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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
[X] Annual Report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended January 31, 1998
-- or --
[_] Transition Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from to
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FINE.COM INTERNATIONAL CORP.
Name of small business issuer as specified in its charter
0-22805
Commission File Number
State of Washington 91-1657402
State or Other Jurisdiction of I.R.S. Employer Identification Number
Incorporation or Organization
1525 Fourth Avenue, Suite 800
Seattle, Washington 98101
Address of Principal Executive Offices
(206) 292-2888
Issuer Telephone Number
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Securities registered under Section 12(b) of the Exchange Act: Common Stock,
no par value
Securities registered under Section 12(g) of the Exchange Act: [None]
Check whether the registrant (1) filed all reports required to Yes [X] No [_]
be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past
90 days.
Check if disclosure of delinquent filers in response to Item Yes [X] No [_]
405 of Regulation S-B is not contained in this form, and no
disclosure will be contained, to the best of Registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or
any amendment to this Form 10-KSB.
The registrant's revenues for its most recent fiscal year were $3,448,084
As of April 21, 1998, there were 2,415,935 shares of the Registrant's common
stock issued and outstanding and the aggregate market value of such common
stock held by non-affiliates was approximately $8,343,188 based on a price of
$6.188 per share, representing the average of the bid ($5.875) and ask ($6.50)
prices on that date.
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
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DOCUMENTS INCORPORATED BY REFERENCE
(1) Issuer's registration statement on Form SB-2, as amended and declared
effective on August 11, 1997 (No. 333-26855) (the "Form SB-2"); (2) final
prospectus dated August 11, 1997 and filed with the Commission pursuant to
Rule 424(b) (the "Prospectus"); and (3) Proxy Statement relating to its June
11, 1998 Annual Meeting of Shareholders and to be filed with the Commission on
or about the date hereof (the "Proxy Statement").
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FINE.COM INTERNATIONAL CORP.
FORM 10-KSB
TABLE OF CONTENTS
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.................................... 1
Overview................................................. 1
Business Strategy........................................ 1
The Internet and the Web................................. 2
Internet Commerce and the Marketing Communications
Industry.................................................. 3
Clients and Services..................................... 5
Company Response To One Client's Needs................... 7
Relationship with Microsoft.............................. 8
Competition.............................................. 9
Employees................................................ 10
Risk Factors............................................. 10
ITEM 2. PROPERTIES................................................. 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 EQUITY AND RELATED STOCKHOLDER MATTERS... 13
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 14
Overview................................................. 14
Results of Operations.................................... 15
Capital Resources and Liquidity.......................... 18
Seasonality and Inflation................................ 19
Year 2000 Compliance..................................... 19
ITEM 7. FINANCIAL STATEMENTS....................................... 20
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................. 34
PART III
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K........................... 34
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
The following discussion contains forward-looking statements regarding the
Company, its business, prospects and results of operations that are subject to
risks and uncertainties posed by many factors and events that could cause the
Company's actual business, prospects and results of operations to differ
materially from those that may be anticipated by such forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed herein as well as those discussed under the
captions "Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" as well as those discussed elsewhere in
this Report. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this Report.
The Company undertakes no obligation to revise any forward-looking statements
in order to reflect events or circumstances that may subsequently arise.
Readers are urged to carefully review and consider the various disclosures
made by the Company in this Report and in the Company's other reports filed
with the Securities and Exchange Commission that attempt to advise interested
parties of the risks and factors that may affect the Company's business.
Further information in satisfaction of Item 1 of Form 10-KSB is incorporated
herein by reference to the sections of the Prospectus under the captions
"Prospectus Summary," "Risk Factors," and "Business." In addition, in further
satisfaction of Item 1 of Form 10-KSB and in satisfaction of the requirements
of Rule 14a-3(b), the following information is provided as to the business of
the Company.
OVERVIEW
The Company plans, develops, maintains and hosts Web sites for major
national and international corporate clients and others. The Company's Web
site development process utilizes marketing expertise and state of the art
interactive database compilation and dissemination techniques and
technologies. Through the planning, development, maintenance and hosting of
interactive Web presentations, the Company enhances clients' marketing
campaigns, fosters the collection of demographic data which is utilized by
clients when allocating marketing resources and facilitates both internal and
external corporate communications for clients.
The Company develops marketing driven, database oriented sites for
businesses to establish a commercial presence on, or conduct Internet commerce
over, the Web. Corporate clients for whom the Company has built and
implemented such Web sites include Marriott International, Inc., The Nasdaq
Stock Market, Twentieth Century Fox Home Entertainment, Inc., Safeway Inc. and
Microsoft Corporation. Through the planning and development of Intranet Web
sites, the Company also serves businesses seeking to establish efficient,
confidential internal corporate communication systems. Intranet clients of the
Company include Microsoft Corporation and Marriott International, Inc. Other
clients for which the Company has developed Web sites include Fluke
Corporation, Intel Corporation, Mann Packing Company, Mitsui Intermodal
Terminal Inc., Optiva Corporation, the State of Washington, Wall Data, Inc.
and Windermere Services Company. See "--Clients and Services."
BUSINESS STRATEGY
The Company specializes in producing complex, database driven and
relationship marketing oriented Web sites. The Company believes that such
state of the art Web sites--as compared to traditional, one-way broadcast
media (such as television) or many first-generation Web sites--will become an
essential means of conducting business for many commercial organizations. The
Company's business strategy is to derive and maximize revenue from the
planning and development of such Web sites. In addition, the Company believes
that, as commercial Internet and internal corporate markets for Intranet sites
develop, ongoing maintenance and hosting of Web sites will become a more
important aspect of the Company's business.
The Company believes that there are thousands of Web site developers who
have created hundreds of thousands of Web sites, but that only a small
percentage of current commercial Web
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sites effectively utilize database integration technologies or interactive
database marketing techniques. Relying upon its knowledge of marketing
principles as well as its specific expertise in custom programming and the
development of relational databases, the Company consults with each of its
commercial Web site clients, first to establish specific database driven
relationship marketing strategies, and then to develop unique Web site
features designed to entice visitors to provide information useful to the
client regarding the visitor's identity, interests and position in the
customer life cycle. Through such Web sites, the Company's clients may obtain
information-rich databases for use in the clients' overall sales and marketing
efforts. Similar techniques and strategies are also applied to the collection,
distribution and analysis of information for Intranet sites developed by the
Company.
The Company's project managers, programmers, media designers, graphic
artists, writers and other personnel use third party software (primarily from
Microsoft), third party hardware and internally developed and customized
software to plan, develop, maintain and host Web sites for the Company's
clients. The Company works with Microsoft to demonstrate to third parties the
manner in which Microsoft products can be used to establish a commercial
presence on the Web. As a result of this relationship, Microsoft has provided
the Company with marketing materials, assisted the Company with new business
development and given recognition to the Company on the Microsoft Web site
(www.microsoft.com). See "--Relationship with Microsoft."
THE INTERNET AND THE WEB
OVERVIEW. The Company believes that the Internet and the Web offer new and
powerful mediums for commercial organizations to rapidly, economically and
productively target and manage a wider and better defined customer base.
Companies from many industries are publishing product and company information
for their vendors and customers, providing customer support, allowing
customers to buy products and permitting companies to collect customer
feedback and demographic information online. User friendly software now
permits businesses to offer multimedia content such as audio files and video
clips, as well as text, spreadsheet and graphical data, over the Web. These
enhanced means of communication are also being used by businesses internally
for confidential corporate communications via Intranets.
THE WEB. The recent growth in Internet use by businesses and individuals is
largely due to the emergence of a network of servers and information available
on the Web. The Web is a client/server system of multimedia data files
introduced in 1992, in which certain computers ("servers" or "home pages")
store files and respond to requests issued by remote computers ("clients") to
download files, thus allowing multiple, geographically dispersed users to view
information stored on a single server.
GROWTH OF THE INTERNET AND THE WEB. Internet use has grown rapidly since the
early 1990s, fueled by increasing use of personal computers and modems, the
development of the Web, the introduction of easy-to-use Web browsers and the
availability of informational, entertainment and commercial software
applications. Technological advances relating to the Internet have occurred
and continue to occur rapidly, resulting in a more robust, lower-cost
infrastructure, improved security and increased value-added services and
content. According to a recent industry report, the number of people using the
Internet is, at a minimum, doubling every year.(1) Industry sources expect
this rate of growth to continue until at least the year 2000, at which time
the number of Internet users is expected to exceed 700 million, an increase
from approximately 57 million users in 1997.(2)
According to another industry source, Internet user growth is occurring at a
rapid pace in both households and businesses. That industry source estimates
that by the year 2000, the number of U.S. households with ready access to the
Internet will increase to 33 million, from 10 million in 1996, and the
percentage of U.S. businesses connected to the Internet will rise to 33% from
4% in
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1 John S. Quarterman, 1997 Users and Hosts of the Internet and the Matrix,
MATRIX NEWS (January 1997); Press Release: Size of the Internet in October
1995, from the Third MIDS Internet Demographic Survey, MATRIX INFORMATION
AND DIRECTORY SERVICES, INC. (February 3, 1996) (hereinafter Demographic
Survey).
2 Quarterman, supra note 1.
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November 1996.(3) Noting that the numbers represent U.S. estimates only, that
industry source concludes that worldwide growth presents significant
opportunities for the transaction of business over the Internet.(4) In
anticipation of such growth, commercial Internet sites are being created at an
explosive pace. According to other industry sources, the number of commercial
Internet sites, defined as domain names ending in ".com," has increased from
171,738 in June 1996 to 609,275 in April 1997 to 1,339,513 in April 1998.(5)
See "--Internet Commerce and the Marketing Communications Industry."
INTERNET COMMERCE AND THE MARKETING COMMUNICATIONS INDUSTRY
INTERNET COMMERCE OVERVIEW. The Internet provides companies, individuals and
others with new means to conduct business and other activities rapidly,
economically and productively. According to industry sources, in 1996,
Internet commerce, defined as business-to-business and business-to-consumer
transactions, product marketing, advertising, entertainment, electronic
publishing, electronic services and customer support, accounted for $9.6
billion in revenues(6) and such industry sources estimated that the Internet
business-to-business trade alone would exceed $8 billion in 1997.(7) This
industry source projects that Internet commerce will generate approximately
$196 billion in revenues by the year 2000.(8) Another industry source
estimates that $66 billion of the aggregate $196 billion is expected to result
from business-to-business Internet commerce and the remaining $140 billion is
expected to be allocated among business and professional information services
($37 billion), financial services ($22 billion), consumer retail ($7 billion)
and technical services relating to Internet infrastructure and access ($74
billion).(9) The Company believes that the planning, development, maintenance
and hosting of Web sites comprise services that are fundamental to all of
these areas of Internet commerce. As a result, the Company believes that it is
strategically positioned to profit from growth in all areas of Internet
commerce.
INTERACTIVE MARKETING COMMUNICATIONS. The Company believes that the Internet
enables businesses to reach and establish personalized two-way communication
with well-defined target audiences without paying the significant costs
required to buy traditional media (e.g. paper, print space, broadcast media
time and mail). The Internet thereby enables such businesses to target and
track customers with specific brand messages, to capture customer and
corporate constituent preferences, opinions, needs and desires, to have
instant access to consumer feedback and to continuously sharpen marketing
plans to address the current marketplace.
Early adopters of Web sites considered such sites to be a relatively
inexpensive way to signal a technologically sophisticated image without
requiring the expenditure of a significant portion of their overall marketing
communications budget. The Company believes, however, that as businesses
become more familiar with interactive marketing techniques and opportunities,
the amounts spent to utilize the new media will increase rapidly. According to
an industry source, Web site growth in total pages will triple in size by the
end of 1998 from 1996.(10) Industry sources have estimated that online
spending for advertising alone will grow from $312 million in 1996 to $5
billion by 2000.(11) Approximately $161 billion was spent on advertising in
the United States in 1995, according to a leading advertising agency.(12) The
Company believes that over the next few years the rate of growth of
expenditures on new media will greatly exceed that of expenditures for
traditional media as more households and businesses connect to the Web and
marketers come to understand the potential benefits of communicating through
that media.
