (a) Subject to paragraph 9.4(b), if at any time during the last twelve (12) months of the term of this Lease there is substantial damage to the Premises, Lessor may at Lessor's option cancel and terminate this Lease as of the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within 30 days after the date of occurrence of such damage. (b) Notwithstanding paragraph 9.4(a), in the event that Lessee has an option to extend or renew this Lease, and the time within which said option may be exercised has not yet expired, Lessee shall exercise such option, if it is to be exercised at all, no later than twenty (20) days after the occurrence of an Insured Loss falling within the classification of Premises Damage during the last twelve (12) months of the term of this Lease. If Lessee duly exercises such option during said twenty (20) day period, Lessor shall, at Lessor's expense, repair such damage, but not Lessee's fixtures, equipment or tenant improvements, as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option during said twenty (20) day period, then Lessor may at Lessor's option terminate and cancel this Lease as of the expiration of said twenty (20) day period by giving written notice to Lessee of Lessor's election to do so within ten (10) days after the expiration of said twenty (20) day period, notwithstanding any term or provision In the grant of option to the contrary. 9.5 Abatement of Rent; Lessee's Remedies. (a) In the event Lessor repairs or restores the Building or Premises pursuant to the provisions of this paragraph 9, and any part of the Premises are not usable (including loss of use due to loss of access or essential services), the rent payable hereunder (including Lessee's Share of Operating Expenses) for the period during which such damage, repair or restoration continues shall be abated, provided (1) the damage was not the result of the negligence of Lessee, and (2) such abatement shall only be to the extent the operation and profitability of Lessee's business as operated from the Premises is adversely affected. Except for said abatement of rent, if any, Lessee shall have no claim against Lessor for any damage suffered by reason of any such damage, destruction, repair or restoration. 14 (b) If Lessor shall be obligated to repair or restore the Premises or the Building under the provisions of this Paragraph 9 and shall not commence such repair or restoration within ninety (90) days after such occurrence, or if Lessor shall not complete the restoration and repair within six (6) months after such occurrence, Lessee may at Lessee's option cancel and terminate this Lease by giving Lessor written notice of Lessee's election to do so at any time prior to the commencement or completion, respectively, of such repair or restoration. In such event this Lease shall terminate as of the date of such notice. (c) Lessee agrees to cooperate with Lessor In connection with any such restoration and repair, Including but not limited to the approval and/or execution of plans and specifications required. 9.6 Termination-Advance Payments. Upon termination of this Lease pursuant to this paragraph 9, an equitable adjustment shall be made concerning advance rent and any advance payments made by Lessee to Lessor. Lessor shall, within ten (10) days in addition, return to Lessee so much of Lessee's security deposit as has not theretofore been applied by Lessor. 9.7 Waiver. Lessor and Lessee waive the provisions of any statute which relate to termination of leases when leased property Is destroyed and agree that such event shall be governed by the terms of this Lease. 10. Real Property Taxes. 10.1 Payment of Taxes. Lessor shall pay the real property tax, as defined In paragraph 10.3, applicable to the Office Building Project subject to reimbursement by Lessee of Lessee's Share of such taxes in accordance with the provisions of paragraph 4.2, except as otherwise provided In paragraph 10.2. 10.2 Additional Improvements. Lessee shall not be responsible for paying any increase in real property tax specified in the tax assessor's records and work sheets as being caused by additional improvements placed upon the Office Building Project by other lessees or by Lessor for the exclusive enjoyment of any other lessee. Lessee shall, however, pay to Lessor at the time that Operating Expenses are payable under paragraph 4.2(c) the entirety of any increase in real property tax if assessed solely by reason of additional improvements placed upon the Premises by Lessee or at Lessee's request. 10.3 Definition of "Real Property Tax". As used herein, the term "real property tax" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed on the Office Building Project or any portion thereof by any authority having the direct or indirect power to tax, including any city, county, state or federal government, or any school. agricultural, sanitary, fire, street, drainage or other improvement district thereof, as against any legal or equitable interest of Lessor in the Office Building Project or in any portion thereof, as against Lessor's right to rent or other income therefrom, and as against Lessor's business of leasing the Office Building Project. The term "real property tax" shall also include any tax, fee, levy, assessment or charge (i) in substitution of, partially or totally, any tax, fee, levy, 15 assessment or charge hereinabove included within the definition of "real property tax:' or (ii) the nature of which was hereinbefore included within the definition of "real property tax:' or (iii) which is imposed for a service or right not charged prior to June 1, 1978, or, if previously charged, has been increased since June 1, 1978, or (iv) which is imposed as a result of a change in ownership, as defined by applicable local statutes for property tax purposes, of the Office Building Project or which is added to a tax or charge hereinbefore included within the definition of real property tax by reason of such change of ownership, or (v) which is imposed by reason of this transaction, any modifications or changes hereto, or any transfers hereof. 10.4 Joint Assessment. If the improvements or property, the taxes for which are to be paid separately by Lessee under paragraph 10.2 or 10.5 are not separately assessed, Lessee's portion of that tax shall be equitably determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information (which may include the cost of construction) as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.5 Personal Property Taxes. (a) Lessee shall pay prior to delinquency all taxes assessed against and levied upon trade fixtures, furnishings, equipment and all other personal property of Lessee contained In the Premises or elsewhere. (b) If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay to Lessor the taxes attributable to Lessee within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property. 11. Utilities. 11.1 Deleted 11.2 Services Exclusive to Lessee. Lessee shall pay for all water, gas, heat, light, power, telephone and other utilities and services specially exclusively supplied and/or metered exclusively to the Premises or to Lessee, together with any taxes thereon. If any such services are not separately metered to the Premises, Lessee shall pay at Lessor's option, either Lessee's Share or a reasonable proportion to be determined by Lessor of all charges jointly metered with other premises in the Building. 11.3 Deleted 11.4 Excess Usage by Losses. Lessee shall not make connection to the utilities except by or through existing outlets and shall not install or use machinery or equipment in or about the Premises that uses excess water, lighting or power, or suffer or permit any act that causes extra burden upon the utilities or services, including but not limited to security services, over standard office usage for the Office Building Project. Lessor shall require Lessee to reimburse Lessor for any excess expenses or costs that may arise out of a breach of this subparagraph by Lessee. Lessor may, in its sole discretion, install at Lessee's 16 expense supplemental equipment and/or separate metering applicable to Lessee's excess usage or loading. 11.5 Interruptions. There shall be no abatement of rent and Lessor shall not be liable in any respect whatsoever for the inadequacy, stoppage, interruption or discontinuance of any utility or service due to riot, strike, labor dispute, breakdown, accident, repair or other cause beyond Lessor's reasonable control or in cooperation with governmental request or directions. 12. Assignment and Subletting. 12.1 Lessor's Consent Required. Lessee shall not voluntarily or by operation of law assign, transfer, mortgage, sublet, or otherwise transfer or encumber all or any part of Lessee's interest in the Lease or in the Premises, without Lessor's prior written consent, which Lessor shall not unreasonably withhold. Lessor shall respond to Lessee's request for consent hereunder in a timely manner and any attempted assignment, transfer, mortgage, encumbrance or subletting without such consent shall be void, and shall constitute a material default and breach of this Lease without the need for notice to Lessee under paragraph 13.1. "Transfer" within the meaning of this paragraph 12 shall include the transfer or transfers aggregating: (a) if Lessee, is a corporation, more than twenty-five percent (25%) of the voting stock of such corporation, or (b) If Lessee 13 a partnership, more then twenty-five percent (25%) of the profit and loss participation In such partnership. 12.2 Losses Affiliate. Notwithstanding the provisions of paragraph 12.1 hereof, Lessee may assign or sublet the Premises, or any portion thereof, without Lessor's consent, to any corporation which controls, is controlled by or is under common control with Lessee, or to any corporation resulting from the merger or consolidation with Lessee, or to any person or entity which acquires all the assets of Lessee as a going concern of the business that is being conducted on the Premises, all of which are referred to as "Lessee Affiliate"; provided that before such assignment shall be effective, (a) said assignee shall assume, in full, the obligations of Lessee under this Lease and (b) Lessor shall be given written notice of such assignment and assumption. Any such assignment shall not, in any way, affect or limit the liability of Lessee under the terms of this Lease even if after such assignment or subletting the terms of this Lease are materially changed or altered without the consent of Lessee, the consent of whom shall not be necessary. 12.3 Terms and Conditions Applicable to Assignment and Subletting. (a) Regardless of Lessor's consent, no assignment or subletting shall release Lessee of Lessee's obligations hereunder or alter the primary liability of Lessee to pay the rent and other sums due Lessor hereunder Including Lessee's Share of Operating Expenses, and to perform all other obligations to be performed by Lessee hereunder. 17 (b) Lessor may accept rent from any person other than Lessee pending approval or disapproval of such assignment. (c) Neither a delay in the approval or disapproval of such assignment or subletting, nor the acceptance of rent, shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the breach of any of the terms or conditions of this paragraph 12 or this Lease. (d) If Lessee's obligations under this Lease have been guaranteed by third parties, then an assignment or sublease, and Lessor's consent thereto, shall not be effective unless said guarantors give their written consent to such sublease and the terms thereof. (e) The consent by Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable on the Lease or sublease and without obtaining their consent and such action shall not relieve such persons from liability under this Lease or said sublease; provided, however, such persons shall not be responsible to the extent any such amendment or modification enlarges or increases the obligations of the Lessee or subleases under this Lease or such sublease. (f) In the event of any default under this Lease, Lessor may proceed directly against Lessee, any guarantors or any one else responsible for the performance of this Lease, including the subleases, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor or Lessee. (g) Lessor's written consent to any assignment or subletting of the Premises by Lessee shall not constitute an acknowledgement that no default then exists under this Lease of the obligations to be performed by Lessee nor shall such consent be deemed a waiver of any then existing default, except as may be otherwise stated by Lessor at the time. (h) The discovery of the fact that any financial statement relied upon by Lessor in giving Its consent to an assignment or subletting was materially false shall, at Lessor's election, render Lessor's said consent null and void. 12.4 Additional Terms and Conditions Applicable to Subletting. Regardless of Lessor's consent, the following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly Incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and Income arising from any sublease heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that until a default shall occur in the performance of Lessee's obligations under this Lease, Lessee may receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of this or any other assignment of such sublease to Lessor nor by reason of the collection of the rents from a subleases, be deemed liable to the subleases for any failure of Lessee to perform and comply with any of Lessee's obligations to such subleases under such sublease. Lessee hereby 18 irrevocably authorizes and directs any such subleases, upon receipt of a written notice from Lessor stating that a default exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents due and to become due under the sublease. Lessee agrees that such subleases shall have the right to rely upon any such statement and request from Lessor, and that such subleases shall pay such rents to Lessor without any obligation or right to inquire as to whether such default exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against said subleases or Lessor for any such rents so paid by said subleases to Lessor. (b) No sublease entered Into by Lessee shall be effective unless and until it has been approved in writing by Lessor. In entering into any sublease, Lessee shall use only such form of sublease as is satisfactory to Lessor, and once approved by Lessor, such sublease shall not be changed or modified without Lessor's prior written consent. Any subleases shall, by reason of entering into a sublease under this Lease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every obligation herein to be performed by Lessee other than such obligations as are contrary to or inconsistent with provisions contained in a sublease to which Lessor has expressly consented in writing. (c) In the event Lessee shall default in the performance of its obligations under this Lease, Lessor, at Its option and without any obligation to do so, may require any subleases to attorn to Lessor, in which event Lessor shall undertake the obligations of Lessee under such sublease from the time of the exercise of said option to the termination of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such subleases to Lessee or for any other prior defaults of Lessee under such sublease. (d) No subleases shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) With respect to any subletting to which Lessor has consented, Lessor agrees to deliver a copy of any notice of default by Lessee to the subleases. Such subleases shall have the right to cure a default of Lessee within three (3) days after service of said notice of default upon such subleases, and the subleases shall have a right of reimbursement and offset from and against Lessee for any such defaults cured by the subleases. 12.5 Lessor's Expenses. In the event Lessee shall assign or sublet the Premises or request the consent of Lessor to any assignment or subletting or If Lessee shall request the consent of Lessor for any act Lessee proposes to do then Lessee shall pay Lessor's reasonable costs and expenses incurred in connection therewith, including attorneys: architects: engineers' or other consultants' fees. 12.6 Conditions to Consent. Lessor reserves the right to condition any approval to assign or sublet upon Lessor's determination that (a) the proposed assignee or subleases shall conduct a business on the Premises of a quality substantially equal to that of Lessee and consistent with the general character of the other occupants of the Office Building Project and not in violation of any exclusives or rights then held by other tenants, and (b) the proposed assignee or subleases be at least as financially responsible as Lessee was expected to be at the time of the execution of this Lease or of such assignment or subletting, whichever is greater. 19 13. Default; Remedies. 13.1 Default. The occurrence of any one or more of the following events shall constitute a material default of this Lease by Lessee: (a) The vacation or abandonment of the Premises by Lessee. Vacation of the Premises shall include the failure to occupy the Premises for a continuous period of sixty (60) days or more, whether or not the rent is paid. (b) The breach by Lessee of any of the covenants, conditions or provisions of paragraphs 7.3(a), (b) or (d) (alterations), 12.1 (assignment or subletting), 13.1(a) (vacation or abandonment), 13.1(e) (insolvency), 13.1(f) (false statement), 16(a) (estoppel certificate), 30(b) (subordination), 13.3 (auctions), or 41.1 (easements), all of which are hereby deemed to be material, non-curable defaults without the necessity of any notice by Lessor to Lessee thereof. (c) The failure by Lessee to make any payment of rent or any other payment required to be made by Lessee hereunder, as and when due, where such failure shall continue for a period of three (3) days after written notice thereof from Lessor to Lessee. In the event that Lessor serves Lessee with a Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes such Notice to Pay Rent or Quit shall also constitute the notice required b this subparagraph. (d) The failure by Lessee to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by Lessee other than those referenced in subparagraphs (b) and (c), above, where such failure shall continue for a period of thirty (30) days after written notice thereof from Lessor to Lessee; provided, however, that it the nature of Lessee's noncompliance is such that more than thirty (30) days are reasonably required for its cure, then Lessee shall not be deemed to be in default it Lessee commenced such cure within said thirty (30) day period and thereafter diligently pursues such cure to completion. To the extent permitted by law, such thirty (30) day notice shall constitute the sole and exclusive notice required to be given to Lessee under applicable Unlawful Detainer statutes. (e) (i) The making by Lessee of any general arrangement or general assignment for the benefit of creditors; (ii) Lessee becoming a "debtor" as defined in 11 U.S.C. Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days; (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored restored Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days. In the event that any provision of this paragraph 13.1(e) is contrary to any applicable law, such provision shall be of no force or effect. 20 (f) The discovery by Lessor that any financial statement given to Lessor by Lessee, or its successor in interest or by any quarantor of Lessee's obligation hereunder, was materially false. 13.2 Remedies. In the event of any material default or breach of this Lease by Lessee, Lessor may at any time thereafter, with or without notice or demand and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such default: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee all damages incurred by Lessor by reason of Lessee's default including, but not limited to, the cost of recovering possession of the Premises; expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and any real estate commission actually paid; the worth at the time of award by the court having jurisdiction thereof of the amount by which the unpaid rent for the balance of the term after the time of such award exceeds the amount of such rental loss for the same period that Lessee proves could be reasonably avoided; that portion of the leasing commission paid by Lessor pursuant to paragraph 15 applicable to the unexpired term of this Lease. (b) Maintain Lessee's right to possession in which case this Lease shall continue in effect whether or not Lessee shall have vacated or abandoned the Premises. In such event Lessor shall be entitled to enforce all of Lessor's rights and remedies under this Lease, including the right to recover the rent as it becomes due hereunder. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. Unpaid installments of rent and other unpaid monetary obligations of Lessee under the terms of this Lease shall bear Interest from the date due at the maximum rate then allowable by law. 13.3 Default by Lessor. Lessor shall not be in default unless Lessor fails to perform obligations required of Lessor within a reasonable time, but in no event later than thirty (30) days after written notice by Lessee to Lessor specifying wherein Lessor has failed to perform such obligation; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days are required for performance then Lessor shall not be in default if Lessor commences performance within such 30-day period and thereafter diligently pursues the same to completion. 13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee to Lessor of Base Rent, Lessee's Share of Operating Expenses or other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease. the exact amount of which will be extremely difficult to ascertain, Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed on Lessor by the terms of any mortgage or trust deed covering the Office Building Project. Accordingly, if any installment of Base Rent, Operating Expenses, or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within ten (10) days after such amount 21 shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to 5% of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's default with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. 14. Condemnation. If the Premises or any portion thereof or the Office Building Project are taken under the power of eminent domain, or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs; provided that if so much of the Premises or the Office Building Project are taken by such condemnation as would substantially and a diversely affect the operation and profitability of Lessee's business conducted from the Premises, Lessee shall have the option, to be exercised only in writing within thirty (30) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within thirty (30) days after the condemning authority shall have taken possession), to terminate this Lease as of the date the condemning authority takes such possession. Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the rent and Lessee's Share of Operating Expenses shall be reduced in the proportion that the floor area of the Premises taken bears to the total floor area of the Premises. Common Areas taken shall be excluded from the Common Areas usable by Lessee and no reduction of rent shall occur with respect thereto or by reason thereof. Lessor shall have the option in its sole discretion to terminate this Lease as of the taking of possession by the condemning authority, by giving written notice to Lessee of such election within thirty (30) days after receipt of notice of a taking by condemnation of any part of the Premises or the Office Building Project. Any award for the taking of all or any part of the Premises or the Office Building Project under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any separate award for loss of or damage to Lessee's trade fixtures, removable personal property and unamortized tenant improvements that have been paid for by Lessee. For that purpose the cost of such improvements shall be amortized over the original term of this Lease excluding any options. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of severance damages received by Lessor in connection with such condemnation, repair any damage to the Premises caused by such condemnation except to the extent that Lessee has been reimbursed therefor by the condemning authority. Lessee shall pay any amount in excess of such severance damages required to complete such repair. 15. Brokers Fee. (a) The brokers involved in this transaction are Martin Properties, Inc. as "listing broker" and Century 21 "cooperating broker," licensed real estate broker(s). A "cooperating broker" is defined as any broker other than the listing broker entitled to a share of any commission arising under this Lease. 22 Upon execution of this Lease by both parties, Lessor shall pay to said brokers jointly. or In such separate shares as they may mutually designate in writing, a fee as set forth in a separate agreement between Lessor and said broker(s), or in the event there Is no separate agreement between Lessor and said broker(s), the sum of $ per separate agreement for brokerage services rendered by said brokers to Lessor in this transaction. (b) Lessor further agrees that (i) if Lessee exercises any Option, as defined in paragraph 39.1 of this Lease, which Is granted to Lessee under this Lease, or any subsequently granted option which is substantially similar to an Option granted to Lessee under this Lease, or (ii) If Lessee acquires any rights to the Premises or other premises described in this Lease which are substantially similar to what Lessee would have acquired had an Option herein granted to Lessee been exercised, or (iii) if Lessee remains in possession of the Premises after the expiration of the term of this Lease after having failed to exercise an Option, or (iv) if said broker(s) are the procuring cause of any other lease or sale entered into between the parties pertaining to the Premises and/or any adjacent property in which Lessor has an interest, or (v) if the Base Rent is increased, whether by agreement or operation of an escalation clause contained herein, then as to any of said transactions or rent increases, Lessor shall pay said broker(s) a fee in accordance with the schedule of said broker(s) in effect at the time of execution of this Lease. Said fee shall be paid at the time such increased rental is determined. (c) Lessor agrees to pay said fee not only on behalf of Lessor but also on behalf of any person, corporation, association. or other entity having an ownership interest in said real property or any part thereof, when such fee is due hereunder. Any transferee of Lessor's Interest In this Lease, whether such transfer Is by agreement or by operation of law, shall be deemed to have assumed Lessor's obligation under this paragraph 15. Each listing and cooperating broker shall be a third party beneficiary of the provisions of this paragraph 15 to the extent of their interest in any commission arising under this Lease and may enforce that right directly against Lessor; provided, however, that all brokers having a right to any part of such total commission shall be a necessary party to any suit with respect thereto. (d) Lessee and Lessor each represent and warrant to the other that neither has had any dealings with any person, firm, broker or finder (other than the person(s), If any, whose names are set forth In paragraph 15(a), above) in connection with the negotiation of this Lease and/or the consummation of the transaction contemplated hereby. and no other broker or other person, firm or entity Is entitled to any commission or finder's fee In connection with said transaction and Lessee and Lessor do each hereby indemnify and hold the other harmless from and against any costs, expenses, attorneys' fees or liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying party. 