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/3/ News Release, Business-to-Business E-Commerce Explodes in 2000, FORRESTER
RESEARCH, INC. (November 29, 1996) (hereinafter E-Commerce).
/4/ E-Commerce, supra Note 3.
/5/ Netcraft Ltd. Web Survey (June 1, 1996); Netcraft Ltd. Web Survey (April
1997) Netcraft Ltd. Web Survey (April 1998) (hereinafter collectively
Netcraft Surveys).
/6/ Stan Gibson, Attention Shoppers: E-Commerce Is Here!, PC WEEK (November 25,
1996).
/7/ Forrester Report, "Business Trade and Technology Strategies" (July 1997).
/8/ Forrester Report, supra Note 7.
/9/ E-Commerce, supra note 3.
/10/ Forrester Research, "Web Sites Triple in Size" May 19, 1997.
/11/ Glenn Hasek, Web's Ad Revenues Rise, CYBERMANAGEMENT (October 7, 1996).
/12/ McCann-Erickson, Insider's Report (December 4, 1995).
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THE INTRANET MARKET. Once a corporation provides its employees with Web
access from their desktops, it may then have an internal corporate Web site
installed to distribute information internally within the corporation and to
host corporate applications. The Company believes that, in addition to the
development of publicly accessible Internet sites, the planning, development,
maintenance and hosting of Intranets will provide significant business
opportunities for Web site developers.(13) Although the exact number of
corporate Intranets presently in existence is unknown, an industry source
estimates that the private Intranet market is far larger than its public
counterpart. According to this industry source, the number of publicly
accessible Internet sites, estimated at over 1 million, may be only a quarter
of the number of Intranets installed.(14) This market is expected to
experience rapid growth and development over the next several years(15) and
Intranet development services revenues are projected to increase to $19.6
billion by the year 2002.(16) As of March 1996, corporate Intranets allowed
employees to use the Web only for internal document sharing.(17) New
applications, however, have been developing monthly.(18) By 2000, a "Full
Service Intranet" is anticipated, which is expected to provide five core
applications consisting of directory services, electronic mail, file
management, print services and network management.(19)
Through Intranets, corporations may utilize the Web to extend their internal
information systems and applications to geographically dispersed facilities,
remote offices and mobile employees. An Intranet can yield significant
operational efficiencies and cost reductions by (a) lowering or eliminating
the costs of long distance telephone charges and leased telephone lines that
connect decentralized offices and staff, (b) permitting the delivery and
receipt of information more quickly, and (c) reducing paper, printing and
postage or delivery costs. Because security concerns have been, and continue
to be, addressed by improving technology, companies are now beginning to
utilize Intranets for confidential communications within the enterprise.
Intranets are also now being used by organizations for confidential
communications to customers and vendors (when used in this manner, Intranets
may be referred to as "Extranets"). An industry source predicts that, as
corporations begin to take advantage of the expanding benefits of Intranets,
the total Intranet market will grow from $12 billion in 1997 to $28 billion by
1999.(20)
PRODUCTION AND HOSTING OF WEB SITES. As the number of Internet users
increases, the need by businesses to obtain effective and engaging Web sites
is expected to create significant opportunities for Web site developers. It
has been estimated that by 2000, fees paid to third party developers for
building Web sites will exceed $10 billion, compared to $1.2 billion paid to
third party developers of Web sites in 1996.(21) Of this $10 billion, it is
estimated that approximately $8.9 billion will be used for building
promotional and commercial Web sites, principally sites that advertise a
company's products or services or provide interactive shopping, banking or
customer services.(22) The $10 billion estimate, however, does not include
estimated expenditures relating to Intranet development.
An industry source has noted that most companies lack the internal resources
necessary to develop their own Web sites or effectively capture commercial
opportunities made available through utilization of the Web.(23) As a result,
businesses are relying upon Web site developers to define and implement unique
Web strategies and to keep businesses current with Internet technology.(24)
According to an industry source, businesses spend in the range of $24,000 to
$120,000 for outsourcing Web site development and services.(25)
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/13/ Ellis Booker, Change in Market Shares; Microsoft Server Tops Netscape's,
WEB WEEK (April 7, 1997).
/14/ Booker, supra Note 13.
/15/ Forrester Report, FORRESTER RESEARCH, INC. (March 1, 1996).
/16/ Forrester Report, "Sizing Technology Services" (June 1997).
/17/ Forrester Report, supra Note 15.
/18/ Paul Korzeniowski, Intranet Bets Pay Off Corporations are Leaping
Headfirst into Intranet Waters, Eschewing Traditional Return on
Investment Research, INFOWORLD ELECTRIC (January 13, 1997).
/19/ Forrester Report, supra Note 15.
/20/ Next-Generation Nets, INTERNETWORK (January 1997).
/21/ News Release, Web Outsourcing to Reach $10 Billion by 2000, FORRESTER
RESEARCH, INC. (February 5, 1997 (hereinafter Web Outsourcing).
/22/ Web Outsourcing, supra note 18.
/23/ News Release, Most Businesses Outsourcing Web Site Hosting, FORRESTER
RESEARCH, INC. (January 15, 1997) (hereinafter Site Hosting).
/24/ Web Outsourcing, supra note 18.
/25/ Nick Wreden, "The Intranet/Internet 100 Outsourcing," Information Week
(Nov. 19, 1997).
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The planning and development of Web sites represent only a part of the Web
site industry. Businesses are also utilizing Web site development firms to
host their Web sites. An industry source reports that two-thirds of Fortune
1000 companies currently use outside entities to host their Web sites, a
service which is estimated to cost 20% less than a comparable, internally
hosted site.(26) The Company believes that businesses may continue to
outsource hosting to acquire the technical expertise, increased reliability
and reported savings associated with outside hosting.
CLIENTS AND SERVICES
The Web permits real time, one-to-one communication with consumers, allowing
users to respond to questions and messages on a Web site. The Company believes
that the Web provides commercial enterprises with unique opportunities to
gather valuable demographic data, including information regarding users'
identities and preferences. Accordingly, the Company has created a Web site
development process involving marketing strategies, interactive communications
strategies and Web site design elements. For example, in creating Web sites
that compile user-provided information, the Company works with its clients,
first to establish specific database driven marketing strategies, and then to
create unique Web site features designed to entice visitors to provide
information useful to the client regarding the visitor's identity, interests
and position in the customer life cycle. Through such Web sites, the Company's
clients may obtain information-rich databases for use in the clients' overall
sales and marketing efforts. The Company also services certain clients by
maintaining and hosting such clients' Web sites.
COMPANY CLIENTS. Since it began operations in 1994, the Company has designed
and created more than 100 Web sites. The Company's clients to date include The
Nasdaq Stock Market, Marriott International, Inc., Twentieth Century Fox Home
Entertainment, Inc., Safeway Inc., Microsoft Corporation, Optiva Corporation,
Fluke Corporation, Intel Corporation, Wall Data, Inc., The DeWolfe Company,
Mitsui Intermodal Terminal Inc., Frank Russell Company, the State of
Washington, Continental Bank, PEMCO Insurance Company, Windermere Services
Company, Amway Corporation and Mann Packing Company.
WEB SITE PRODUCTION AND SUPPORT. The Company has expertise in custom
programming, relational databases and computer graphics. The Company attempts
to provide each of its clients with the appropriate product or service for its
particular need. The Company's services with respect to a particular client's
interactive Web site may fall within any combination of up to four major
areas: Web site planning; Web site development; Web site maintenance; and Web
site hosting.
Web Site Planning. The Company's process of developing a Web site begins
with planning. Web site planning generally consists of: 1) high level
marketing and business process consultation called the Scope Analysis; and, 2)
the detailed specifications of a site's feature set and functionality called
the Blueprint.
1. Scope Analysis. The Scope Analysis is the first step in the Planning
Phase and an integral part of the overall development process. In the Scope
Analysis, the client's business case is documented; goals, objectives and
priorities are outlined; the development team is identified; roles within the
team are agreed upon; and an initial architectural plan is presented. An
essential component of the Scope Analysis is the review or creation of the
client's strategic plan for their online endeavor. The Company engages in two
principle forms of strategic consultation.
. Internet Marketing Consultation. The Company believes that one of its
strengths is its knowledge and utilization of online marketing
principles. Every Internet Web site created by the Company is designed
with the idea that the end product should be an integrated part of the
client's overall marketing plan. The Company believes that its use of
marketing principles, in the context of developing Web sites and
designing the manner in which such Web sites are capable of interacting
with users, differentiates the Company from its competitors.
. Intranet Business Process Consultation. Many of the marketing principles
used in designing an Internet Web site are also applied by the Company in
designing Intranet Web sites for its
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/26/ Site Hosting, supra note 23.
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clients. Utilizing online marketing principles, the Company and client
identify the target audience and match applicable information with the
appropriate recipient. In addition, the Company consults with its clients
as to utilization of the Web for extensions of the client's internal
information systems and enterprise applications to geographically
dispersed facilities, remote offices and mobile employees. The Company
seeks to design Web sites in a manner that will enable its clients to
achieve operational efficiencies and cost reductions.
2. Web Site Blueprint. The technical plan, or Blueprint, prepared by the
Company for each client describes in detail the Web site objectives, design
strategy and tactics, reporting requirements, technical specifications, review
and testing processes, program management and communication protocols, site
promotion, future site enhancements and project timeline. In particular, the
Company focuses its resources to design Web sites that will provide
measurements of actual performance relative to each client's desired
measurable results. The Company compiles these Blueprints and attempts, by
leveraging the information and experiences gained from each project completed
by the Company, to further enhance its development processes routinely
utilized for formulation of client proposals and projects.
Web Site Development. The Company's process of developing interactive Web
sites combines up to five elements: graphic design; multimedia production;
custom programming; database development; and systems integration. The Company
believes that the Web sites it creates are unique and among only a small
percentage of Web sites that effectively utilize database integration
technologies or interactive database marketing techniques.
. Graphic Design. The Internet and the Web allow the Company to produce for
its clients a Web site that communicates with the site visitor using both
text and graphic design. The Company employs personnel skilled in
presenting text which is consistent with the client's overall marketing
strategy and in providing sophisticated art direction that is visually
stimulating and capable of capturing the target audience's attention.
. Multimedia Production. The Company develops Web sites utilizing still
photographs, full motion video, dynamically generated charts and graphs,
animation and sound. Any or all of these features may be used to appeal
to a client's target audience on a Web site. Although these features are
used routinely for marketing to parties external to the client, such
features may also be used as part of a client's internal communications
strategy.
. Custom Web Application Interface Development. Developing Web sites that
permit real time one-to-one interaction with site visitors requires
specialized computer programming beyond simple HTML development skills.
The Company therefore employs a team of highly trained developers and
information designers with specific expertise in developing customized
Web applications, creating and testing the usability of web applications
and providing information design evaluation and implementation services.
In addition to HTML development skills, Company personnel have expertise
in and regularly use such tools as Microsoft(R) Visual Basic(R)
programming language, Sun's Java(R) programming language, Microsoft
Visual Basic(R) Scripting Edition, Backweb BALI programming platform,
Microsoft Internet Information Server(R) Active Server Pages, Microsoft
Component Object Model (COM) Middleware platform, W3C Document Object
Model (DOM) client scripting platform, Microsoft Visual J++(TM),
Microsoft Visual C++(R), Microsoft FrontPage(R) and Microsoft Visual
SourceSafe(R).
. Custom Database Design and Development. Modern Web design requires the
collection and manipulation of online database information. To meet this
need, the Company employs highly skilled personnel with specific
expertise in analyzing business information needs, creating complex data
models, mining databases for information that supports business
objectives and implementing complex relational database designs using the
Microsoft(R) SQL Server(R) DBMS. These database systems are designed to
function in conjunction with other server products including Microsoft
Internet Information Server(R) Integrated with Microsoft Windows NT(R),
Microsoft Exchange Server(R), Microsoft Transaction Server(R), Microsoft
Site Server(R) Enterprise Edition (including Microsoft Commerce Server(R)
and the Microsoft Personalization Server(R)), Microsoft Internet Finance
Server Toolkit(R) and Backweb Channel Server.
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. Systems Integration. A key component of a Web site is its ability to be
integrated into a client's internal legacy information systems, both as
those systems exist currently and as they change over time. The Company
employs technical personnel with expertise in analyzing and documenting
clients' existing internal systems, defining and developing data feeds as
both output from and input to legacy systems and creating Web site
designs that are versatile enough to facilitate a changing information
landscape.
Web Site Maintenance. Maintaining and updating a Web site serves to protect
a client's investment in its site. Such maintenance may include supporting,
augmenting and enhancing the information collection and analysis efforts
provided for in the Web site's Blueprint. In some cases, certain maintenance
activities may be performed directly by the client due to features designed
and implemented by the Company when creating the Web site. The Company,
pursuant to written agreements in addition to the original Web site
development agreement, will frequently provide ongoing marketing and business
process consultation, Web site content updates, refreshment of graphic and
multimedia content and database management.
. Content Updates. Web sites often require event driven or regularly
scheduled modifications of site content. Examples of such updating
includes posting of new properties on a real estate company's Web site
(e.g., Windermere Services Corporation), replacing outdated coupons with
new coupons promoting different merchandise (e.g., Safeway Inc.) or
changing employment listings on a company's Intranet human resources Web
site (e.g., Microsoft Corporation).
. Graphic and Multimedia Refreshes. Both content updates and graphic
refreshment are driven by the interactive nature of the Web site. As an
interactive media, the Web site provides a virtually instantaneous gauge
of the site's communications effectiveness. This feedback allows the
client to continuously modify the form and content of a Web site message
to improve its effectiveness.
. Database Management. Databases experiencing large volumes of original
input normally require periodic maintenance to ensure the integrity and
usefulness of the data. The Company performs such functions for certain
of its clients.
Web Site Hosting. The Company also serves certain clients by hosting the Web
sites it has planned, developed or maintained. In addition, the Company
provides hosting services for Web sites other than those it has planned,
developed or maintained. The primary elements of Web site hosting are
reporting and Internet connectivity.
. Reporting. The Company serves certain clients by periodically analyzing
the client's Web site traffic and reporting the results.
. Internet Connectivity. Every Web site must be made accessible to the
Internet in order to be viable. The Company serves as a host for certain
clients' Web sites. The Company provides the computers and/or the
connection to the Internet necessary to allow the client's Web site to be
accessed by users of the Internet.
COMPANY RESPONSE TO ONE CLIENT'S NEEDS
One example of the services performed by the Company is the initial project
undertaken for Twentieth Century Fox Home Entertainment, Inc. For this client,
the Company planned, developed and currently maintains a brand-intensive,
highly interactive Web site supporting the release of the home video version
of the film Independence Day as it is distributed into retail outlets outside
of the United States. The Company believes that the Web site created for
Twentieth Century Fox is representative of the Company's ability to create
sophisticated Web sites for its clients.
The objectives of Twentieth Century Fox's Independence Day Web site included
generating public awareness of the video's availability, stimulating store
traffic, reinforcing the positioning and branding of the movie, cross-
promoting other movies, driving consumer traffic to related promotional events
and encouraging both word-of-mouth site referrals and repeat site visits.
Twentieth Century
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Fox desired a highly interactive database to run the Web site as well as
provide timely feedback on the results of the various programs and events
promoted on the site. The complex database implemented by the Company for this
site enables analysis of the consumer profile information collected on the
site, site image statistics and consumer segmentation data.
The Company made extensive use of several programming applications to create
the custom features used to capture the attention of the site's target
audience. The Independence Day Web site contains three games for site visitors
to play. Each game was paired with a promotion or sweepstakes. The site was
configured to allow online postcards to be sent from a site visitor to anyone
in the world with an electronic mail address. The postcard recipient may then
go to the site's "post office" and retrieve the message that was sent. The
site is available in multiple languages for various international audiences.
The Independence Day Web site was designed to be an ongoing resource for the
client. The site's database is capable of handling the information related to
additional videos as they are released and promoted via the Web. The Company
has already created an additional site (Aliens Trilogy) for the client to take
advantage of this resource.
RELATIONSHIP WITH MICROSOFT
Since its formation in 1994, the Company has developed technical expertise
in planning, developing, maintaining and hosting Web sites for clients. To
date, the Company has developed such Web sites principally through the
application of Microsoft products and has developed specialized training for
its production personnel in the use of Microsoft products. The Company is a
beta tester, and is sometimes an alpha tester, of new software products
developed by Microsoft and other software developers. As a result, Company
personnel have historically been regularly informed of the latest developments
in interactive technology.
WORKING WITH MICROSOFT AS A PAID VENDOR. The Company serves Microsoft as a
paid vendor, developing various components of both Internet and Intranet Web
sites for Microsoft. During fiscal 1998, fiscal 1997 and fiscal 1996, the
Company created over 30 Web sites for various Microsoft units including its
Enterprise Customer Unit, Organization Customer Unit, Human Resources
Department, Product Groups (including Exchange, Project, Publisher/Works, and
Word) and The Microsoft Network. Total services rendered by the Company to
Microsoft accounted for 22%, 19%, and 34% of the Company's gross revenue for
fiscal 1998, fiscal 1997, and fiscal 1996, respectively.
MICROSOFT SPONSORED MARKETING PROGRAMS. The Company is an active participant
in two Microsoft sponsored marketing programs: the Microsoft Solution Provider
Partner program and the Microsoft Site Builder Network program:
. Microsoft Solution Provider Partner Program. Microsoft Solution Provider
Partners are individual companies that provide consulting, integration,
customization, development, training, technical support or other services
utilizing Microsoft products. Through the Microsoft Solution Provider
Partner program, Microsoft works with companies to provide information,
tools and business development assistance to successfully implement
business solutions and provide services using the Microsoft Solutions
platform and technologies. The Microsoft Solution Provider Partner
program clearly identifies companies as having a special relationship
with Microsoft.
. Microsoft Site Builder Network Program. Participants in this program
receive national marketing materials, including a four-color printed
brochure that promotes the participants and their services, a featured
client case study on the Microsoft Web site, and a listing on the
Microsoft Web site within a directory of site builders. In addition,
Microsoft offers technical support and training opportunities, including
free training at a Microsoft Authorized Technical Education Center and
special participant-only technical briefings. Microsoft also provides to
participants the latest development information and tools and sales leads
of businesses requesting assistance implementing Microsoft technology.
The Company is a Level Three Microsoft Site Builder (the highest attainable
service level) and was the first entity to achieve this designation. The
Company believes it was the first site builder featured
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in a direct mail campaign conducted by Microsoft. The Company has developed
several significant client relationships from this association.
JOINT MARKETING PRESENTATIONS. In conjunction with both the Microsoft
Solution Provider Partner and the Microsoft Site Builder Network programs,
representatives of the Company have been invited to take part in several joint
marketing opportunities with Microsoft. These include:
. co-authored a Microsoft Level 3 SiteBuilder book, "The Wild, Wild Web"
being published by Microsoft Press in June 1998.
. the International Franchise Association/Microsoft, "International
Franchise Summit" held in March 1998 in Las Vegas, Nevada.
. the Microsoft/fine.com Corporation/International Franchise Association,
"Franchise of the Future" held in December 1997 in Atlanta, Georgia, and
in New York, New York.
. participated in Skills 2000 Career Expos, a job fair sponsored by
Microsoft in Bellevue, Washington in October 1997.
. the Microsoft/fine.com Corporation/XcellNet/Successful
Franchising/Hewlett Packard seminar, "Franchise of the Future," held at
the Microsoft Redmond, Washington campus in April 1997.
. the fine.com Corporation/Microsoft seminar, "Retailing on the Internet,"
held at the Microsoft Boston, Massachusetts offices in April 1997; and
. as co-developer and presenter of a Microsoft/Hewlett Packard/fine.com
Corporation "Consumer Solutions Briefing" made available on CD ROM in
March 1997;
. the Microsoft/fine.com Corporation/Polaris Group seminar, "Microsoft
Intranet Solutions," at the Microsoft Bellevue, Washington campus in
February 1997;
. the Microsoft/Onyx Software/fine.com Corporation seminar, "How to
Successfully Market Products and Services on the Web," at the Microsoft
Bellevue, Washington campus in January 1997;
. the Microsoft/Ernst & Young LLP "Small Business Summit 1996" held in San
Francisco, California in October 1996;
COMPETITION
The Internet-related interactive marketing industry is highly competitive.
The Company expects competition for its services to intensify in the future.
Due to the rapidly evolving nature of the Internet, competition also is
characterized by pressures to adopt and utilize new capabilities and
technologies to respond rapidly to evolving client requirements.
The Company faces competition from a number of competitors, some or all of
which may provide Web site planning, creation, maintenance or hosting
services. Direct competitors include: (1) prospective clients that perform Web
site development services in-house; (2) Web site service firms, such as K2
Design Inc., Free Range Media, Razorfish Inc., Red Sky Interactive, Inc. and
USWeb Corp.; (3) Internet-oriented advertising agencies such as The Leap
Group, CKS Group and The Martin Agency; (4) communications, telephone and
telecommunications companies such as UUNET Technologies and US West; and (5)
established online service companies, advertising agencies, direct Internet
access providers as well as specialized and integrated marketing communication
firms, all of which are entering the Web site planning, creation, maintenance
or hosting markets in varying degrees and are competing with the Company, and
many of which have announced plans to offer expanded Web site planning,
development, maintenance and/or hosting services. Many of the Company's
competitors or potential competitors have longer operating histories, longer
customer relationships and significantly greater financial, management,
technological, development, sales, marketing and other resources than the
Company. The Company also competes on the basis of creative and technical
talent, price, customer service and responsiveness. There can be no assurance
that the Company will be able to compete effectively and its inability to do
so would have a material adverse impact on the Company.
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EMPLOYEES
As of January 31, 1998, the Company had 43 full time employees. The Company
has no labor contracts or collective bargaining agreements. The Company
considers its relations with its employees to be good.
RISK FACTORS
In addition to the other information in this Report, the following risk
factors should be considered carefully in evaluating the Company and its
business. This Report may contain forward-looking statements that involve
risks and uncertainties. When used in this Report, the words "anticipate,"
"believe," "effect," "estimate," "expect" and similar expressions as they
relate to the Company or its management are intended to identify such forward-
looking statements. The Company's actual results, performance or achievements
could differ materially from the results expressed in or implied by these
forward-looking statements. Factors that might cause such differences include,
but are not limited to, those discussed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" as
well as those discussed elsewhere in this Report.
UNCERTAINTIES REGARDING ADOPTION OF NEW MEDIA BY MARKETING COMMUNICATIONS
INDUSTRY; LIMITED OPERATING HISTORY. The market for information gathering and
dissemination through new electronic media such as the Internet has only
recently begun to develop, is rapidly evolving and is characterized by an
increasing number of market entrants who have introduced or developed products
and services for communication and commerce through new electronic media.