16. Estoppel Certificate. (a) Each party (as "responding party") shall at any time upon not less than ten (10) days' prior written notice from the other party ("requesting party") execute, acknowledge and deliver to the requesting party a statement in writing (i) certifying that this Lease is unmodified and In full force and effect (or, 23 if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the date to which the rent and other charges are paid in advance , if any, and (II) acknowledging that there are not, to the responding party's knowledge, any uncured defaults on the part of the requesting party, or specifying such defaults if any are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Office Building Project or of the business of Lessee. (b) At the requesting party's option, the failure to deliver such statement within such time shall be a material default of this Lease by the party who is to respond, without any further notice to such party, or it shall be conclusive upon such party that (i) this Lease is in full force and effect, without modification except as may be represented by the requesting party, (ii) there are no uncured defaults in the requesting party's performance, and (iii) if Lessor is the requesting party, not more than one month's rent has been paid in advance. (c) If Lessor desires to finance, refinance, or sell the Office Building Project, or any part thereof, Lessee hereby agrees to deliver to any lender or purchaser designated by Lessor such financial statements of Lessee as may be reasonably required by such lender or purchaser. Such statements shall include the past three (3) years' financial statements of Lessee. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes he rein set forth. 17. Lessor's Liability. The term "Lessor" as used herein shall mean only the owner or owners, at the time in question, of the fee title or a lessee's interest in a ground lease of the Office Building Project, and except as expressly provided in paragraph 15, in the event of any transfer of such title or interest, Lessor herein named (and in case of any subsequent transfers then the grantor) shall be relieved from and after the dale of such transfer of all liability as respects Lessor's obligations thereafter to be performed, provided that any funds in the hands of Lessor or the then grantor at the time of such transfer, in which Lessee has an interest, shall be delivered to the grantee. The obligations contained in this Lease to be performed by Lessor shall, subject as aforesaid, be binding on Lessor's successors and assigns, only during their respective periods of ownership. 18. Severabiity. The invalidity of any provision of this Lease as determined by a court of competent jurisdiction shall in no way affect the validity of any other provision hereof. 19. Interest on Post-due Obligations. Except as expressly herein provided, any amount due to Lessor not paid when due shall bear Interest at the maximum rate then allowable by law or judgments from the date due. Payment of such interest shall not excuse or cure any default by Lessee under this Lease; provided, however, that Interest shall not be payable on late charges incurred by Lessee nor on any amounts upon which late charges are paid by Lessee. 24 20. Time of Essence. Time 13 of the essence with respect to the obligations to be performed under this Lease. 21. Additional Rent. All monetary obligations of Lessee to Lessor under the terms of this Lease, including but not limited to Lessee's Share of Operating Expense and any other expenses payable by Lessee hereunder shall be deemed to be rent. 22. Incorporation of Prior Agreements; Amendments. This Lease contains all agreements of the parties with respect to any matter mentioned herein, No prior or contemporaneous agreement or understanding pertaining to any such matter shall be effective. This Lease may be modified in writing only, signed by the parties in interest at the time of the modification. Except as otherwise stated in this Lease, Lessee hereby acknowledges that neither the real estate broker listed in paragraph 15 hereof nor any cooperating broker on this transaction nor the Lessor or any employee or agents of any of said persons has made any oral or written warranties or representations to Lessee relative to the condition or use by Lessee of the Premises or the Office Building Project and Lessee acknowledges that Lessee assumes all responsibility regarding the Occupational Safety Health Act, the legal use and adaptability of the Premises and the compliance thereof with all applicable laws and regulations in effect during the term of this Lease. 23. Notices. Any notice required or permitted to be given hereunder shall be in writing and may be given by personal delivery or by certified or registered mail, and shall be deemed sufficiently given if delivered or addressed to Lessee or to Lessor at the address noted below or adjacent to the signature of the respective parties, as the case may be. Mailed notices shall be deemed given upon actual receipt at the address required, or forty-eight hours following deposit in the mail, postage prepaid, whichever first occurs. Either party may by notice to the other specify a different address for notice purposes except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for notice purposes. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by notice to Lessee. 24. Waivers. No waiver by Lessor of any provision hereof shall be deemed a waiver of any other provision hereof or of any subsequent breach by Lessee of the same or any other provision. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to or approval of any subsequent act by Lessee. The acceptance of rent hereunder by Lessor shall not be a waiver of any preceding breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted, regardless of Lessor's knowledge of such preceding breach at the time of acceptance of such rent. 25. Recording. Either Lessor or Lessee shall, upon request of the other. execute, acknowledge and deliver to the other a "short form" memorandum of this Lease for recording purposes. 25 26. Holding Over. If Lessee, with Lessor's consent, remains in possession of the Premises or any part thereof after the expiration of the term hereof, such occupancy shall be a tenancy from month to month upon all the provisions of this Lease pertaining to the obligations of Lessee, except that the rent payable shall be one hundred ten percent (110%)of the rent payable immediately preceding the termination date of this Lease, and all Options, If any, granted under the terms of this Lease shall be deemed terminated and be of no further effect during said month to month tenancy. 27. Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. Covenants and Conditions. Each provision of this Lease performable by either party shall be deemed both a covenant and a condition. 29. Binding Effect; Choice of Law. Subject to any provisions hereof restricting assignment or subletting by Lessee and subject to the provisions of paragraph 17, this Lease shall bind the parties, their personal representatives, successors and assigns. This Lease shall be governed by the laws of the States where the Office Building Project is located and any litigation concerning this Lease between the parties hereto shall be initiated In the county in which the Office Building Project is located. 30. Subordination. (a) This Lease, and any Option or right of first refusal granted hereby, at Lessor's option, shall be subordinate to any ground lease, mortgage, deed of trust, or any other hypothecation or security now or hereafter placed upon the Building and to any and all advances made on the security thereof and to all renewals, modifications, consolidations, replacements and extensions thereof. Notwithstanding such subordination, Lessee's right to quiet possession of the Premises shall not be disturbed it Lessee is not in default and so long as Lessee shall pay the rent and observe and perform all of the provisions of this Lease, unless this Lease is otherwise terminated pursuant to its terms. If any mortgagee, trustee or ground lessor shall elect to have this Lease and any Options granted hereby prior to the lien of its mortgage, deed of trust or ground lease, and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such mortgage, deed of trust or ground lease, whether this Lease or such Options are dated prior or subsequent to the date of said mortgage, deed of trust or ground lease or the date of recording thereof. (b) Lessee agrees to execute any documents required to effectuate an attornment, a subordination, or to make this Lease or any Option granted herein prior to the lien of any mortgage, deed of trust or ground lease, as the case may be. Lessee's failure to execute such documents within ten (10) days after written demand shall constitute a material default by Lessee hereunder without further notice to Lessee or, at Lessor's option, Lessor shall execute such documents on behalf of Lessee as Lessee's attorney-in-fact. Lessee does hereby make, constitute and irrevocably appoint Lessor as Lessee's attorney-in-fact and in 26 Lessee's name, place and stead, to execute such documents in accordance with this paragraph 30(b). 31. Attorneys' Fees. 31.1 If either party or the broker(s) named herein bring an action to enforce the terms hereof or declare rights hereunder, the prevailing party in any such action, trial or appeal thereon, shall be entitled to his reasonable attorneys' fees to be paid by the losing party as fixed by the court In the same or a separate suit, and whether or not such action is pursued to decision or judgment. The provisions of this paragraph shall inure to the benefit of the broker named herein who seeks to enforce a right hereunder 31.2 The attorneys' fee award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred in good faith. 31.3 Lessor shall be entitled to reasonable attorneys' fees and all other costs and expenses incurred in the preparation and service of notices of default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such default. 32. Lessor's Access. 32.1 Lessor and Lessor's agents shall have the right to enter the Premises at reasonable times for the purpose of Inspecting the same, performing any services required of Lessor, showing the same to prospective purchasers, lenders, or lessees, taking such safety measures, erecting such scaffolding or other necessary structures, making such alterations, repairs, improvements or additions to the Premises or to the Office Building Project as Lessor may reasonably deem necessary or desirable and the erecting, using and maintaining of utilities, services, pipes and conduits through the Premises and/or other premises as long as there is no material adverse effect to Lessee's use of the Premises. Lessor may at any time place on or about the Premises or the Building any ordinary "For Sale" signs and Lessor may at any time during the last 120 days of the term hereof place on or about the Premises an ordinary "For Lease" signs. 32.2 All activities of Lessor pursuant to this paragraph shall be without abatement of rent, nor shall Lessor have any liability to Lessee for the same. 32.3 Lessor shall have the right to retain keys to the Premises and to unlock all doors in or upon the Premises other than to files, vaults and safes, and in 27 the case of emergency to enter the Premises by any reasonably appropriate means, and any such entry shall not be deemed a forceable or unlawful entry or detainer of the Premises or an eviction. Lessee waives any charges for damages or injuries or interference with Lessee's property or business in connection therewith. 33. Auctions. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises or the Common Areas without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. The holding of any auction on the Premises or Common Areas in violation of this paragraph shall constitute a material default of this Lease. 34. Signs. Lessee shall not place any sign upon the Premises or the Office Building Project without Lessor's prior written consent. Under no circum- stances shall Lessee place a sign on any roof of the Office Building Project. 35. Merger. The voluntary or other surrender of this Lease by Lessee, or a mutual cancellation thereof, or a termination by Lessor, shall not work a merger, and shall, at the option of Lessor, terminate all or any existing subtenancies or may, at the option of Lessor, operate as an assignment to Lessor of any or all of such subtenancies. 36. Consents. Except for paragraphs 33 (auctions) and 34 (signs) hereof, wherever in this Lease the consent of one party is required to an act of the other party such consent shall not be unreasonably withheld or delayed. 37. Guarantor. In the event that there is a guarantor of this Lease, said guarantor shall have the same obligations as Lessee under this Lease. 38. Quiet Possession. Upon Lessee paying the rent for the Premises and observing and performing all of the covenants, conditions and provisions on Lessee's part to be observed and performed hereunder, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. The individuals executing this Lease on behalf of Lessor represent and warrant to Lessee that they are fully authorized and legally capable of executing this Lease on behalf of Lessor and that such execution is binding upon all parties holding an ownership interest in the Office Building Project. 39. Options. 28 39.1 Definition. As used in this paragraph the word "Option" has the following meaning: (1) the right or option to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (2) the option or right of first refusal to lease the Premises or the right of first offer to lease the Premises or the right of first refusal to lease other space within the Office Building Project or other property of Lessor or the right of first offer to lease other space within the Office Building Project or other property of Lessor; (3) the right or option to purchase the Premises or the Office Building Project, or the right of first refusal to purchase the Premises or the Office Building Project or the right of first offer to purchase the Premises or the Office Building Project, or the right or option to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor or the right of first offer to purchase other property of Lessor. 39.2 Options Personal. Each Option granted to Lessee In this Lease is personal to the original Lessee and may be exercised only by the original Lessee while occupying the Premises who does so without the intent of thereafter assigning this Lease or subletting the Premises or any portion thereof, and may not be exercised or be assigned, voluntarily or involuntarily, by or to any person or entity other than Lessee; provided, however, that an Option may be exercised by or assigned to any Lessee Affiliate as defined in paragraph 12.2 of this Lease. The Options, if any, herein granted to Lessee are not assignable separate and apart from this Lease, nor may any Option be separated from this Lease in any manner, either by reservation or otherwise. 39.3 Multiple Options. In the event that Losses has any multiple options to extend or renew this Lease a later option cannot be exercised unless the prior option to extend or renew this Lease has been so exercised. 39.4 Effect of Default on Options. (a) Lessee shall have no right to exercise an Option, notwithstanding any provision In the grant of Option to the contrary, (i) during the time commencing from the date Lessor gives to Lessee a notice of default pursuant to paragraph 13.1 (c) or 13.1 (d) and continuing until the noncompliance alleged in said notice of default is cured. Or (ii) during the period of time commencing on the day after a monetary obligation to Lessor is due from Lessee and unpaid (without any necessity for notice thereof to Lessee) and continuing until the obligation is paid, or (iii) in the event that Lessor has given to Lessee three or more notices of default under paragraph 13.1(c), or paragraph 13.1(d), whether or not the defaults are cured, during the 12 month period of time immediately prior to the time that Lessee attempts to exercise the subject Option, (iv) if Lessee has committed any non-curable breach, including without limitation those described in paragraph 13.1(b), or is otherwise in default of any of the terms, covenants or conditions of this Lease. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's Inability to exercise an Option because of the provisions of paragraph 39.4(a). 29 (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease, (i) Lessee falls to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessee fails to commence to cure a default specified in paragraph 13.1 (d) within thirty (30) days after the date that Lessor gives notice to Lessee of such default and/or Lessee fails thereafter to diligently prosecute said cure to completion, (iii) Lessor gives to Lessee three or more notices of default under paragraph 13.1(c). or paragraph 13.1(d), whether or not the defaults are cured, or (iv) if Lessee has committed any non-curable breach, including without limitation those described in paragraph 13.1(b), or is otherwise in default of any of the terms, covenants and conditions of this Lease. 40. Security Measures-Lessor's Reservations. 40.1 Lessee hereby acknowledges that Lessor shall have no obligation whatsoever to provide guard service or other security measures for the benefit of the Premises or the Office Building Project. Lessee assumes all responsibility for the protection of Lessee, its agents, and Invitees and the property of Lessee and of Lessee's agents and invitees from acts of third parties. Nothing herein contained shall prevent Lessor, at Lessor's Sole option, from providing security protection for the Office Building Project or any part thereof, in which event the cost thereof shall be included within the definition of Operating Expenses, as set forth in paragraph 4.2(b). 40.2 Lessor shall have the following rights: (a) To change the name, address or title of the Office Building Project or building In which the Premises are located upon not less than 90 days prior written notice; (b) To, at Lessee's expense, provide and Install Building standard graphics on the door of the Premises and such portions of the Common Areas as Lessor shall reasonably deem appropriate; (c) To permit any lessee the exclusive right to conduct any business as long as such exclusive does not conflict with any rights expressly given herein; (d) To place such signs, notices or displays as Lessor reasonably deems necessary or advisable upon the root, exterior of the buildings or the Office Building Project or on Dole signs In the Common Areas: 40.3 Losses shall not: (a) Deleted 30 (b) Suffer or permit anyone, except In emergency, to go upon the roof of the Building. 41. Easements. 41.1 Lessor reserves to itself the right, from time to time, to grant such easements, rights and dedications that Lessor deems necessary or desirable, and to cause the recordation of Parcel Maps and restrictions, so long as such easements, rights, dedications, Maps and restrictions do not unreasonably Interfere with the use of the Premises by Lessee. Lessee shall sign any of the aforementioned documents upon request of Lessor and failure to do so shall constitute a material default of this Lease by Lessee without the need for further notice to Lessee. 41.2 The obstruction of Lessee's view, air, or light by any structure erected in the vicinity of the Building, whether by Lessor or third parties, shall in no way affect this Lease or impose any liability upon Lessor. 42. Performance Under Protest. If at any time a dispute shall arise as to any amount or sum of money to be paid by one party to the other under the provisions hereof, the party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment, and there shall survive the right on the part of said party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said party to pay such sum or any part thereof, said party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 43. Authority. If Lessee is a corporation, trust, or general or limited partnership, Lessee, and each individual executing this Lease on behalf of such entity, represent and warrant that such individual is duly authorized to execute and deliver this Lease on behalf of said entity If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after execution of this Lease, deliver to Lessor evidence of such authority satisfactory to Lessor. 44. Conflict. Any conflict between the printed provisions, Exhibits or Addenda of this Lease and the typewritten or handwritten provisions, It any, shall be controlled by the typewritten or handwritten provisions. 45. No Offer. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to Lessee to lease. This Lease shall become binding upon Lessor and Lessee only when fully executed by both parties. 46. Lender Modification. Lessee agrees to make such reasonable modifications to this Lease as may be reasonably required by an institutional lender in 31 connection with the obtaining of normal financing or refinancing of the Office Building Project. 47. Multiple Parties. It more than one person or entity is named as either Lessor or Lessee herein, accept as otherwise expressly provided herein, the obligations of the Lessor or Lessee herein shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee, respectively. 48. Deleted 49. Attachments. Attached hereto are the following documents which constitute a part of this Lease. See Addendum LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION RELATING THERETO: THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN LEGAL COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. LESSOR Martin Properties, Inc. By: (Signature of Rob Martin, President of Martin Properties) LESSEE Simulations Plus, Inc. By: (Signature of Walter S. Woltosz, President & CEO of Simulations Plus, Inc.) C 1984 American industrial Real Estate Association FULL SERVICE-NET 32 NOTE: These forms are often modified to meet changing requirements of law and needs of the industry. Always write or call to make sure you are utilizing the Most Current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 345 So. Figueroa St., M-1, Los Angeles, CA 90071. (213) 687-8777. 33 Addendum to Standard Office Lease - Net AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION In conjunction with the Standard Office Lease - Net dated May 14, 1998 by and between MARTIN PROPERTIES, INC., as the Lessor and, SIMULATIONS PLUS. INC., as the Lessee, the following terms and conditions are hereby incorporated and made part of said lease: 50. POSSESSION: The premises shall be delivered to the Lessee on or before July 1, 1998. Lessee and Lessor shall execute an amendment to this lease establishing the date of Tender of Possession or the actual taking of possession by Lessee. Tenant shall have two months of free rent regardless of the possession date. The lease shall be for thirty-six (36) months from the rental commencement date. 51. RENT PAYMENTS & NOTIFICATIONS: Accordance with paragraph 1.6, commencing on September 1st, 1998 and on the 1st day of each subsequent month without demand from Lessor, Lessee agrees to mail or deliver the rent payments to the following address: MARTIN PROPERTIES, INC. 5655 Lindero Canyon Road, Suite 603 Westlake Village, CA 91362 52. BASE RENT AND INCREASES: Monthly Base Rent for the Lease Term will be as follows: Year 1 $10,000 per month $.64 S.F. NNN Year 2 $10,920 per month $.70 S.F. NNN Year 3 $11,700 per month $.75 S.F. NNN Lessee shall be responsible for all utilities and services that are separately metered to their space and shall pay their pro-rata share of the common area maintenance expenses, real estate taxes and insurance. 53. OPTION TO RENEW: Provided that Lessee Is not then in default of any of the terms, covenants or conditions of the Lease, Lessee shall be provided two (2) two (2) year Options to Renew term by providing Lessor with not less than three (3) months prior written notice of its intention to exercise these options. All other terms shall remain the same. The base Rent shall increase four (4) per cent per annum. 34 54. TENANT IMPROVEMENTS: Lessee is solely responsible for any and all costs for tenant improvement work required (if any) for its occupancy in the premises, following those guidelines set forth in paragraph 7. Lessee shall have the right to construct at Lessee's sole cost and expense any additional Tenant Improvements in the premises with Lessor's prior consent, said consent not to be unreasonable withheld or delayed. Lessee warrants to Lessor that any such Tenant Improvements initially or subsequently constructed in the premises will conform to the applicable building and safety codes of the City of Lancaster. Lessee shall apply and obtain a building permit for said Tenant Improvements if one is required. 55. CONDITION OF THE PREMISES AND REPAIRS: Lessor shall deliver HVAC system, plumbing and electrical in working order and shall warrant these systems for a period of 90 days from the delivery date. Lessor shall repair defective and missing floor tiles and roof shall be free of leaks and warrant same for the term of the lease in accordance with paragraph 6.3, Lessee is aware and has read those provisions contained in paragraphs 7 and 9, and understands Lessor's obligations for repair and maintenance extend to the structural portions of the premises only. Lessee is responsible for any and all repairs required within the interior of the leased premises during its occupancy in the Premises, other than structural elements contained therein. Lessor to repair and paint holes in walls where sinks/cabinets were removed prior to Lessee's occupancy of the building. 56. SIGNAGE: Notwithstanding paragraph 34, page 8 of the lease, Lessee, at Lessee's sole cost may install a sign on the leased premises which follows those guidelines set forth by the City of Lancaster's Code and the standards for Centerpoint Business Park. 57. ADA: Please be advised that an owner or Lessee of real property may be subject to the Americans With Disabilities Act (the ADA), a Federal law codified at 42 USC Section 12101 et. seq. Requirements of the ADA that could apply to your property include Title III. Title III requires owners and tenants of "public accommodations" to remove barriers to access by disabled persons and to provide auxiliary aids and services for vision or speech impaired persons by January 26, 1992. The regulations under Title III of the ADA are codified at 28 CFR Part 36. We recommend that you and your attorney review the ADA and the regulations, and, if appropriate, your proposed lease or purchase agreement, to determine if this law would apply to you, and the nature of the requirements. These are legal issues. You are responsible for conducting your own independent investigation of these issues, and Lessor and Brokers shall be held harmless and indemnified from the impacts on Lessee's business and use within the Premises. 