Demand and market acceptance for recently introduced products and services are
subject to a high level of uncertainty. Additionally, the Company commenced
operations in October 1994 and, as a result, has a limited operating history
upon which an evaluation of the Company's prospects can be made. There can be
no assurance that commerce and communication through new electronic media will
continue to grow or that the Company will be successful in addressing the
risks encountered by companies which are operating in rapidly evolving
markets. The use of new electronic media in marketing, information gathering
and dissemination, particularly by businesses that have historically relied
upon traditional means of marketing, generally requires the acceptance of new
methods of conducting business and exchanging information. If commerce and
communication through new electronic media fail to gain widespread acceptance
or develop more slowly than expected, the Company would be materially
adversely affected. See "Business--Internet Commerce and the Marketing
Communications Industry."
RELIANCE ON MANAGEMENT AND KEY EMPLOYEES. The Company is dependent upon the
services of certain key management personnel, the loss of whose services would
have a material adverse effect on the Company. In particular, the Company
depends on the services of Daniel M. Fine, Chairman and Chief Executive
Officer and James P. Chamberlin, Chief Financial Officer and Chief Operating
Officer. The Company has obtained $100,000 of key person insurance on the
lives of each of Messrs. Fine and Chamberlin. In addition, the Company is
dependent upon the services of qualified and experienced marketing, technical
and creative personnel. There can be no assurance that any of these persons
will remain employed by the Company or that these persons will not participate
in businesses that compete with the Company in the future. In seeking
qualified personnel, the Company is required to compete with companies having
greater financial and other resources than the Company. Since the Company's
future success will be dependent on its ability to attract and retain
qualified personnel, the inability to do so would have a material adverse
affect on the Company.
COMPETITION. The market for the Company's services is highly competitive and
is characterized by demands to adopt and utilize new capabilities and
technologies, and to respond rapidly to evolving client requirements. The
Company faces competition from a number of sources, including potential
clients that perform Web site planning, creation, maintenance and hosting
services in-house. Other sources of competition include Web site service
firms, communications, telephone and telecommunications companies, computer
hardware and software companies, established online services companies, direct
Internet access providers, advertising agencies and specialized and integrated
marketing communication firms, all of which are entering the Web site
planning, creation, maintenance and hosting markets in varying degrees. Many
of the Company's competitors have
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announced plans to offer expanded Web site planning, creation, maintenance
and/or hosting services and many of such competitors or potential competitors
have longer operating histories, longer customer relationships and
significantly greater financial, management, technological, development,
sales, marketing and other resources than the Company. The Company expects
competition to intensify in the future, as anticipated growth in the industry
attracts other participants. There can be no assurance that the Company will
be able to compete effectively, if at all, and its inability to do so would
have a material adverse effect on the Company. See "Business--Competition."
LACK OF PROPRIETARY PROTECTION; INTELLECTUAL PROPERTY RIGHTS; RISK OF
INFRINGEMENT; POSSIBLE LITIGATION. The Company does not believe that its
business is dependent upon any patents, copyrights or trademarks, and the
Company does not currently have any registered patents, copyrights or
trademarks. Consequently, the Company relies solely on a combination of common
law and statutory law to protect its trademarks, proprietary information and
know-how. The majority of the Company's current agreements with its clients
contain provisions granting to the client intellectual property rights to
certain of the Company's work product, including customized programming that
is created during the course of a project. The Company anticipates that
agreements with future clients may contain similar provisions. Other existing
agreements to which the Company is a party are, and future agreements may be,
silent as to the ownership of such rights. To the extent that the ownership of
such intellectual property rights is expressly granted to a client or is
ambiguous, the Company's ability to reuse or resell such rights will or may be
limited. See "Business--Clients and Services."
The Company utilizes technology owned, and may seek to use technology
developed in the future, by third parties. Although the Company believes that
there are currently sufficient alternative sources of third-party technology
which would be available to it, if any particular third-party technology that
it is currently using were to be discontinued or otherwise become unavailable,
there can be no assurance that licenses for any technology owned or developed
by third parties that might be required for provision of the Company's
services will be available in the future on reasonable terms, or at all, and
the inability to obtain any such licenses could have a material adverse effect
on the Company. Although the Company does not believe that either its services
or its utilization of technology owned by third parties infringes the
proprietary rights of any third parties, there can be no assurance that third
parties will not in the future assert claims against the Company based on such
services or utilization or that any of those claims would not be successful.
In addition, litigation may be necessary in the future to enforce the
Company's intellectual property rights and to protect its proprietary
information, to determine the validity and scope of the proprietary rights of
third parties or to defend against claims of infringement or invalidity.
Litigation of this nature, whether or not successful, could result in
substantial costs and diversion of resources, which could have a material
adverse effect on the Company. Furthermore, third parties making claims
against the Company could secure a judgment awarding substantial damages, as
well as injunctive or other equitable relief that could directly or indirectly
prohibit the Company from providing certain services. A judgment of this
nature could have a material adverse effect on the Company.
Additionally, the Company and other Web site developers face potential
liability for the actions of clients and others using their services,
including liability for infringement of intellectual property rights, rights
of publicity, defamation, libel and criminal activity under the laws of the
United States and foreign jurisdictions. The Company has obtained errors and
omissions insurance, although there can be no assurance that such insurance
will be adequate. Any imposition of liability based on the actions of clients
and others using the Company's services could have a material adverse effect
on the Company.
DEPENDENCE UPON CONTINUED DEVELOPMENT OF ACCESS TO AND INFRASTRUCTURE OF THE
INTERNET. The Company's ability to generate revenues from the planning,
development, maintenance and hosting of commercial Web sites will depend upon
the continued development of an infrastructure for providing Internet access
and carrying Internet traffic. The Internet may not prove to be a viable
commercial marketplace due to inadequate development of the necessary
infrastructure or delays in the development of complementary products.
Moreover, other critical issues concerning the commercial use of the Internet
(including security, reliability, cost, ease of use and access, and quality of
service) remain unresolved and may adversely impact the anticipated growth of
Internet use. It is difficult to
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<PAGE>
predict whether the Internet will prove to be and remain a viable commercial
marketplace. If the infrastructure and complementary products necessary to
support the Internet's commercial viability are not developed or if the
Internet does not become a viable marketplace, the Company would be materially
adversely affected. See "Business--The Internet and the Web."
FLUCTUATIONS IN FOREIGN CURRENCIES; UNCERTAINTIES IN INTERNATIONAL
OPERATIONS. The Company recently opened an office in the United Kingdom, and
intends to continue to expand its services internationally. As an increased
percentage of the Company's revenues is derived from international operations,
which are conducted in foreign currencies, changes in the value of these
foreign currencies relative to the U.S. dollar may affect the Company's
results of operations and financial position. The Company may engage in
currency-hedging transactions or other means intended to reduce the effect of
fluctuations in foreign currency exchange rates on the Company's results of
operations, although there can be no assurance that such transactions will
materially reduce the effect of fluctuations in foreign exchange rates on the
Company's business. Such fluctuations may have a material adverse affect on
the Company's international operations and the Company's overall business,
financial condition and results of operations. Other potential risks inherent
in the Company's international operations include difficulties in staffing and
managing foreign operations, longer payment cycles, greater difficulties in
accounts receivable collection, unexpected changes in regulatory requirements,
market acceptance in foreign countries, reduced protection for intellectual
property rights in some countries, seasonal reductions in business activity
during the summer months in Europe, and potentially adverse tax consequences,
any one or more of which could adversely impact the Company's international
operations and the Company's overall business, financial condition and results
of operations.
RISK OF CHANGING TECHNOLOGY. The services that the Company offers, and the
services that the Company expects to offer in the future, are impacted by
rapidly changing technology, evolving industry standards, emerging competition
and frequent service, software and other product introductions. There can be
no assurance that the Company will be able to successfully identify new
business opportunities and develop and bring new services to market in a
timely and cost-effective manner or that services, products or technologies
developed by others will not render the Company's services noncompetitive or
obsolete. See "Business--Competition."
DEPENDENCE ON MICROSOFT. The Company has historically been dependent upon
Microsoft for new business referrals and for work as a paid Microsoft vendor.
In addition, the Company is dependent upon its expertise with Microsoft
software and relies upon such software in creating Web sites for the Company's
clients. Although the Company participates in the Microsoft Solution Provider
Partner and Site Builders Network programs, there can be no assurance that its
relationship with Microsoft will continue or that the Company will continue to
derive benefits from that relationship. In addition, if Microsoft's products,
standards or approach to the Internet or other markets were to fall into
disfavor or other parties were able to develop products, standards or
approaches which had greater market acceptance than those offered by
Microsoft, the Company could be materially adversely affected. See "Business--
Relationship with Microsoft."
GOVERNMENT REGULATION. The Company is not currently subject to direct
regulation by any government agency, other than regulations applicable to
businesses generally. However, it is possible that laws and regulations may be
adopted with respect to the Internet, covering issues such as user privacy and
pricing, characteristics and quality of products and services. The adoption of
any such laws or regulations may decrease the growth of the Internet (which
could in turn decrease the demand for the Company's services), increase the
Company's cost of doing business, cause the Company to modify its operations
or otherwise have an adverse effect on the Company. Moreover, the
applicability to the Internet of existing laws governing issues such as
property ownership, libel and personal privacy is uncertain. The Company
cannot predict the impact, if any, that any future laws or regulations, or the
applicability of such existing laws, may have on its business.
FLUCTUATIONS IN MARKET PRICE. The market price of the Company's common
stock, like that of other Web site development companies, is highly volatile
and is subject to wide fluctuations in response to quarterly variations in
operating results, announcements of activities by competitors and
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other events and factors. The Company's stock price may also be effected by
broader market trends unrelated to the Company's performance.
ITEM 2. PROPERTIES
The Company's headquarters currently occupies approximately 15,650 square
feet of an office building at 1525 Fourth Avenue, Seattle, Washington 98101 at
a monthly rent of approximately $22,100. Such payments include the Company's
allocable share of certain real property taxes and building operating
expenses. The remaining lease term expires on April 30, 2005.
The Company continues to lease approximately 8,000 square feet at its prior
headquarters at 1118 Post Avenue, Seattle, Washington at an annual rent of
approximately $80,000. The remaining lease term expires in April 2001. The
Company has sublet all of this space to a third party for the remainder of the
term of the lease. In addition, pursuant to the Company's acquisition of
Pacific Analysis and Computing Corporation in February 1998, the Company
assumed Pacific Analysis' office lease for approximately 3,355 square feet in
Bellevue, Washington at a monthly rent of approximately $5,044. The term of
such lease expires on October 31, 2002. The Company has sublet a portion of
this office space to a third party for the remainder of the term of the lease.
See Note 6 in "Notes to Financial Statements."
The Company also leases approximately 1,250 square feet of office space in
Santa Monica, California and approximately 550 square feet of office space in
Bethesda, Maryland. The Santa Monica lease expires on February 29, 1999 and
provides for annual rent of approximately $36,000. The Bethesda lease expires
on July 31, 1998 and provides for annual rent of approximately $13,080. In
addition, the Company shares office space in Tokyo, Japan with Mitsui & Co.,
Ltd. as part of the feasibility study with Mitsui.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended January 31, 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on The Nasdaq SmallCap Market
("Nasdaq") under the symbol "FDOT." The common stock first began trading on
August 11, 1997, the effective date of the Company's initial public offering
of common stock. The following table contains the high and low closing sales
price as reported by Nasdaq for each quarter of fiscal 1998.
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- -------------- -----------
(BEGINNING
AUG. 11, 1997)
<S> <C> <C> <C> <C>
Common Stock
High....................... -- -- $8.875 $7.250
Low........................ -- -- 6.625 4.375
</TABLE>
At January 31, 1998, there were 2,380,065 shares of common stock
outstanding. As of such date, the approximate number of record holders of its
common stock was 27, not including beneficial owners whose shares are held by
banks, brokers and other nominees.