35 58. COMPLIANCE WITH ENVIRONMENTAL LAW: Lessee hereby represents, warrants, covenants and agrees with Lessor, as follows: Lessee agrees that it will not intentionally permit the use, generation, manufacture, disposal or storage of any toxic and/or "Hazardous Materials" in, on and/or around the Leased premises now or at any future time. For the purposes of this Lease, "Hazardous Materials" shall include, but shall not be limited to, any substances, material or waste which is or becomes regulated by any state or local governmental or quasi-governmental authority, or by the United States government, or any agency thereof, including but not limited to the United States Environmental Protection Agency (collectively referred to herein as the "Governmental Authorities"). Notwithstanding the representations set forth in subparagraph above, Lessor, and Lessee acknowledge and agree that should Lessee use, store or maintain materials in the ordinary course of Lessee's business operations, which constitute Hazardous Materials, Lessee will: Obtain all required licenses, permits and other necessary agreements with respect to the permitted Materials from all applicable Governmental Authorities before using, storing or maintaining such materials in or about the Leased Premises, and; Lessee shall comply with all laws, statutes, ordinances, regulations, rules, court or administrative orders or decrees, licenses or permits, ("The Applicable Laws") of all applicable Governmental Authorities with respect to the Permitted Materials; and; Lessee shall maintain detailed and accurate books and records of receipt and disposal of the Permitted Material on the Leased Premises in accordance with the general standards of the industry in which Lessee operates, and such books and records shall account for and shall reveal no discrepancies between the receipt and disposal of such Permitted Materials; and Lessee shall immediately notify Lessor of any notice from any Governmental Authority received by lessee, or if Lessor should have reason to believe, that the Permitted Materials are being used, or stored in violation of Applicable Laws, or that there are hazardous materials other than the Permitted materials affecting any all or any portion of the Leased Premises. Lessee shall thereafter immediately commence, at its sole expense, all remedial action necessary to eradicate the violations and to bring the Leased Premises in full compliance with all Applicable Laws, and shall diligently pursue to completion such necessary actions. In order to verify Lessee's compliance with this section, Lessor, at any time after receipt of notice of a violation of any Applicable Laws, may contract for the services of persons to perform environmental site assessments on the Leased Premises at Lessor's expense, to be performed at any time or times upon reasonable notice, and under reasonable conditions. Lessor shall have the option to require specific performance of Lessee's obligations hereunder. Lessee hereby indemnities and holds Lessor and lessor's 36 Lender harmless from and against any loss, liability, cost expense, penalty, litigation, demand, defense, action, proceeding or disbursement (including reasonable attorneys' fees) which may be imposed upon Lessor in connection with the use or storage of the Permitted Materials, or which may result in connection with Materials other than the Permitted Materials, as they relate to the leased Premises or any surrounding areas. It is expressly agreed and understood that upon Lessee's vacation of the Leased Premises, Lessee, at Lessee's expense, shall leave the leased Premises "environmentally clean", as when delivered to Lessee. 59. SUBJECT TO LESSOR ACQUIRING TITLE: Lessee is aware that Lessor is currently in escrow to purchase the subject property and this lease is subject to Lessor acquiring title to the subject property. Should Lessor not obtain title to the subject property by July 30, 1998 than this lease shall be null and void and both parties shall mutually release each party from any obligation or claim. 60. RENT PAID UPON EXECUTION AND SECURITY DEPOSIT: Shall be paid to Century 21 and shall be deposited into their trust account, and shall be paid to Lessor upon close of escrow. Should escrow fail to close by July 30, 1998 then deposits shall be returned to Lessee. 61. Lessee hereby accepts the premises, subject to all applicable zoning, municipal, county and state laws, ordinances and regulations governing and regulating the use of the premises. Lessor and Lessee acknowledge that they have reviewed the Covenants, Conditions, and Restrictions of Centerpoint Business Park, and believe the Lessee's intended use of the premises does not conflict with said Covenants, Conditions and Restrictions. However, should legal actions be brought against Lessee by any of the owners or occupants of Centerpoint Business Park, which legal action results in a final judgement that interferes with Lessee's uses and occupancy of the premises, then Lessee shall be relieved of any further obligation to Lessor under the said Lease Agreement, and the Lease shall be of no further force and effect. Under such circumstances, Lessor shall pay to Lessee an amount equal to Lessee's cost expended in leasehold improvements (but not trade fixtures) with respect to the premises multiplied by a fraction, the numerator of which is the number of months which Lessee has occupied the premises, and the denominator of which is the total number of months of the Lease term. Lessee shall provide to Lessor a detailed list of the proposed leasehold improvements within ten (10) days from the execution of the Lease. Lessor shall have three business days to approve said improvements. Upon completion of the leasehold improvements, Lessee shall provide Lessor with a detailed schedule of all the costs supported by invoices therefor. Attachments: 37 Exhibit 'A' Site Plan Exhibit 'B' Floor Plan Exhibit 'C' Rules and Regulations Exhibit 'D' Sign Criteria "LESSEE" SIMULATIONS PLUS, INC. By: Walter S. Woltosz Its President and CEO "LESSOR" MARTIN PROPERTIES, INC. By: Rob Martin Its President. 38 9. Landlord will have the right to approve where and how telephone wires are to be Introduced. No boring or cutting for wires or any kind will be allowed without the consent or Landlord. The location of telephone, call boxes and other equipment affixed to the Premises shall be subject to the approval of Landlord. 10. No Tenant shall lay linoleum, tile, carpet or other similar Floor covering so that the same shall be affixed to the floor of the Premises in any manner except as approved by the Landlord. The expenses of repairing any damage resulting from any violation of this rule shall be borne by the Tenant by whom, or by whose contractors, employees or invitees, the damage shall have been caused. 11. Deleted 12. No Tenant shall make, or permit to be made any unseemly or disturbing noises or disturb or Interfere with occupants of neighboring buildings or Premises or those having business within them whether by the use of musical instruments, radio, phonograph, unusual noise, or in any other way. No Tenant shall throw anything out of doors, windows or skylight or down the passage ways. 13. No Tenant nor any Tenant's servants, employees agents, visitors or licensees, shall at any time bring or keep upon the Premises any inflammable, combustible or, explosive fluid, chemical or substance, except for ordinary office supplies and small quantities of cleaning fluids and glues used in light electronic assembly. 14. Landlord reserves the right to exclude or expel from the Building any person who, in the judgment of Landlord is intoxicated or under the influence of liquor or drugs, or who shall in any manner do any act in violation of any of the rules and regulations of the Building. 15. The requirements Of Tenant will be attended to only upon application at the office of the Landlord. Employees of Landlord shall not perform any work or do anything outside of their regular duties unless under special instructions from the Landlord and no employee shall admit any person (Tenant or other wise) to any office without specific instructions from the Landlord. 16. Landlord shall have the right, exercisable without notice and without liability to Tenant, to change the name and the street address of the Building of which the Premises are a part. 17. The word "Building" as used herein means the building of which the Premises are a part. 39 18. Landlord reserves the right to make such other and further rules and regulations as in its judgement may be for the safety, care and cleanliness of the Premises and for the preservation of good order therein. Tenant agrees to abide by all such additional rules and regulations which are adopted. 19. No air conditioning unit or similar apparatus shall be installed or used by Tenant without the written consent of Landlord. 20. No vending machines shall be installed, maintained or operated on the Premises without the written consent of the Landlord. 21. Deleted 22. Canvassing, soliciting and peddling in the building are prohibited and each Tenant shall cooperate to prevent the same. 23. Deleted 24. Deleted 40 SIGN CRITERIA FOR OFFICE/SHOP BUILDING TENANTS/OWNERS LOCATED IN CENTERPOINT BUSINESS PARK LANCASTER, CALIFORNIA LHA JOB NO. 8643 NOVEMBER 20, 1990 DEVELOPER MOORE DEVELOPMENT CORPORATION 1575 SPINNAKER DRIVE, SUITE 204 VENTURA, CALIFORNIA 93008 (805) 650-8910 ARCHITECT LEIDENPROST/HOROWITZ, AIA & ASSOCIATES 1833 S. VICTORY BOULEVARD GLENDALE, CALIFORNIA 91505 (818) 246-6050 Subject to City of Lancaster's Approval 41 SIGN CRITERIA These criteria have been established for the purpose of assuring an outstanding business park, and for the mutual benefit of all tenants. Conformance will be strictly enforced and any installed non-conforming or unapproved signs must be brought into conformance at the expense of the tenant. A. GENERAL REQUIREMENTS 1. Each tenant shall submit or cause to be submitted to the Landlord/Developer for approval before fabrication at least four copies of detailed drawings indicating the location, size, layout, design and color of the proposed signs, including all lettering and/or graphics. The tenant shall submit or cause to be submitted to the City of Lancaster, Department of Community Development, three (3) copies of the Landlord approved and signed drawings for review and approval before fabrication and installation. 2. All permits for signs and their installation shall be obtained by the tenant or tenant's representative prior to installation. 3. Tenant shall be responsible for the fulfillment of all requirements and specifications. 4. All signs shall be constructed and installed at tenant's expense. 5. All signs shall be reviewed by the Landlord/Developer and his designed Project Architect for conformance with this criteria and overall design quality. With this Approval or disapproval of sign submittals based on aesthetics of design shall remain the sole right of the Landlord/Developer. 6. Tenant's sign contractor to be responsible for obtaining all required City Approvals. 7. All signs shall be installed no later than 30 days following the date tenant opens for business. 8. Tenant shall repair all damage made by installation and/or removal of all signs. 9. Tenant shall keep all signs in good repair and all electrified signs fully illuminated (as to operating condition) and in good working order and shall promptly repair or replace any broken or damaged sign surfaces, enclosures, and electrical parts. 42 SIGN CRITERIA Page 2 of 4 B. GENERAL SPECIFICATIONS 1. Tenant signs will be as shown on the attached detail sheet drawings. 2. No audible, flashing, animated, or Neon type (except for "open" window sign) signs will be permitted. 3. No projections above or below the sign panel will be permitted. Sign must be within dimensional limits as indicated on the attached drawings. 4. All wall signs shall be internally illuminated and the source of illumination shall not be visible. 5. Style of letter other than that detailed may be permitted after written approval by Landlord/Developer and governing agency. 6. Under-canopy signs: None. 7. Tenant shall be responsible for the installation and maintenance of all signs. 8. Wording of signs shall not include the product sold except as part of the tenant's trade name or insignia unless approved by Landlord/Developer and governing agency. 9. Where applicable, width of tenant's fascia sign shall not exceed 70% of width of the office of storefront except where office or storefront is 16 feed or less. In such case 75% maximum is allowable on buildings with sign type E, the sign shall not exceed 10 feet in length. Building L and H shall be permitted no more than four fascia signs per building. All other buildings will be permitted no more than two fascia signs per building. 10. Letters on building "G", "E", "A", "L" (north face), shall be a maximum of 24 inches in height. All other buildings shall be allowed a maximum letter height of 18 inches. 11. All tenant signs on building G, E, A, L (north face) shall be of a color chosen by tenant and approved by Landlord/Developer and governing agency. All other building fascia signs shall be constructed in accordance with sign type "C" in the color of blue chosen by Landlord/Developer. 43 SIGN CRITERIA Page 3 of 4 12. Electrical service to all, signs where necessary will be connected to tenant's meter. 13. All lettering on monument signs shall be black block letters. 14. With the exception of building "L", no one tenant shall be allowed two different sign types. C. CONSTRUCTION REQUIREMENTS 1. Letter fastening and clips are to be concealed with stucco and be of galvanized, stainless steel aluminum, brass or bronze metals. Letters may be attached with approved adhesives. 