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No cash dividends have been paid on the capital stock of the Company and no
dividends are currently contemplated by management. The Company's Revolving
Line of Credit places certain restrictions on the Company's ability to pay
cash dividends.
The Company's Form SB-2 (File No. 333-26855) relating to the Company's
initial public offering of the Company's common stock, was declared effective
by the Commission on August 11, 1997. Total gross proceeds from the offering
were $8,222,500, of which the Company received proceeds of $7,400,250; after
deducting underwriting discounts and commissions of $822,250.
From the effective date of the Registration Statement through the Company's
fiscal year ended January 31, 1998, the Company incurred an estimated
$1,994,458 in expenses for the Company's account in connection with the
issuance and distribution of the securities registered, including underwriting
discounts and commissions ($822,250), expenses paid to or for the underwriters
($346,738) and other expenses ($825,470). The Company believes that none of
these payments were made, directly or indirectly, to: (i) directors or
officers of the Company or their affiliates; (ii) persons owning ten percent
or more of the Company's common stock; or (iii) affiliates of the Company.
From the effective date of the Registration Statement through January 31,
1998, the Company has applied its net proceeds as follows:
<TABLE>
<S> <C>
Net proceeds from IPO.......................................... $6,228,042
Accounts receivable, work-in-process and other working capital
requirements.................................................. (191,368)
Capital expenditures for fixed assets.......................... (308,949)
Repayment of indebtedness...................................... (467,615)
----------
Unapplied proceeds held in money market funds and marketable
securities at January 31, 1998................................ $5,260,110
==========
</TABLE>
The Company believes that none of these payments were made, directly or
indirectly, to: (i) directors or officers of the Company or their affiliates;
(ii) persons owning ten percent or more of the Company's common stock; or
(iii) affiliates of the Company. To date, the Company believes that it has
used the offering proceeds in a manner consistent with the use of proceeds
described in the Registration Statement and Prospectus.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Financial
Statements and accompanying notes and the other financial information
appearing elsewhere in this Report.
OVERVIEW
fine.com plans, develops, maintains and hosts Web sites for major national
and international corporate clients and others. The Company's Web site
development process utilizes marketing expertise and state of the art
interactive database compilation and dissemination techniques and
technologies. Through the planning, development, maintenance and hosting of
interactive Web presentations, the Company enhances clients' marketing
campaigns, fosters the collection of demographic data which is utilized by
clients when allocating marketing resources, and facilitates both internal and
external corporate communications for clients.
The Company generates substantially all of its revenues from fees associated
with the planning and development of commercial Web sites for clients. These
fees are generally earned pursuant to long-term fixed fee contracts (with
terms typically ranging from two to seven months). Revenues generated from
long-term contracts are recognized under the percentage-of-completion method.
Percentage-of-completion is generally measured on the attainment of specific
contract milestones (based on the ratio of costs incurred to total estimated
project costs). Estimated earnings from long-term contracts are reviewed
periodically as work progresses. All other revenue is recorded on the
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basis of performance of services. The Company assumes greater financial risk
on fixed fee contracts than on either time-and-material or cost-reimbursable
contracts. Failure to anticipate technical problems, estimate costs accurately
or control costs during performance of a fixed fee contract may reduce the
Company's profit or cause a loss individually on a particular project and in
the aggregate. The Company has generated a net profit for each of the past
three fiscal years.
The Company has recently initiated efforts to generate recurring revenues
from Web site maintenance and Web site hosting fees. The amount of revenue
generated to date from the Company's provision of such services has not been
significant. Even if revenues from such sources increase, fees for maintenance
and hosting services may not become a significant percentage of the Company's
revenues, if and to the extent that revenues increase from the planning and
development of Web sites. No assurance can be given that revenues from
maintenance and hosting fees, or from other new methods of generating
recurring revenues, will be sufficient to offset the costs incurred by the
Company in performing such services.
Historically, the Company has been dependent upon Microsoft for work as a
paid vendor. The aggregate revenues generated from the multiple departments
and divisions at Microsoft for which the Company performed services accounted
for 22%, 19%, and 34% of the Company's gross revenue in the fiscal year ended
January 31, 1998 ("fiscal 1998"), the fiscal year ended January 31, 1997
("fiscal 1997") and the fiscal year ended January 31, 1996 ("fiscal 1996"),
respectively. Additionally, Marriott International, Inc., The Nasdaq Stock
Market, and Safeway Inc. accounted for 15%, 12% and 12% of the Company's gross
revenue during fiscal 1998, respectively. In addition, Twentieth Century Fox
Home Entertainment, Inc. and Safeway Inc. accounted for 11% and 14% of the
Company's gross revenue during fiscal 1997, respectively. Neither Twentieth
Century Fox Home Entertainment, Inc. nor Safeway Inc. were clients of the
Company during fiscal 1996. Management believes that the long-term success of
the Company is not dependent on any one or a few major customers.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED JANUARY 31, 1998 AND 1997
GROSS REVENUE. Gross revenue for fiscal 1998 and fiscal 1997 was $3,448,084
and $1,485,869, respectively. During each of these fiscal years, substantially
all of the Company's revenue was generated by its Web site planning and
development services. The 132% increase in fiscal 1998 gross revenue over
fiscal 1997 gross revenue is attributable primarily to the number of clients
contracting with the Company for such services increasing from approximately
25 clients in fiscal 1997 to approximately 29 clients in fiscal 1998, as well
as an increase in the average amount billed per client from approximately
$56,000 per client in fiscal 1997 to approximately $102,000 in fiscal 1998 for
such services. The Company believes that the increase in number of such
clients was attributable to increased levels of marketing, advertising and new
business development activities. The average amount billed per client during
fiscal 1998 for Web site planning and development services increased from
fiscal 1997 primarily due to the Company's clients generally undertaking more
sophisticated levels of Web site development. See "Business--Internet Commerce
and the Marketing Communications Industry" and "--Clients and Services."
DIRECT SALARIES AND COSTS. Direct salaries and costs include all internal
labor costs and other direct costs related to project performance, such as
project specific independent contractor fees, supplies and specific project
related expenditures. The Company's direct salaries and costs for fiscal 1998
were $2,292,206, and consisted primarily of $1,451,760 paid as direct
salaries, taxes and benefits and, secondarily, of $840,446 as other direct
costs of goods sold related to specific projects. The Company hired additional
employees during fiscal 1998 to meet increased demand and had 43 full time
employees at January 31, 1998. The increase in direct salaries and costs was
directly attributable to the increase in the number of employees. The Company
expects that it will hire additional staff if and as needed to meet demand
from current clients and prospective clients whose projects are anticipated to
commence within ninety days after such hiring. The Company engages independent
contractors and subcontractors to service unanticipated projects or supplement
in-house production capability. The Company's direct salaries and costs for
fiscal 1997 were $774,242 and
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consisted, primarily, of $619,884 of direct salaries, taxes and benefits and,
secondarily, of $154,358 of other direct costs of goods sold related to
specific projects. The Company had 21 full time employees at January 31, 1997.
As a percentage of gross revenue, total direct salaries and costs increased
14% from fiscal 1997 to fiscal 1998. Such increase was due primarily to
increases in the number of employees and secondarily to the increased level of
contract labor expenses incurred to service the increased number of client
projects and to the increase in costs associated with serving clients outside
of the Seattle, Washington area. The Company has undertaken efforts to hire
additional in-house production staff as well as open regional offices to more
effectively serve clients in the Mid-Atlantic and Southern California areas.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $1,168,776 and $514,059 for fiscal 1998 and
fiscal 1997, respectively. In each period, these expenses consisted primarily
of administrative salaries, professional fees, occupancy costs, telephone and
related Internet connectivity fees, computer network costs, office expenses
and supplies, marketing, advertising and new business development costs. The
increase in selling, general and administrative expenses for fiscal 1998 over
fiscal 1997 was due primarily to the costs of relocating the Company's
corporate headquarters into new office space and the leasing of additional
offices in Bethesda, Maryland and Santa Monica, California, depreciation of
new computer equipment purchases and the costs involved with being a public
reporting company.
Marketing, advertising and new business development costs increased as a
percentage of gross revenue in fiscal 1998 from fiscal 1997. Marketing,
advertising and new business development costs were $189,968 representing 6%
of gross revenue in fiscal 1998 as compared to $68,687 representing 5% of
gross revenue in fiscal 1997. The Company believes that the increase in
marketing, advertising and new business development costs was instrumental in
the 132% increase in gross revenue from fiscal 1997 to fiscal 1998. A
substantial portion of these costs were incurred as part of the Company's
efforts in establishing an office in the United Kingdom and participating in a
feasibility study in Japan. Management believes that these costs will continue
to increase as a percentage of gross revenue in future periods and may reach
approximately 7% of gross revenue.
Overall, selling, general and administrative expenses as a percentage of
gross revenue were 34% for fiscal 1998 as compared to 35% for fiscal 1997.
This overall decrease in selling, general, and administrative expenses as a
percentage of gross revenue was a result of the Company's ongoing effort to
control expenses and effectively assimilate higher volumes of business using
existing resources, offset by increased marketing, advertising and new
business development, and administrative expenses due to new office spaces,
depreciation of equipment purchases and the compliance and reporting
obligations associated with being a publicly held company.
INTEREST INCOME. Interest income increased during fiscal 1998 due to an
increase in the average level of funds available for investment as a result of
the net proceeds received from the Company's initial public offering in August
1997.
NET INCOME. The Company recognized net income of $80,682 (representing 2% of
gross revenue) for fiscal 1998 as compared to $124,274 (representing 8% of
gross revenue) for fiscal 1997. The decrease in profitability (as a percentage
of gross revenue) is due to the factors discussed above.
FISCAL YEARS ENDED JANUARY 31, 1997 AND 1996
GROSS REVENUE. Gross revenue for fiscal 1997 and fiscal 1996 was $1,458,869
and $531,800, respectively. During each of these fiscal years, substantially
all of the Company's revenue was generated by its Web site planning and
development services. The 179% increase in fiscal 1997 gross revenue over
fiscal 1996 gross revenue is attributable primarily to the number of clients
contracting with the Company for such services increasing from approximately
18 clients in fiscal 1996 to approximately 25 clients in fiscal 1997 as well
as an increase in the average amount billed per client
16
<PAGE>
from approximately $25,000 per client in fiscal 1996 to approximately $56,000
in fiscal 1997 for such services. The Company believes that the increase in
number of such clients was attributable to increased levels of marketing,
advertising and new business development activities. The average amount billed
per client during fiscal 1997 for Web site planning and development services
increased from fiscal 1996 primarily due to the Company's clients generally
undertaking more sophisticated levels of Web site development.
DIRECT SALARIES AND COSTS. Direct salaries and costs include all internal
labor costs and other direct costs related to project performance, such as
project specific independent contractor fees, supplies and specific project
related expenditures. The Company's direct salaries and costs for fiscal 1997
were $774,242, and consisted primarily of $619,884 paid as direct salaries,
taxes and benefits and, secondarily, of $154,358 as other direct costs of good
sold related to specific projects. The Company hired additional employees
during fiscal 1997 to meet increased demand and had 21 full time employees at
January 31, 1997. The Company engages independent contractors and
subcontractors to service unanticipated projects. The Company's direct
salaries and costs for fiscal 1996 were $258,532 and consisted, primarily, of
$178,803 of direct salaries, taxes and benefits and, secondarily, of $79,729
of other direct costs of goods sold related to specific projects. The Company
had 13 full time employees at January 31, 1996.
As a percentage of gross revenue, total direct salaries and costs increased
4% from fiscal 1996 to fiscal 1997. Such increase was due primarily to the
increased level of salaries paid to production employees. This increase,
combined with a greater reliance on production employees as compared to
independent contractors and/or subcontractors, resulted in the salaries, taxes
and benefits component of direct salaries and costs increasing from 69% in
fiscal 1996 to 80% in fiscal 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $514,059 and $225,517 for fiscal 1997 and fiscal
1996, respectively. In each period, these expenses consisted primarily of
administrative salaries, professional fees, occupancy costs, telephone and
related Internet connectivity fees, computer network costs, office expenses
and supplies, marketing, advertising and new business development costs.