2. No labels will be permitted on the exposed surface of signs, except those required by local ordinance which shall be placed in an inconspicuous location. 3. Where applicable, tenants shall have identification signs designed in a manner compatible with and complimentary to adjacent and facing office or storefronts and the overall design concept of the park. 4. Design, layout and materials for tenants' signs shall conform in all respects with the sign design drawings included with this criteria. The maximum height for letters in the body of the sign shall be as indicated in these documents. 5. All monument signs to be finished with stucco, and have non-illuminated block letters in accordance with "Sign B". 6. All penetrations of the building structure required for sign installation shall be sealed in a water-tight condition and shall be patched to match adjacent finish. D. MISCELLANEOUS REQUIREMENTS 1. Each tenant shall be permitted to place upon each entrance of its demised premises not more than 144 square inches of gold leaf or decal application lettering not to exceed two inches in height, indicating hours of business, emergency telephone numbers, etc. 44 SIGN CRITERIA Page 4 of 4 2. Except as provided herein, no advertising placards, banners, pennants, names, insignia, trademarks, or other descriptive material shall be affixed or maintained upon the glass panes and supports of the show windows and doors, or upon the exterior walls of buildings without the written previous approval of the Landlord and the City of Lancaster. 3. Each tenant who has a non-customer door for receiving merchandise may have uniformly applied on said door the tenant's name and address, in three (3) inch high block letters, as directed by the Landlord/Developer. Where more than one tenant uses the same door, each name and address shall be applied. Colors of letters shall match Ameritone Black. No other rear entry signs shall be permitted. 4. Contractors installing signs are to be State registered contractors and are to have a current City business license. E. INDIVIDUAL TENANT IDENTIFICATION WINDOW SIGNS 1. Location: On the right of left side of main entrance to tenant's space, no higher than eye level. 2. Hand painted white Helveticia letters with a six inch maximum letter height. 3. Submit to Landlord/Developer for approval. 4. Not to exceed four feet in length. EX-10.28 5 EXHIBIT 10.28 1 EXHIBIT 10.28 SOFTWARE OEM AGREEMENT FOR ASSISTIVE MARKET DEVELOPER BETWEEN DIGITAL EQUIPMENT CORPORATION and WORDS +, INC. for DECtalk Access32 Software Windows 95/NT AGREEMENT # QR-CLAM2-61 EFFECTIVE DATE 10/15/97 TABLE OF CONTENTS PREAMBLE ARTICLE 1: DEFINITIONS ARTICLE 2: TITLE AND LICENSE GRANTS ARTICLE 3: COMPENSATION ARTICLE 4: RECORDS AND ROYALTY PAYMENTS Page 1 2 ARTICLE 5: DISCLAIMER OF WARRANTIES ARTICLE 6: INTELLECTUAL PROPERTY INDEMNIFICATION ARTICLE 7: LIMITATION OF LIABILITY ARTICLE 8: TERM AND TERMINATION ARTICLE 9: PUBLICITY ARTICLE 10: QUALITY CONTROL ARTICLE 11: GENERAL APPENDIX A: DISTRIBUTION SOFTWARE/LICENSE FEES APPENDIX B: DISTRIBUTION DOCUMENTATION APPENDIX C: END USER AGREEMENT APPENDIX D: LEGAL REQUIREMENTS FOR RESELLER AGREEMENT APPENDIX E: GUIDELINES FOR USING DECtalk TRADEMARK APPENDIX F: QUARTERLY ACTIVITY/FEE REPORT Software OEM Agreement for Assistive Market Developer between DIGITAL EQUIPMENT CORPORATION and WORDS +, INC. This Software OEM Agreement, 10/15/1997, (the "Effective Date") is entered into by and between Digital Equipment Corporation, a Massachusetts corporation with principal offices at 111 Powdermill Road, Maynard, Massachusetts, 01754 ("DIGITAL") and Words +, Inc. 40015 Sierra Highway Building B-145 Palmdale, CA. 93550 ("SOFTWARE OEM") WHEREAS, DIGITAL has developed a proprietary speech synthesis technology and related software, known as DECtalk Access32; WHEREAS, SOFTWARE OEM has acquired the standard DECtalk Access32 software developers kit from DIGITAL which includes a separate license agreement with DIGITAL ("END USER SOFTWARE LICENSE AGREEMENT"), which permits evaluation of DIGITAL'S DECtalk Access32 software for, potential use in conjunction with SOFTWARE OEM's internally developed assistive Page 2 3 applications for visually or vocally impaired individuals; WHEREAS, such END USER SOFTWARE LICENSE AGREEMENT does not permit SOFTWARE OEM to distribute DECtalk Access32 software with such assistive applications; and WHEREAS, SOFTWARE OEM desires to obtain a non-exclusive right to distribute DECtalk Access32 software only for use as a component of SOFTWARE OEM's assistive applications, NOW THEREFORE, in consideration of the mutual promises and covenants contained herein, DIGITAL and SOFTWARE OEM agree as follows: ARTICLE I - DEFINITIONS As used in this Software OEM Agreement, the following terms shall have the meanings set forth below: 1.01 DIGITAL'S INTELLECTUAL PROPERTY RIGHTS shall mean DIGITAL's rights in its text to speech synthesis technology and DECtalk Access32 Version 2.0 software, and future versions of DECtalk Access32 software, if and when they are made commercially available by DIGITAL, including: 1.01.01 All rights, title and interests in all Letters Patent, including any re-issue, division, continuation or continuation-in-part applications throughout the world now or hereafter filed; 1.01.02 All rights, title and interests in all DECtalk trademarks, and trademark rights arising under common law, state law, federal law and laws of foreign countries; Page 3 4 1.01.03 All rights, title and interests in all copyrights and all other literary property and author rights, whether or not copyrightable, throughout the world. 1.02 DISTRIBUTION SOFTWARE shall mean DIGITAL'S DECtalk Access32 Version 2.0 software for the Windows NT/95 operating system files identified in Appendix A. 1, including any future versions of such DECtalk Access32 software, if and when they become commercially, available by DIGITAL, and any part or any derivatives of such operating system and future versions thereof. 1.03 DISTRIBUTION DOCUMENTATION shall mean the documents identified in Appendix B, or any part thereof, or any derivatives thereof 1.04 ASSISTIVE APPLICATION shall mean (1) a screen access system employing a mechanical, electronic or voice input mechanism and integrated speech output mechanism specially designed for use by a visually or reading impaired individual to allow eyes-free audio output of text-based and written information; or (2) a voice output communication aid device that provides a data entry input mechanism and an integrated speech output mechanism specially designed to allow vocally impaired individuals a means to orally communicate with other individuals. 1.05 COPY PROTECTION METHOD shall mean a method whereby SOFTWARE OEM prohibits the unauthorized copying of DISTRIBUTION SOFTWARE. 1.06 SHARED MEMORY INITIALIZATION TECHNIQUE (SMIT) shall mean a SOFTWARE OEM created routine incorporated into its ASSISTIVE APPLICATION which shall create and initialize a shared-memory section for DECtalk Access32 software that shall include a unique encrypted identifier, provided by DIGITAL, and which functions to unlock DECtalk Access32 and allow it to be used by the END USER. 1.07 END USER shall mean a third party authorized by SOFTWARE OEM to use DISTRIBUTION SOFTWARE and DISTRIBUTION DOCUMENTATION solely as a component of SOFTWARE OEM's ASSISTIVE APPLICATION and only for the END USER's own internal operation with no right to distribute to others. Page 4 5 1.08 RESELLER shall mean a party authorized by SOFTWARE OEM to transfer SOFTWARE OEM'S ASSISTIVE APPLICATION, including DISTRIBUTION SOFTWARE or DISTRIBUTION DOCUMENTATION as a component thereof, directly or indirectly to an END USER without adding value to or changing DISTRIBUTION SOFTWARE in any way. 1.09 END USER AGREEMENT shall mean the agreement between SOFTWARE OEM and an END USER or between RESELLER and an END USER, a copy of which is provided in Appendix C. 1.10 RESELLER AGREEMENT shall mean an agreement between SOFTWARE OEM and a RESELLER, which incorporates all of the requirements listed in Appendix D. 1.11 TRADE shall mean DIGITAL's "DECtalk" trademark. ARTICLE 2 - TITLE AND LICENSE GRANTS 2.01 Subject to the limited non-exclusive rights granted to SOFTWARE OEM as expressly set forth in this Article 2, DIGITAL owns and shall retain all rights, title and interests in DIGITAL's INTELLECTUAL PROPERTY RIGHTS, DECtalk Access32 software, DISTRIBUTION SOFTWARE, and DISTRIBUTION DOCUMENTATION. 2.02 Subject to the payment of the royalties set forth in Article 4, DIGITAL grants to SOFTWARE OEM a non-exclusive, non-transferable, revocable license under DIGITAL's INTELLECTUAL PROPERTY RIGHTS, to: 2.02.01 copy DISTRIBUTION SOFTWARE in object form only within SOFTWARE OEM's own facilities, provided that the SHARED MEMORY INITIALIZATION TECHNIQUE is implemented within SOFTWARE OEM's ASSISTIVE APPLICATIONS and an approved COPY PROTECTION METHOD is operative; Page 5 6 2.02.02 have copied DISTRIBUTION SOFTWARE in object form only and only by an authorized agent of SOFTWARE OEM, provided that the SHARED MEMORY INITIALIZATION TECHNIQUE is implemented within SOFTWARE OEM's ASSISTIVE APPLICATIONS and an approved COPY PROTECTION METHOD is operative; 2.02.03 copy DISTRIBUTION DOCUMENTATION in full or in part as required to meet END USER requirements; 2.02.04 distribute DISTRIBUTION SOFTWARE and DISTRIBUTION DOCUMENTATION worldwide directly to END USERs only as a component of SOFTWARE OEM's ASSISTIVE APPLICATION, provided each of such END USERS enters into an END USER AGREEMENT; 2.02.05 distribute DISTRIBUTION SOFTWARE and DISTRIBUTION DOCUMENTATION worldwide directly to RESELLERs only as a component of SOFTWARE OEM's ASSISTIVE APPLICATION and indirectly to END USERs, provided that the SOFTWARE OEM has entered into a RESELLER AGREEMENT with the RESELLER and the END USER enters into an END USER AGREEMENT; 2.02.06 use the TRADEMARK in the marketing and distribution of DISTRIBUTION SOFTWARE and DISTRIBUTION DOCUMENTATION but only in accordance with Appendix E and Article 9. 2.03 The license grant in Article 2.02 is not effective until: (1) SOFTWARE OEM's COPY PROTECTION METHOD, and any subsequent changes thereto, are evaluated by DIGITAL and SOFTWARE OEM receives written approval to use COPY PROTECTION METHOD from DIGITAL; (2) SOFTWARE OEM has incorporated COPY PROTECTION METHOD into its ASSISTIVE APPLICATION; and (3) SOFTWARE OEM has incorporated the SHARED MEMORY INITIALIZATION TECHNIQUE into its ASSISTIVE APPLICATION. ARTICLE 3 - COMPENSATION 3.01 In consideration of the rights granted to SOFTWARE OEM by DIGITAL Page 6 7 under this Software OEM Agreement SOFTWARE OEM shall pay DIGITAL the License Fees specified in Appendix A.2. 3.02 All payments due hereunder shall be made in United States dollars and without deduction for taxes, assessments, or other charges of any kind attributable to either party which may be imposed on either party by any government in any country in which SOFTWARE OEM is distributing DISTRIBUTION SOFTWARE or DISTRIBUTION DOCUMENTATION. ARTICLE 4 - RECORDS AND ROYALTY PAYMENTS 4.01 SOFTWARE OEM shall make and retain true and accurate records, files, and books of account containing all data required for full computation and verification of the amounts to be paid under this Software OEM Agreement for a period of at least five years after creation of each record. SOFTWARE OEM shall permit the audit of the records, files, and books of accounts once during any calendar year during normal business hours by an auditor mutually agreed upon between SOFTWARE OEM and DIGITAL, upon thirty (30) days written notice. Such auditor shall not disclose to DIGITAL any information other than that relating solely to the correctness of, or that is necessary for, the report and payments to be made to DIGITAL pursuant to this Software OEM Agreement. Any such audit shall be done at DIGITAL's expense, unless the results of such audit establishes that inaccuracies in SOFTWARE OEM's quarterly reports have resulted in underpayments of fees for any year by more than five percent (5%) of the amount actually due, in which case SOFTWARE OEM shall bear the expense of the audit and additional fees owed. 4.02 Within thirty (30) days following the end of each calendar quarter, SOFTWARE OEM shall pay DIGITAL the License Fees as specified in Appendix A.2. SOFTWARE OEM shall submit a quarterly report in the format shown in Appendix F, along with the payment due, if any, attached. 4.03 All fees and reports shall be mailed by SOFTWARE OEM to: U.S. Cash Applications Digital Equipment Corporation 100 Nagog Park Page 7 8 Acton, MA. 01720 ATTN.: A/R Accounting Manager with copies of reports and checks sent to DIGITAL's contact persons at the addresses identified in Article 10.04. 