Marketing, advertising and new business development costs increased as a
percentage of gross revenue in fiscal 1997 from fiscal 1996. Marketing,
advertising and new business development costs were $68,687 representing 5% of
gross revenue in fiscal 1997 as compared to $10,237 representing 2% of gross
revenue in fiscal 1996. The Company believes that the increase in marketing,
advertising and new business development costs was instrumental in the 179%
increase in gross revenue from fiscal 1996 to fiscal 1997.
Overall, selling, general and administrative expenses as a percentage of
gross revenue were 35% for fiscal 1997 as compared to 42% for fiscal 1996.
This overall decrease in selling, general, and administrative expenses as a
percentage of gross revenue was a result of the Company's ongoing effort to
control expenses and effectively assimilate higher volumes of business using
existing resources, offset by increased marketing, advertising and new
business development.
NET INCOME. The Company recognized net income of $124,274 (representing 8%
of gross revenue) for fiscal 1997 as compared to $30,082 (representing 6% of
gross revenue) for fiscal 1996. The increase in profitability (as a percentage
of gross revenue) is due to the factors discussed above.
17
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
Historically, the Company has funded its capital requirements through
earnings, borrowings from affiliates and commercial lenders, and equity
financing and private placements of its capital stock. The Company had cash
and cash equivalents in the aggregate amount of $1,419,591 at January 31,
1998.
The Company's working capital increased $3,390,055, from $301,728 at January
31, 1997 to $3,691,783 at January 31, 1998. Operating activities for fiscal
1998 required net cash in the amount of $433,294, primarily due to increases
in work in process, accounts receivable and prepaid expenses, and offset by
increases in accounts payable and advance payments. Work in process increased
$179,505 from $0 at January 31, 1997. Accounts receivable increased $465,477,
from $476,766 at January 31, 1997 to $942,243 at January 31, 1998, primarily
due to the increase in gross revenue during the 12 months ended January 31,
1998. Prepaid expenses and other assets increased $138,259 due to deposits
made for future consulting and marketing services. Accounts payable increased
$55,209, from $117,459 at January 31, 1997 to $172,668 at January 31, 1998.
Deferred revenue decreased from $36,722 at January 31, 1997 to $0 at January
31, 1998.
The purchase of equipment and furniture required cash in the amount of
$443,180 during fiscal 1998. These expenditures were made primarily for
computer hardware and software, furniture, fixtures and leasehold improvements
necessary to accommodate an increase in Company personnel. The Company
believes that the increase in personnel was a principal factor enabling the
Company to generate higher gross revenue in fiscal 1998. Net cash provided
from financing activities was $6,120,670, primarily due to net proceeds in the
amount of $6,228,042 from the initial public offering of its common stock in
August 1997.
During fiscal 1998, the Company had a Revolving Line of Credit from a
commercial bank. At January 31, 1998, the maximum amount available under this
Revolving Line of Credit was $750,000 and there were no amounts outstanding
under such line of credit as of such date. The Revolving Line of Credit has
been extended through June 30, 1998 and the Company is negotiating for renewal
of the Revolving Line of Credit through the 1999 fiscal year. Amounts
outstanding under the Revolving Line of Credit bear interest at such bank's
prime interest rate plus .25% (8.75% at January 31, 1998). Amounts outstanding
under the Revolving Line of Credit are secured by all of the Company's
accounts receivable and the personal guaranty of the Company's Chairman and
Chief Executive Officer. The Revolving Line of Credit requires that the
Company maintain working capital amounts (as calculated therein), tangible net
worth, and the maximum capital expenditures (as defined therein). The
Revolving Line of Credit limits the Company's ability to incur additional
debt, to repurchase the Company's capital stock or amend its capital
structure, to pay cash dividends or to undergo a merger, consolidation or
liquidation. In addition, a change in ownership of twenty-five percent of the
common stock constitutes an event of default.
During the 1998 fiscal year, the Company also had an equipment line of
credit (the "Equipment Line of Credit") from the commercial bank which made
the Revolving Line of Credit available. The maximum amount available under the
Equipment Line of Credit was $400,000 and at January 31, 1998, there were no
amounts outstanding under the Equipment Line of Credit. Amounts drawn by the
Company pursuant to the Equipment Line of Credit were to be used exclusively
for the purchase of computer hardware and software, furniture and fixtures,
and leasehold improvements. Amounts outstanding under the Equipment Line of
Credit bore interest at the same rate of interest as applicable to the
Revolving Line of Credit. The Equipment Line of Credit expired on December 31,
1997 and has not been renewed.
As of April 30, 1998, the Company's principal commitments consisted of
obligations outstanding under operating leases. Although the Company currently
has no material commitments for capital expenditures, it anticipates that its
capital expenditures and lease commitments will increase consistent with
anticipated growth in operations, infrastructure and personnel. The Company
may acquire additional office space or fixed assets through capital leases,
which will require it to commit to additional lease obligations.
18
<PAGE>
On August 15, 1997, the Company completed its initial public offering and
issued 1,100,000 shares of common stock to the public at an initial public
offering price of $6.50 per share. On August 25, 1997, pursuant to the
exercise of an over-allotment option granted to the underwriters in the
Company's initial public offering, the Company issued an additional 165,000
shares of common stock at a price of $6.50 per share. Proceeds to the Company,
net of offering expenses of $1,994,458, amounted to $6,228,042. Pending
ultimate application of the net proceeds from the offering, the Company
invested such proceeds primarily in certain interest bearing securities issued
or guaranteed by the United States government or its agencies and secondarily
in money market funds.
The Company believes that existing cash and cash equivalent balances, cash
generated from operations and the funds available to it under credit
facilities, together with the remaining proceeds from the initial public
offering, will be sufficient to fund its capital requirements for the
foreseeable future.
SEASONALITY AND INFLATION
The Company does not believe that inflation or seasonality has had a
significant effect on the Company's operations to date.
YEAR 2000 COMPLIANCE
The Company's services and products are designed to be Year 2000 compliant
and do not contain any date or time dependent code strings, fields, variables
or other mechanisms that inhibit their use or reliability following the turn
of the century. In addition, the Company believes that its internal systems
are Year 2000 compliant. However, there can be no guarantee that the systems
of other companies on which the Company relies or does business with are Year
2000 compliant and would not have an adverse effect on the Company's business.
19
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders fine.com International Corp.
We have audited the accompanying balance sheets of fine.com International
Corp. as of January 31, 1998 and 1997, and the related statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended January 31, 1998. These financial statements are the responsibility for
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of fine.com International
Corp. at January 31, 1998 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended January 31, 1998,
in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Seattle, Washington
March 27, 1998
20
<PAGE>
FINE.COM INTERNATIONAL CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $1,419,591 $198,317
Marketable Securities (Note 2).......................... 1,593,032 --
Accounts receivable, less allowances (Note 3)........... 942,243 476,766
Work-in-process......................................... 179,505 --
Income taxes refundable................................. 784 784
Prepaid expenses and other.............................. 147,668 9,409
Notes receivable from officer........................... 26,686 30,435
- -------------------------------------------------------------------------------
Total current assets.................................. 4,309,509 715,711
Marketable Securities (Note 2)............................ 2,325,236 --
Other long-term assets.................................... 60,724 --
Deferred offering costs................................... -- 41,116
Deferred income tax asset (Note 7)........................ 220,318 30,883
Equipment and furniture, net (Note 4)..................... 435,721 80,827
- -------------------------------------------------------------------------------
Total assets.......................................... $7,351,508 $868,537
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank (Note 5)........................... $ -- $ 90,286
Accounts payable........................................ 172,668 117,459
Accrued offering costs.................................. -- 16,002
Accrued expenses........................................ 48,357 28,046
Advance payments........................................ 70,500 --
Deferred revenue........................................ -- 36,722
Note payable to director................................ -- 15,000
Deferred income tax liabilities (Note 7)................ 322,337 100,769
Capitalized lease obligations........................... 3,864 9,699
- -------------------------------------------------------------------------------
Total current liabilities............................. 617,726 413,983
Shareholders' equity:
Convertible preferred stock, no par value:
No shares authorized, issued or outstanding at January
31, 1998 and 1,000,000 shares authorized, 59,524
shares issued and outstanding at January 31, 1997..... -- 239,918
Common stock, no par value:
10,000,000 shares authorized, 2,380,065 shares issued
and outstanding at January 31, 1998; and 9,000,000
shares authorized, 1,055,541 shares issued and
outstanding at January 31, 1997....................... 6,542,960 75,000
Retained earnings....................................... 220,318 139,636
Unrealized loss on marketable securities................ (29,496) --
- -------------------------------------------------------------------------------
Total shareholders' equity.............................. 6,733,782 454,554
- -------------------------------------------------------------------------------
Total liabilities and shareholders' equity............ $7,351,508 $868,537
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
21
<PAGE>
FINE.COM INTERNATIONAL CORP.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31,
---------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross revenue.............................. $3,448,084 $1,485,869 $ 531,800
Direct salaries and costs.................. 2,292,206 774,242 258,532
- ------------------------------------------------------------------------------
Gross profit............................... 1,155,878 711,627 273,268
Selling, general and administrative ex-
penses.................................... 1,168,776 514,059 225,517
- ------------------------------------------------------------------------------
Operating income (loss).................... (12,898) 197,568 47,751
Interest income............................ 176,535 -- --
Interest expense........................... (36,388) (8,840) (2,721)
- ------------------------------------------------------------------------------
Income before income taxes................. 127,249 188,728 45,030
Provision for income taxes (Note 7)........ 46,567 64,454 14,948
- ------------------------------------------------------------------------------
Net income................................. $ 80,682 $ 124,274 $ 30,082
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Net income per share (Notes 1 and 10):
Basic.................................... $ 0.05 $ 0.12 $ 0.03
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Diluted.................................. $ 0.05 $ 0.12 $ 0.03
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Shares used in computation of net income
per share:
Basic.................................... 1,669,303 1,055,541 1,055,541
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Diluted.................................. 1,763,975 1,072,788 1,055,541
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
22
<PAGE>
FINE.COM INTERNATIONAL CORP.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED
STOCK--SERIES A COMMON STOCK
------------------ --------------------
COMMON UNREALIZED
STOCK RETAINED LOSS ON TOTAL
SUBSCRIPTION EARNINGS MARKETABLE SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT RECEIVABLE (DEFICIT) SECURITIES EQUITY
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at February 1,
1995................... -- $ -- 1,055,541 $ 75,000 $(25,000) $(14,720) $ -- $ 35,280
Payment of common stock
subscription
receivable............ -- -- -- -- 25,000 -- -- 25,000
Net income............. -- -- -- -- -- 30,082 -- 30,082
- -------------------------------------------------------------------------------------------------------------------------
Balance at January 31,
1996................... -- -- 1,055,541 75,000 -- 15,362 -- 90,362
Sale of Series A
convertible preferred
stock, net of offering
costs of $10,082...... 59,524 239,918 -- -- -- -- -- 239,918
Net income............. -- -- -- -- -- 124,274 -- 124,274
- -------------------------------------------------------------------------------------------------------------------------
Balance at January 31,
1997................... 59,524 239,918 1,055,541 75,000 -- 139,636 -- 454,554
Conversion of Series A
convertible preferred
stock into 59,524
shares of common
stock................. (59,524) (239,918) 59,524 239,918 -- -- -- --
Issuance of shares in
initial public
offering, net of
offering costs of
$1,994,458............ -- -- 1,265,000 6,228,042 -- -- -- 6,228,042
Unrealized loss on
marketable securities,
net of taxes of
$14,434............... -- -- -- -- -- -- (29,496) (29,496)
Net income............. -- -- -- -- -- 80,682 -- 80,682
- -------------------------------------------------------------------------------------------------------------------------
Balance at January 31,
1998................... -- $ -- 2,380,065 $6,542,960 $ -- $220,318 $(29,496) $6,733,782
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
23
<PAGE>
FINE.COM INTERNATIONAL CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31,
----------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................ $ 80,682 $ 124,274 $ 30,082
Adjustments to reconcile net income to net
cash provided by (used in) operating ac-
tivities:
Depreciation and amortization........... 88,286 29,791 25,475
Deferred income taxes................... 46,567 64,458 13,728
Net changes in operating assets and lia-
bilities:
Accounts receivable..................... (465,477) (412,911) (44,638)
Work-in-process......................... (179,505) -- --
Prepaid expenses and other assets....... (138,259) (9,409) --
Deferred offering costs................. 25,114 (25,114) --
Accounts payable........................ 55,209 65,542 2,531
Accrued expenses........................ 20,311 27,428 618
Advance payments........................ 70,500 -- --
Deferred revenue........................ (36,722) 36,722 --
Current income taxes.................... -- (2,061) 1,277
- -------------------------------------------------------------------------------
Net cash provided by (used in) operating
activities............................... (433,294) (101,280) 29,073
- -------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of marketable securities........ (3,962,198) -- --
Purchases of equipment and furniture...... (443,180) (50,372) (29,409)
Other assets.............................. (60,724) -- --
- -------------------------------------------------------------------------------
Net cash used in investing activities..... (4,466,102) (50,372) (29,409)
- -------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock,
net of issuance costs.................... 6,228,042 -- --
Increase (decrease) in notes payable to
bank..................................... (90,286) 90,286 --
Payments on capital lease obligations..... (5,835) (4,381) --
Increase (decrease) in note receivable
from officer............................. 3,749 (6,522) (18,065)
(Decrease) Increase in note payable to di-
rector................................... (15,000) 15,000 --
Cash received on collection of common
stock subscription receivable............ -- -- 25,000
Net cash received from sale of preferred
stock.................................... -- 239,918 --
- -------------------------------------------------------------------------------
Net cash provided by financing activi-
ties..................................... 6,120,670 334,301 6,935
- -------------------------------------------------------------------------------
Net increase in cash and cash equiva-
lents.................................... 1,221,274 182,649 6,599
Cash and cash equivalents at beginning of
period................................... 198,317 15,668 9,069
- -------------------------------------------------------------------------------
Cash and cash equivalents at end of peri-
od....................................... $ 1,419,591 $ 198,317 $ 15,668
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Income taxes paid......................... $ -- $ 2,000 $ --
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Interest paid............................. $ 36,388 $ 8,840 $ 2,721
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Equipment acquired through capitalized
lease obligations........................ $ -- $ 14,080 $ --
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
24
<PAGE>
FINE.COM INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
fine.com International Corp. (the "Company"), formerly fine.com Corporation,
was incorporated in the State of Washington on October 15, 1994. The Company
plans, develops, maintains and hosts World Wide Web ("Web") sites for major
national and international corporate clients and others, utilizing marketing
expertise and state of the art interactive database compilation and
dissemination techniques and technologies.
USE OF 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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company accounts for long-term contracts under the percentage-of-
completion method. Estimated contract earnings are reviewed periodically as
work progresses. If such estimates indicate a loss would be incurred on the
contract, the estimated amount of such loss would be recognized in the period
the estimated loss was determined. All other revenue is recorded on the basis
of time and material for the performance of services.
RISKS AND UNCERTAINTIES
Financial instruments which potentially subject the Company to a
concentration of credit risk consist principally of accounts receivable. The
Company's customer base is dispersed across many different geographic areas
throughout the United States in a variety of industries. The Company does not
require collateral or other security to support credit sales, but provides an
allowance for bad debts based on historical experience and specific
identification. The following is a detail of customers which accounted for
greater than 10% of gross revenue in the respective fiscal years:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31,
---------------------------------
CUSTOMER 1998 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Microsoft Corporation.................. 22% 19% 34%
Marriott International, Inc............ 15 -- --
The Nasdaq Stock Market, Inc........... 12 -- --
Safeway Inc............................ 12 14 --
Twentieth Century Fox Home
Entertainment, Inc. .................. 4 11 --
</TABLE>
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with an original maturity of
three months or less to be cash equivalents. Excess cash is primarily invested
in treasury bills, securities of government agencies, and commercial paper.
Cash equivalents are carried at amortized cost, which approximates fair market
value.
MARKETABLE SECURITIES
Marketable securities, which consist primarily of U.S. Government agency
securities, are carried at market value. Market values are determined based on
quoted prices. Marketable securities are classified in the balance sheet as
current and non-current based on maturity dates and the Company's expectation
of sales and redemptions in the following year.
25
<PAGE>
FINE.COM INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
EQUIPMENT AND FURNITURE
Equipment and furniture are recorded at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of three to seven years. Leasehold improvements are amortized
over the lesser of the lease term or estimated useful life. Repairs and
maintenance that do not improve or extend the lives of the respective assets
are expensed in the period incurred.
INCOME TAXES
The Company accounts for income taxes under the liability method. Under the
liability method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities, and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be realized.
STOCK-BASED COMPENSATION
The Company has elected to apply the disclosure only provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (Statement No. 123) (see Note 8). Accordingly, the Company
accounts for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. Compensation cost for
stock options is measured as the excess, if any, of the fair value of the
Company's common stock at the date of grant over the stock option exercise
price.
ADVERTISING
Advertising costs are expensed as incurred. Advertising expense was $24,382,
$20,805 and $5,438 in the fiscal years ended January 31, 1998, 1997 and 1996,
respectively.
NET INCOME PER SHARE
In February 1997, the Financial Accounting Standards Board issued a
Statement No. 128, "Earnings Per Share." Statement No. 128 replaced the
calculation of the primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. Common equivalent shares are
excluded from the computation if their effect is antidilutive. All earnings
per share amounts for all periods have been presented, and where appropriate,
restated to conform to the Statement No. 128 requirements.
In February 1998, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 98 ("SAB 98"). SAB 98 changed the rules related to the
way a company calculates earnings per share prior to the time of an initial
public offering ("IPO"). Accordingly, the Company has restated all earnings
per share calculations for all periods prior to its IPO in August 1997. Fully
diluted earnings per share calculated under the old rules were $0.11 and $0.03
in fiscal 1997 and 1996, respectively.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The FASB issued Statement No. 130, "Reporting Comprehensive Income" and
Statement No. 131, "Disclosures About Segments of an Enterprise and Related
Information." Statement No. 130 established standards for reporting
comprehensive income in annual and interim financial statements. Statement
No. 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those
26
<PAGE>
FINE.COM INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company will adopt Statement No. 130 and 131 in fiscal 1999 and
does not anticipate any impact on the Company's consolidated results of
operations, financial position or cash flows.
2. MARKETABLE SECURITIES
Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. Management has classified the Company's marketable securities as
available-for-sale, in accordance with the provisions of Statement No. 115.
Accordingly the securities are carried at fair value, with unrealized holding
gains and losses, net of income taxes, excluded from net income and recorded
as an adjustment to shareholder's equity. Interest, dividends and realized
gains and losses are included in net income.
The following is a summary of marketable securities at January 31, 1998, all
of which are classified as available-for-sale:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less.......... $1,621,144 $ -- $(28,112) $1,593,032
Due after one year through three
years........................... 2,341,815 5,147 (21,726) 2,325,236
- ------------------------------------------------------------------------------
$3,962,959 $5,147 $(49,838) $3,918,268
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
3. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Activity in the allowance for doubtful accounts is summarized as follows:
<TABLE>
<CAPTION>
JANUARY 31,
---------------------
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance........................................ $ 5,000 $5,000 $5,000
Additions charged to expense............................. 30,583 -- --
Write-offs, net.......................................... -- -- --
- -------------------------------------------------------------------------------
Ending balance........................................... $35,583 $5,000 $5,000
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
4. EQUIPMENT AND FURNITURE
Equipment and furniture consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
-------------------
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Computer equipment......................................... $ 384,647 $129,765
Office furniture and equipment............................. 136,537 13,047
Leasehold Improvements..................................... 64,808 --
- --------------------------------------------------------------------------------
585,992 142,812
Accumulated depreciation and amortization.................. (150,271) (61,985)
- --------------------------------------------------------------------------------
$ 435,721 $ 80,827
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
FINE.COM INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. NOTE PAYABLE TO BANK
The Company has a Revolving Line of Credit with a commercial bank for
$750,000 which expires on June 30, 1998, and is secured by all accounts
receivable and the personal guarantee of the Company's Chairman and Chief
Executive Officer. The Company is negotiating for renewal of the Revolving
Line of Credit through fiscal 1999. Amounts outstanding under the Revolving
Line of Credit bear interest at the bank's prime interest rate plus 0.25%
(effective rate of 8.75% at January 31, 1998). At January 31, 1998, no amounts
were outstanding under the Revolving Line of Credit.
At January 31, 1997, the Company had a $200,000 Revolving Line of Credit
which expired on March 31, 1997, and was replaced with the new $750,000 credit
agreement. Borrowings under this agreement bore interest at the bank's prime
interest rate plus 2% (effective rate of 10.25% at January 31, 1997). At
January 31, 1997, $90,286 was outstanding under this agreement. This
obligation was collateralized by eligible accounts receivable.
The Revolving Line of Credit requires that the Company maintain working
capital amounts (as calculated therein), tangible net worth and the maximum
capital expenditures (as defined therein). The Revolving Line of Credit limits
the Company's ability to incur additional debt, to repurchase the Company's
capital stock or amend its capital structure, to pay cash dividends or to
undergo a merger, consolidation or liquidation. In addition, a change in
ownership of twenty-five percent of the common stock constitutes an event of
default. The Company met all Revolving Line of Credit covenants at January 31,
1998.
6. LEASE COMMITMENTS
The Company leases certain equipment and facilities under capital and
operating leases. The operating leases contain annual escalation clauses based
on inflation.
The Company sublets a portion of its office space and offsets rent expense
through sublease billings. Net rent expense under the operating lease amounted
to $74,326, $60,230 and $15,996 in fiscal 1998, 1997 and 1996, respectively.
Future minimum lease payments under noncancelable leases with terms in
excess of one year and premises with contractual subleases at January 31,
1998, are as follows:
<TABLE>
<CAPTION>
LEASES SUBLEASE NET
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1999........................................... $ 238,118 $ (95,995) $ 142,123
2000........................................... 271,849 (97,893) 173,956
2001........................................... 274,733 (97,893) 176,840
2002........................................... 200,957 (18,110) 182,847
2003........................................... 182,595 -- 182,595
Thereafter..................................... 446,923 -- 446,923
- --------------------------------------------------------------------------------
$1,615,175 $(309,891) $1,305,284
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
FINE.COM INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31,
------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current.......................................... $ -- $ (4) $ 1,220
Deferred......................................... 46,567 64,458 13,728
- --------------------------------------------------------------------------------
$ 46,567 $ 64,454 $ 14,948
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The provision for income taxes differs from the amount computed by applying
the federal statutory income tax rate to income before taxes as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31,
-----------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed tax at federal statutory rate........... $ 43,265 $ 64,168 $ 15,310
Other items, net................................. 3,302 286 (362)
- --------------------------------------------------------------------------------
$ 46,567 $ 64,454 $ 14,948
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The Company has elected to use the cash method of accounting for income tax
purposes because it currently qualifies for the small business exception. This
exception allows corporate taxpayers to use the cash method of accounting if
their gross receipts over the three immediately preceding taxable years do not
exceed $5,000,000 and they meet certain other requirements. The Company will
convert to the accrual method for income tax purposes when it no longer
satisfies the criteria for this exception. Deferred taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income
tax purposes.