4.04 SOFTWARE OEM shall pay interest to DIGITAL from the payment due date to the actual date of payment upon any and all amounts of royalty that are overdue, at the rate of three percentage points over the prime interest rate of CitiBank of New York published in the Wall Street Journal on the payment due date. ARTICLE 5 - DISCLAIMER OF WARRANTIES 5.01 The DISTRIBUTION SOFTWARE as provided by DIGITAL shall perform substantially as described in the "DECtalk for the Windows NT Operating System: Programmer's Guide and warranted as described under the separate license agreement ("END USER SOFTWARE LICENSE AGREEMENT"), however DIGITAL makes no other representation as to the quality, characteristics or functionality of the DISTRIBUTION DOCUMENTATION and DISTRIBUTION SOFTWARE including but not limited to whether it is error-free or will operate in accordance with the performance requirements of SOFTWARE OEM or any of its RESELLER's or END USERS. DIGITAL HEREBY DISCLAIMS ALL EXPRESS AND IMPLIED WARRANTIES, INCLUDING ANY WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 5.02 After the warranty period described under the separate license agreement ("END USER SOFTWARE LICENSE AGREEMENT), and upon SOFTWARE OEM's written request to DIGITAL for maintenance support, DIGITAL may at its sole discretion provide such support to SOFTWARE OEM at DIGITAL's commercial rates then in effect and under a separate agreement. Under no circumstances, however, will DIGITAL be responsible for or provide maintenance support directly to RESELLERs or END USERS. Page 8 9 5.04 DIGITAL shall have no liability whatsoever to SOFTWARE OEM, RESELLERS, END USERS or any other person for or on account of any lost data, lost profits, injury, loss, of damage, of any kind or nature, sustained by, or any damage assessed or asserted against, or any other liability incurred by or imposed upon SOFTWARE OEM or any other person, including incidental, consequential, special or indirect damages, arising out of or in connection with or resulting from (a) the use of any DISTRIBUTION SOFTWARE or DISTRIBUTION DOCUMENTATION, or (b) any advertising or other promotional activities with respect to any of the foregoing, and SOFTWARE OEM shall hold DIGITAL, and its officers, agents, or employees, harmless in the event DIGITAL, its officers, agents, or employees, is held liable. ARTICLE 6 - INTELLECTUAL PROPERTY INDEMNIFICATION 6.01 Notwithstanding Article 5, should the DISTRIBUTION SOFTWARE become the subject of a claim of infringement of a third party's proprietary right DIGITAL will, at its expense and at SOFTWARE OEM's request defend any claim brought against SOFTWARE OEM, to the extent it is based on a claim that the DISTRIBUTION SOFTWARE infringes or violates any patent or copyright, and DIGITAL will pay all costs and damages finally awarded; provided that SOFTWARE OEM gives DIGITAL (a) prompt written notice of such claim, and (b) information, reasonable assistance and sole authority to defend or settle such claim. In defense or settlement of such claim DIGITAL may: (a) procure for SOFTWARE OEM the right to continue to make, use and distribute the DISTRIBUTION SOFTWARE: or (b) replace or modify the DISTRIBUTION SOFTWARE to make such DISTRIBUTION SOFTWARE non-infringing; or (c) if neither (a) or (b) is reasonably feasible, to terminate this Software OEM Agreement with no future royalty obligations from the LICENSEE. ARTICLE 7 - LIMITATION OF LIABILITY 7.01 DIGITAL's total cumulative liability under this Software OEM Agreement arising out of the licensing or infringement of the DISTRIBUTION SOFTWARE or DISTRIBUTION DOCUMENTATION, to incur direct damages, out of pocket costs in the defense of any suit, to pay damages awarded or settlement amounts in any suit or suits, for breach of this Software OEM Agreement or for any other claim by SOFTWARE OEM shall not exceed in total the amount of license fees paid by SOFTWARE OEM under this Software OEM Agreement. This limitation of liability shall apply regardless of the form of action, whether in contract or tort. Any action against DIGITAL must be brought within 2 years after such cause of action arises. Page 9 10 ARTICLE 8 - TERM AND TERMINATION 8.01 The term of this Software OEM Agreement shall commence on the Effective Date and continues thereafter for a period of three (3) years unless sooner terminated in accordance with this Article. 8.02 This Software OEM Agreement may be terminated by the non-defaulting party only upon the other party's default and by sending a Notice of Termination in accordance with the notice provisions of Article 11. The following constitutes a default: a party defaults in the performance or observation of any material provision or material condition on its part to be performed or observed, or fails to make any payment due hereunder, and if such defaulting party fails to cure the default within thirty (30) days after receipt of written notice of the default from the other party. 8.03 Upon expiration or termination of this Software OEM Agreement by DIGITAL, SOFTWARE OEM shall immediately cease to license or otherwise dispose of DISTRIBUTION SOFTWARE and DISTRIBUTION DOCUMENTATION, and shall at DIGITAL's option, (a) either return to DIGITAL within sixty (60) days of termination all documents, software, updates and improvements provided hereunder and all complete and partial copies thereof, in its possession, or (b) certify the destruction of all of such materials. 8.04 Upon termination, SOFTWARE OEM. SOFTWARE OEM shall immediately cease to license or otherwise dispose Of DISTRIBUTION SOFTWARE and DISTRIBUTION DOCUMENTATION but may retain the documents and software required SOFTWARE OEM to maintain DISTRIBUTION SOFTWARE that have been distributed to END USERs prior to termination and for no other purpose. SOFTWARE OEM shall at DIGITAL's option return to DIGITAL all other documents and software not so required within sixty (60) days after such expiration or termination or certify the destruction of such material. 8.05 Termination or expiration of this Software OEM Agreement shall not affect licenses to use DISTRIBUTION SOFTWARE and DISTRIBUTION DOCUMENTATION granted by SOFTWARE OEM under this Software OEM Agreement prior to termination and for which fees have been paid to DIGITAL prior to receiving or giving Notice of Termination. 8.06 The termination rights provided herein shall be in addition to and not in substitution for any right to damages or injunctive relief that may be available to or exercisable by the party terminating or having the right to terminate this Software OEM Agreement, nor shall such Page 10 11 termination rights relieve either party from liability or damage to the other party for breach of this Software OEM Agreement. ARTICLE 9 - PUBLICITY 9.01 The existence of this Software OEM Agreement is not considered to be confidential. However the terms of this Software OEM Agreement are considered to be the confidential information of the parties. Except as expressly provided in this Software OEM Agreement, a party shall not disclose the terms of this Software OEM Agreement (including its Appendices), or any provision of or rights granted under this Software OEM Agreement in any publicity, advertising, or promotional activity, without the written approval of the other party, except as may be required by law. ARTICLE 10 - QUALITY CONTROL 10.01 SOFTWARE OEM agrees that it shall make no modifications to DISTRIBUTION SOFTWARE and shall in no way degrade the quality of speech produced by DISTRIBUTION SOFTWARE. SOFTWARE OEM shall not permit its RESELLERS or END USERS to modify of degrade DISTRIBUTION SOFTWARE. However, in the event that DIGITAL has reason to believe that the quality of speech produced by DISTRIBUTION SOFTWARE, when used in conjunction with any of the SOFTWARE OEM's ASSISTIVE APPLICATIONS, is significantly less than that produced by DIGITAL's DECtalk products using the same version of DIGITAL's DECtalk Access32 software as is licensed under this Software OEM Agreement, DIGITAL shall have the right to evaluate such use of DISTRIBUTION SOFTWARE and make recommendations for modifications of the use of DISTRIBUTION SOFTWARE to improve the quality of the speech. Within 30 days of receipt of DIGITAL's written recommendations for modification of the use of the DISTRIBUTION SOFTWARE by SOFTWARE OEM, SOFTWARE OEM shall notify, DIGITAL as to whether it will incorporate such recommended modifications, into the ASSISTIVE APPLICATION. If SOFTWARE OEM does not notify DIGITAL within the 30 day period that it will incorporate the recommended modifications, or having notified DIGITAL within the 30 days period that it will incorporate the recommended modifications, fails to incorporate the modifications recommended by DIGITAL within 90 days from thereafter, the license granted herein shall terminate 90 days from the receipt of DIGITAL's Page 11 12 written modification recommendation. ARTICLE 11 - GENERAL 11.01 This Software OEM Agreement shall not be assigned or transferred by SOFTWARE OEM except upon notice to DIGITAL and with the written consent of DIGITAL and any attempted assignment or transfer without such notice and consent shall be voidable by DIGITAL. 11.02 Nothing in this Software OEM Agreement shall be construed as making either party the agent of the other. 11.03 The failure of either party to give notice to the other party of the breach or non-fulfillment of any term, clause, provision or condition of this Software OEM Agreement shall not constitute a waiver thereof, nor shall the waiver of any breach or non-fulfillment of any term, clause, provision of condition of this Software OEM Agreement constitute a waiver of any other breach or non-fulfillment of that or any other term, clause, provision or condition of this Software OEM Agreement. 11.04 Any notice under this Software OEM Agreement shall be in writing and deemed to have been sufficiently given when, if given to DIGITAL. is addressed to: Director Corporate Licensing Office Digital Equipment Corporation 111 Powdermill Road, MS02-3/C11 Maynard, MA 01754 USA With duplicates to: Manager Page 12 13 Assistive Technology Group Digital Equipment Corporation 334 South Street, SHR3-1/X4 Shrewsbury, MA 01545 USA and when. if given to SOFTWARE OEM, it is addressed to: Words +, Inc. 40015 Sierra Highway, Bldg. B-145 Palmdale, CA 93550 and sent by registered or certified mail, return receipt requested postage prepaid. The date of execution of the return receipt or five (5) days after the date of mailing, whichever comes first, shall be deemed to be the date on which such notice has been given. Each party shall give prompt written notice to the other party of any change in its address or corporate name, and after notice of such change has been given, any notice by the other party to it shall be addressed in accordance with that change. 11.05 If any provision of this Software OEM Agreement is held invalid by any law. rule, order, or by the final determination of any State or Federal court. it shall not affect any other provisions of this Software OEM Agreement which can be given effect without such invalid provision and to this extent the parties agree that the provisions of this Software OEM Agreement are and shall be severable. 11.06 SOFTWARE OEM recognizes that the transfer of the DISTRIBUTION SOFTWARE and DISTRIBUTION DOCUMENTATION from one country to another may be subject to the approval of the government of the United States of America and/or other countries that the SOFTWARE OEM might operate in, or various agencies thereof, and international control organizations in which such governments participate. SOFTWARE OEM shall obtain all such approvals as are required by such governments or bodies before any such transfer of the DISTRIBUTION SOFTWARE and DISTRIBUTION DOCUMENTATION is effected. 11.07 SOFTWARE OEM shall only distribute DISTRIBUTION SOFTWARE as a component of its ASSISTIVE APPLICATION which includes an approved and operative COPY PROTECTION METHOD and an Page 13 14 operative SHARED MEMORY INITIALIZATION TECHNIQUE. SOFTWARE OEM shall only distribute DISTRIBUTION SOFTWARE and DISTRIBUTION DOCUMENTATION and related materials with proper inclusion of any copyright and proprietary notices, legends, and markings as provided by DIGITAL. Related materials and applicable initialization and configuration screens of the software components of SOFTWARE OEM applications shall also include such notices, legends and markings. With respect to any document or software containing a copyright notice and/or a confidential, proprietary, restricted or similar legend, provided by one party to the other under this Software OEM Agreement, the SOFTWARE OEM shall agree to include the copyright notice and/or such legend on all authorized reproductions it makes of such document or software in the same manner and location that such notice and/or legend appears in the document or software provided. 11.08 This Software OEM Agreement is governed by the laws of the Commonwealth of Massachusetts. 11.09 This Software OEM Agreement and the END USER SOFTWARE LICENSE AGREEMENT sets forth the entire agreement and understanding between the parties as to the subject matter hereof and merges all prior discussions and agreements between them and neither of the parties shall be bound by any conditions, definitions, warranties, understandings or representations with respect to such subject matter other than as expressly provided herein. This Software OEM Agreement may not be modified, amended, or supplemented except by a document executed by a proper and duly authorized officer or representative of the party to be bound thereby. IN WITNESS WHEREOF, the parties hereto have as of the Effective Date first written above caused this Software OEM Agreement, which includes Appendices A, B, C, D, E and F to be signed in duplicate by their duly authorized representatives. DIGITAL EQUIPMENT CORPORATION Page 14 15 Signed by William Armitage Vice President on October 30, 1997 WORDS +, IN Signed by Philip R. Lawrence, Vice President, Operations on October 30, 1997 APPENDIX A A. 1 DISTRIBUTION SOFTWARE A. 1.1 DISTRIBUTION SOFTWARE shall include the following files: A C-language file, SMIT***.C, which contains a SOFTWARE OEM specific encrypted identifier for use with the SOFTWARE OEM created SHARED MEMORY INITIALIZATION TECHNIQUE software. This encrypted identifier must be held in confidence by SOFTWARE OEM; SMIT enabled DECtalk Dynamic Linked Library (.DLL) for commercially available DECtalk Access32 software languages; SMIT enabled Microsoft Speech Application Programmers Interface (SAPI) Dynamic Linked Library (.DLL) for commercially available DECtalk Access32 software languages'. DECtalk Main Dictionary for commercially available DECtalk Access32 software languages; DECtalk User Dictionary Generator Program; Page 15 16 DECtalk Help File; and DECtalk Access32 Multilanguage Management Software for the DIGITAL Application Programmers Interface (DAPI). A. 1.2 SOFTWARE OEM is authorized to copy from the DECtalk Access32 V2.0 software developers kit, or subsequent versions as they become commercially available, the above identified files for purposes of creating DISTRIBUTION SOFTWARE: A.2 LICENSE FEES: SOFTWARE OEM shall pay to DIGITAL a license fee for each copy of DISTRIBUTION SOFTWARE distributed to an END USER or RESELLER as follows: Copies of DISTRIBUTION DECtalk License Fee Payable to DIGITAL SOFTWARE Distributed Quantity 1 end user copy US$100 for each individual language (for example, U.S. English) used on each desktop US$200 for each multilanguage kit used on each desktop APPENDIX B - DISTRIBUTION DOCUMENTATION (1) DECtalk (tm) Software for the Windows NT/95 (tm) Operating System: Getting Started Guide. (2) DECtalk (tm) Software for the Windows NT/95 (tm) Operating System: Release Notes. Page 16 17 APPENDIX C - END USER AGREEMENT A copy of the attached DIGITAL END USER AGREEMENT shall be included by SOFTWARE OEM with each copy of DISTRIBUTION SOFTWARE. An electronic file (license.doc) will be provided to SOFTWARE OEM for its use in creating copies of the DIGITAL END USER AGREEMENT for inclusion with DISTRIBUTION SOFTWARE. SOFTWARE OEM shall be allowed to make format changes to this file to meet unique packaging requirements; however, the text content or the logo image included in this file may not be changed. TM END USER AGREEMENT IMPORTANT - CAREFULLY READ THE DIGITAL LICENSE AGREEMENT BEFORE PROCEEDING. IF YOU DO NOT AGREE TO ITS TERMS, PLEASE RETURN THE LICENSE AGREEMENT AND ALL ACCOMPANYING MATERIALS WITHOUT FURTHER OPENING OR USING THEM. RETURN THEM TO THE SUPPLIER FROM WHICH YOU OBTAINED THEM FOR A FULL REFUND. FURTHER OPENING OR USE OF THE MATERIALS INDICATES YOUR ACCEPTANCE OF THE TERMS OF THE LICENSE AGREEMENT. DIGITAL LICENSE AGREEMENT SOFTWARE PROGRAM: DECtalk Access32 software runtime kit This document Is your Proof of License and the legal agreement governing your use of the Software. Please store It In a safe place. LICENSE TERMS Page 17 18 1. GRANT Digital Equipment Corporation ("DIGITAL") grants you the right to use the Software Program Version (the "Software") specified above on any single computer. You may only use the Software as a component of the Words +, Inc. application accompanying it. You may copy the Software into the local memory or stores device of such computer. You may make archival or back-up copies of the Software. You may permanently transfer your rights to use the Software, the Software itself including any updates to the specified version of the Software, and the accompanying documentation including this License Agreement, providing you retain no copies of the Software, updates, documentation, or License Agreement, and the recipient agrees to the terms of this License Agreement. 2. COPYRIGHT The Software is owned by DIGITAL and Its suppliers and Is protected by copyright laws and International treaties. Your use of the Software and associated documentation is subject to the applicable copyright laws and the express rights and restrictions of this License Agreement. 3. RESTRICTIONS You may not rent, lease, or otherwise transfer the Software except as expressly authorized in this License Agreement. You may not remove any copyright, trademark or other proprietary notices from the Software or the media. You may not reverse engineer, decompile, or disassemble the Software, except to extend DIGITAL cannot prohibit such acts by law. LIMITED WARRANTY DIGITAL warrants that the Software will perform substantially as described Page 18 19 in the documentation accompanying the Software for a period of ninety (90) days from delivery. ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE ARE LIMITED TO NINETY (90) DAYS. EXCLUSIVE REMEDY. DIGITAL's and its suppliers' entire liability and your exclusive remedy for Software which does not conform to DIGITAL's Limited Warranty shall be, at DIGITAL's option, either (1) repair or replacement of the nonconforming Software, or (2) refund of your license price. This warranty and remedy are subject to your returning the non-conforming Software during the warranty period to the DIGITAL reseller of the Software from which it was purchased in the country in which you obtained the Software. DISCLAIMER OF WARRANTIES. THE ABOVE WARRANTIES ARE YOUR EXCLUSIVE WARRANTIES AND NO OTHER WARRANTY, EXPRESS OR IMPLIED, WILL APPLY. DIGITAL does not warrant that the operation of the Software will be uninterrupted or error free. This warranty gives you specific legal rights, and you may also have other rights which vary from state to state. Some states do not allow limitations on how long an implied warranty lasts, so the above limitation may not apply to you. ALLOCATION OF LIABILITY DIGITAL'S AND ITS SUPPLIERS' TOTAL LIABILITY TO YOU FOR ANY CAUSE WHATSOEVER SHALL BE LIMITED TO THE LICENSE PRICE YOU PAID FOR THE PRODUCT. THIS LIMITATION WILL APPLY REGARDLESS OF THE FORM OF ACTION, WHETHER IN CONTRACT OR TORT, INCLUDING WITHOUT LIMITATION NEGLIGENCE. THE FOREGOING LIMITATION DOES NOT APPLY TO DAMAGES RESULTING FROM PERSONAL INJURY CAUSED BY DIGITAL'S NEGLIGENCE. IN NO EVENT WILL DIGITAL OR ITS SUPPLIERS BE LIABLE FOR ANY DAMAGES RESULTING FROM LOSS OF DATA OR USE, LOST PROFITS, OR ANY INCIDENTAL OR CONSEQUENTIAL DAMAGES. Some jurisdictions do not allow the exclusion or limitation of incidental or consequential damages, so the above limitation or exclusion may Page 19 20 not apply to you. U.S. GOVERNMENT RESTRICTED RIGHTS The Software and documentation are provided with "RESTRICTED RIGHTS". Use, duplication, or disclosure by the U.S. Government is subject to restrictions as set forth in subparagraph (c)(1)(ii) of DFARS 252.227-7013, or FAR 52.227-19, or in FAR 52.227-14 Aft. III, as applicable. Contractor/manufacturer is Digital Equipment Corporation. GENERAL You are responsible for compliance with all applicable export or re-export control laws and regulations if you export the Software. This Agreement is governed by and is to be construed under the laws of the Commonwealth of Massachusetts. The 1980 United Nations Convention on Contracts for the International Sale of Goods will not apply. If you have any questions concerning this Agreement, please contact the DIGITAL reseller from which you obtained the Software or write to: DIGITAL EQUIPMENT CORPORATION, 111 Powdermill Road, Maynard, MA. 01754-1418. All registered and unregistered trademarks are the sole property of their owners, and are specifically listed in the Software Product Description or user documentation for this Software Program. Copyright Digital Equipment Corporation, 1995. All rights reserved. -September, 1997- APPENDIX D - LEGAL REQUIREMENTS FOR RESELLER AGREEMENT 1. Prohibit use of the DISTRIBUTION SOFTWARE and DISTRIBUTION DOCUMENTATION for any purpose other than solely as a component of SOFTWARE OEM's ASSISTIVE APPLICATION. Page 20 21 2. Prohibit the RESELLER from copying the DISTRIBUTION SOFTWARE and DISTRIBUTION DOCUMENTATION. 3. Prohibit the reverse engineering, reverse compilation, disassembly or decomposition of the DISTRIBUTION SOFTWARE. 4. Specify that title of the DISTRIBUTION SOFTWARE which is a component of SOFTWARE OEM's ASSISTIVE APPLICATION does not pass to the RESELLER. 5. Disclaim DIGITAL's liability, as a supplier to SOFTWARE OEM, for any damages, whether direct, indirect, incidental or consequential arising from the use of the DISTRIBUTION SOFTWARE. 6. Require the RESELLER, at the termination or expiration of the RESELLER AGREEMENT, to discontinue use and destroy or return to SOFTWARE OEM all SOFTWARE OEM ASSISTIVE APPLICATIONs which contain DISTRIBUTION SOFTWARE and DISTRIBUTION DOCUMENTATION as a component thereof. APPENDIX E - GUIDELINES FOR USING DECtalk TRADEMARK E.1 SOFTWARE OEM agrees not to use, attempt to register, sell, or otherwise dispose of any products bearing any mark identical to or confusingly similar to the TRADEMARK, except as permitted by the rights granted under this SOFTWARE OEM Agreement. E.2 The DIGITAL DECtalk trademark should always appear exactly as follows: DECtalk Examples of proper and improper displays of the mark include: Right Wrong Page 21 22 DECtalk technology DECTALK technology DECtalk Access32 software DECTALK ACCESS32 software E.3 When using the DECtalk trademark in a one or two page publication, inset an asterisk after it and identify DIGITAL as the owner of the trademark in a footnote at the bottom of the text. This should be done the first time the trademark is used and in headlines. The footnote should say either "DECtalk is a trademark of Digital Equipment Corporation", or "DECtalk is a trademark for human voice synthesis products sold by Digital Equipment Corporation". In a very long publication, a note on the title page instead of asterisks and footnotes can be used. If it is clear from the copy that DIGITAL is owner of the trademark. a "TM" may be used in place of the asterisk and footnote. The word "Trademark" (in a country-appropriate language) in small type just below the trademark could also be used. E.4 The trademark should be used as an adjective and not a noun. A noun should always follow the DECtalk trademark. The first time the DECtalk trademark is used in headlines and at least once on each page of the copy, use the trademark with the specific noun that identifies the product (e.g., human voice synthesis products). Examples of proper and improper uses of the mark include: Right Wrong The DECtalk Access32 software will... DECtalk will... E.5 The DECtalk trademark should not be modified. In particular, plural or possession forms should not be created. APPENDIX F QUARTERLY ACTIVITY/FEE REPORT SOFTWARE OEM NAME QUARTER ENDING Page 22 23 SOFTWARE OEM ADDRESS SOFTWARE OEM AGREEMENT NUMBER License Fee(s) for past quarter individual end user copies @ $100 multilanguage end user copies @ $200 Total Amount due for the past quarter upon which License Fees are due Check Number and Date Name of the Bank Signature (Authorized Representative of the SOFTWARE OEM) Name Title Date Page 23 EX-10.29 6 EXHIBIT 10.29 1 EXHIBIT 10.29 EPSON AMERICA, INC. March 26, 1998 Mr. Phil Lawrence Vice President, Operations Words+, Inc. 40015 Sierra Highway Building B-145 Palmdale, CA 93550 EPSON 20770 Madrona Avenue PO. Box 2842 Torrance, California 90509-2842 Phone: 310.782.0770 FAX: 310.782.5220 RE: Understandings Concerning Discontinuation of EHT 400 and 410 Series Dear Mr. Lawrence: As our Dan McGuire advised you earlier this month, Epson has been forced to discontinue its EHT-400 and EHT-410 series hand-held terminals. A formal notice of discontinuation is enclosed. The purpose of this letter agreement is to memorialize the understandings between Epson and Words+ in connection with the product discontinuance. If you agree with this letter, please countersign below and send us a fully-executed copy. This letter agreement will represent the complete understanding between Epson and Words+ on these matters, and will supersede any prior understandings. Any modification to this letter agreement must be in writing and signed by both parties. 1. Epson will fill the current booked orders of Words+. These are: PO Number Model Number Ouantity Price Delivery Date Al 16042 EHT-410CF 32 $2240.00 04/18/98 EHT41OHDD 340MB HDD 40 $470.00 04/18/98 2. Epson will accept a last order, from Words+ for 50 EHT-410 terminals, with 360MB hard disk drives, on these terms: a) PO to be received by March 31, 1998. b) PO must request shipment of all units by September 30, 1998. c) Payment must be net 30 from invoice date. d) PO may not be rescheduled or cancelled. 3. We understand that, for your own purposes, you are making modifications to the earphone jack and parallel port for the EHTs received. Also, for FCC approval purposes, we have authorized you to add a choke coil and filter capacitor to the DC input circuitry. Epson will have no responsibility for product performance, product liability or other issues that arise from the 2 modifications to the ear phone jack or parallel port. In addition, Epson will have no responsibility for any such issues arising from the failure of Words+ to correctly perform the modifications to the DC input circuitry. 4. Similarly, Epson will have no responsibility for product performance, product liability or other issues that arise from use of the Epson products with hardware or software (including hard disk drive cards) not supplied by Epson. EPSON AMERICA Signed by: Mike Helm Title: Group Manager Date: March 26, 1998 WORDS+, INCORPORATED Signed by: Philip Lawrence Title: V.P. of Operations Date: March 31, 1998 3 Notice of Product Discontinuance March 18, 1998 Effective immediately, Epson America has discontinued sale of its EHT-400 and 410 series hand-held terminals. This action is made necessary for a number of reasons, but primarily because Epson's sole supplier for the terminal's hard disk drive card -- Integral Peripherals, Inc., of Boulder, Colorado -- has recently announced closure of its manufacturing plant and cessation of all sales and support for the cards. Epson anticipates being able to fill currently-booked orders. The product warranty will continue to be honored. Please contact your Epson sales representative if you have any questions about this announcement. EX-27.1 7 FINANCIAL DATA SCHEDULE
5 1 U.S. DOLLARS YEAR AUG-31-1998 SEP-01-1997 AUG-31-1998 1 198,154 0 391,900 (16,130) 348,675 951,540 458,655 (268,452) 2,010,858 696,131 0 0 0 3,350 1,280,442 2,010,858 2,645,159 2,645,159 1,755,905 3,073,728 74,933 0 16,447 (2,067,639) 1,600 (2,069,239) 0 0 0 (2,069,239) (0.62) (0.62)
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