Significant components of the Company's net deferred income tax liabilities
are as follows:
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation............................. $ (4,402) $ (3,354)
Accrual to cash basis adjustments...................... (336,771) (100,769)
- -------------------------------------------------------------------------------
(341,173) (104,123)
Deferred tax assets:
Net operating loss carryforward........................ 224,720 34,237
Unrealized loss on marketable securities............... 14,434 --
- -------------------------------------------------------------------------------
239,154 34,237
- -------------------------------------------------------------------------------
Net deferred tax liabilities............................. $(102,019) $ (69,886)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Balance sheet classification:
Non-current assets..................................... $ 220,318 $ 30,883
Current liabilities.................................... (322,337) (100,769)
- -------------------------------------------------------------------------------
Net deferred tax liabilities............................. $(102,019) $ (69,886)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
At January 31, 1998, the Company had net operating loss carryforwards of
approximately $695,000 which begin to expire in 2011. Utilization of net
operating loss carryforwards may be subject to certain limitations under
Section 382 of the Internal Revenue Code of 1986, as amended.
29
<PAGE>
FINE.COM INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. SHAREHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
On January 31, 1997, the Company completed a private placement for the
issuance and sale of 59,524 shares of Series A Convertible Preferred Stock of
the Company for $250,000 less offering costs of $10,082. Upon the
effectiveness of the Company's Registration Statement relating to the
Company's initial public offering of the common stock, all outstanding shares
of the Series A Convertible Preferred Stock automatically converted into
shares of common stock, at a one-to-one conversion ratio. In addition, upon
the effective date of the Registration Statement, the authority of the Company
to issue preferred stock terminated and the number of authorized shares of
preferred stock were converted into additional authorized shares of common
stock.
INITIAL PUBLIC OFFERING
On August 15, 1997, the Company completed its initial public offering and
issued 1,100,000 shares of common stock to the public at an initial public
offering price of $6.50 per share. On August 25, 1997, pursuant to the
exercise of an over-allotment option granted to the underwriters in the
Company's initial public offering, the Company issued an additional 165,000
shares of common stock at a price of $6.50 per share. Proceeds to the Company,
net of offering expenses of $1,994,458, amounted to $6,228,042.
Immediately prior to the date of the initial public offering of the
Company's common stock, the Company had authorized capital stock consisting of
9,000,000 shares of common stock, of which 1,055,541 shares were issued and
outstanding, and 1,000,000 shares of preferred stock, of which 59,524 shares
were designated as Series A Convertible Preferred Stock, all of which were
issued and outstanding. On the effective date of the Registration Statement
relating to the initial public offering of the Company's common stock, the
issued and outstanding shares of Series A Convertible Preferred Stock
automatically converted into 59,524 shares of common stock. Additionally, on
such date, all authorized shares of preferred stock automatically converted
into additional authorized shares of common stock and, as a result, the
Company's authorized capital stock, on such date, consisted solely of
10,000,000 shares of common stock.
In connection with the initial public offering, the Company agreed to sell
warrants to the underwriters for $110. The underwriters' warrants entitle them
to purchase 110,000 shares at $8.775 per share. The warrants are limited to a
term of five years beginning August 11, 1997, and are exercisable for a four
year period commencing August 11, 1998.
STOCK OPTION PLAN
In February 1996, the Board of Directors approved the 1996 Incentive Stock
Option Plan (the "1996 Plan") that provides for the issuance of nonqualified
and incentive stock options to officers, employees, and consultants. In April
1997, the Company adopted the 1997 Option Plan (the "1997 Plan") and reserved
200,000 shares of common stock for issuance thereunder. The 1997 Plan provides
for the grant of both incentive stock options and nonqualified stock options.
A committee of the Board of Directors determines the terms and conditions of
options granted under the Plans, including the exercise price. The exercise
price for incentive stock options shall not be less than the fair market value
of common stock at the date of grant unless the incentive stock option is
granted to a person who owns greater than 10% of the Company for which the
exercise price shall not be less than 110% of the fair market value at the
date of grant. The exercise price of nonqualified stock options shall not be
less than 85% of the fair market value of the common stock at the date of
grant. Pursuant to the terms of the Underwriting Agreement with the Company's
underwriters in the initial public offering, the Company has agreed to grant
options under the 1997 Plan at not less than the IPO price per share of $6.50
for a period of 18 months following the effective date of the Registration
Statement.
30
<PAGE>
FINE.COM INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Options expire between 5 and 10 years from the date of grant. Subject to the
maintenance of a continuous relationship from the date of grant, options vest
according to a schedule which provides that 5% of the total number of shares
granted will vest after one year, 15% will vest after two years, 30% after
three years, 50% is vested after four years, and the option grant is fully
vested after five years from the date of grant. Options granted under the 1996
Plan and which are subsequently canceled, do not revert back to the option
pool. Options which are granted under the 1997 Plan and are subsequently
canceled, revert back to the option pool.
A summary of stock option activity follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-------------------------
WEIGHTED
SHARES AVERAGE
AVAILABLE FOR NUMBER OF EXERCISE
GRANT SHARES PRICES
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at February 1, 1996.......... -- -- --
1996 Plan introduction............... 107,157 -- --
Granted in fiscal 1997............... (107,157) 107,157 $ 2.05
- ------------------------------------------------------------------------------
Balance at January 31, 1997
(exercisable 4,028)................. -- 107,157 2.05
1997 Plan introduction............... 200,000 -- --
Granted in fiscal 1998............... (90,793) 90,793 6.50
Canceled in fiscal 1998.............. 15,000 (31,642) 4.16
- ------------------------------------------------------------------------------
Outstanding at January 31, 1998
(exercisable 4,525)................. 124,207 166,308 4.08
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
The following table summarizes information concerning currently outstanding
and exercisable options at January 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED WEIGHTED AVERAGE
AVERAGE AVERAGE EXERCISE
EXERCISE NUMBER REMAINING EXERCISE NUMBER PRICES FOR
PRICES OUTSTANDING CONTRACTUAL LIFE PRICES EXERCISABLE SHARES VESTED
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$2.05 90,515 8.5 years $2.05 4,525 $2.05
6.50 75,793 9.7 years 6.50 -- 6.50
- -------------------------------------------------------------------------
166,308 9.1 years 4.08 4,525 2.05
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
</TABLE>
COMMON STOCK RESERVED
Common stock reserved for future issuance was as follows:
<TABLE>
<CAPTION>
JANUARY 31, 1998
----------------
<S> <C>
Stock options............................................ 290,515
Common stock warrants.................................... 110,000
- --------------------------------------------------------------------------------
400,515
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
PRO FORMA INFORMATION FOR STOCK-BASED COMPENSATION
Pro forma information regarding net income per share is required by
Statement No. 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that Statement. The
value for these options was estimated at the date of grant using a Black-
Scholes option pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Expected dividend yield.................................... 0% 0%
Expected stock price volatility............................ 0.437-0.676 N/A
Risk-free interest rate.................................... 5.7%-6.5% 6.5%
Expected life of options in years.......................... 5.0 7.0
</TABLE>
31
<PAGE>
FINE.COM INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
For purposes of pro forma disclosures, the estimated weighted average value
of the options granted of $2.32 and $0.75 per share during 1998 and 1997,
respectively, is amortized to expense over the options' vesting period. During
the phase in period of Statement No. 123, which has been applied only for
options granted beginning in 1997, the effects of applying the Statement for
providing pro forma disclosure are not indicative of future amounts until the
new rules are applied to all outstanding nonvested awards. The Company's pro
forma information is as follows (in thousands except per share amounts):
<TABLE>
<CAPTION>
JANUARY 31,
----------------
1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Net income-as reported........................................ $80,682 $124,274
Net income-pro forma.......................................... 51,682 112,274
Diluted earnings per share-as reported........................ $ 0.05 $ 0.11
Diluted earnings per share-pro forma.......................... 0.03 0.10
</TABLE>
9. TRANSACTIONS WITH OFFICERS AND DIRECTORS
At January 31, 1998 and 1997, the Company had a note receivable from an
officer which was non-interest bearing. Additionally, the Company had a note
payable to a director bearing interest at 9%; this note was repaid in March
1997.
10. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31,
--------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Numerators:
Net income................................. $ 80,682 $ 124,274 $ 30,082
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Denominators:
Denominator for basic earnings per share--
Weighted average common stock............... 1,669,303 1,055,541 1,055,541
Effect of dilutive securities:
Weighted average convertible preferred
stock....................................... 31,234 163 --
Employee stock options...................... 63,438 17,084 --
- -------------------------------------------------------------------------------
Denominator for diluted earnings per share--
Adjusted weighted average shares and assumed
conversions................................. 1,763,975 1,072,788 1,055,541
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Basic earnings per share..................... $ 0.05 $ 0.12 $ 0.03
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Diluted earnings per share................... $ 0.05 $ 0.12 $ 0.03
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
FINE.COM INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
11. SUBSEQUENT EVENT
ACQUISITION OF PACIFIC ANALYSIS AND COMPUTING CORPORATION
On February 13, 1998, the Company entered into an agreement for the merger
of Pacific Analysis and Computing Corporation with and into the Company. The
Company issued 35,870 shares of its common stock valued at $143,480 in
exchange for all outstanding Pacific Analysis shares. The transaction was a
tax-free reorganization and will be accounted for under the purchase method of
accounting. The purchase price is expected to be allocated to assets acquired
and liabilities assumed based on their fair value at the date of acquisition
as follows:
<TABLE>
<S> <C>
Property and equipment................................................ $ 85,630
Net current assets.................................................... 27,850
Other................................................................. 30,000
- -------------------------------------------------------------------------------
$143,480
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
EARNINGS (LOSS)
PER SHARE(1)
NET INCOME -----------------
GROSS REVENUE GROSS PROFIT (LOSS) BASIC DILUTED
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fiscal 1998:
1st Quarter.......... $ 811,433 $ 257,491 $ 43,424 $ 0.04 $ 0.04
2nd Quarter.......... 752,966 205,913 27,868 0.03 0.02
3rd Quarter.......... 1,001,146 401,344 79,637 0.04 0.03
4th Quarter.......... 882,539 291,130 (70,247) (0.03) (0.03)
- -------------------------------------------------------------------------------
$3,448,084 $1,155,878 $ 80,682
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Fiscal 1997:
1st Quarter.......... $ 225,737 $ 96,808 $ 3,891 $ 0.00 $ 0.00
2nd Quarter.......... 266,391 123,414 2,652 0.00 0.00
3rd Quarter.......... 318,006 125,831 1,228 0.00 0.00
4th Quarter.......... 675,735 365,574 116,503 0.11 0.11
- -------------------------------------------------------------------------------
$1,485,869 $ 711,627 $124,274
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
(1) The sum of earnings (loss) per share on a quarterly basis will not
necessarily equal the earnings per share reported for the year since the
average shares and share equivalents used in the earnings per share
computation changes throughout the year.
33
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The information called for by Items 9 through 12 of Part III is included in
the Registrant's Proxy Statement and is incorporated herein by reference. The
information appears in the Proxy Statement under the captions "Election of
Directors," "Security Ownership of Directors, Executive Officers and Certain
Beneficial Owners," "Executive Compensation" and "Certain Transactions."
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
3.1* Articles of Incorporation, as amended
3.1A** Amendment to Articles of Incorporation filed April 2, 1998
3.2* Bylaws
4.1* Specimen Common Stock Certificate
4.2* Form of Representative's Warrant (included as Exhibit A to
Representative's Warrant Agreement filed as Exhibit 10.9)
10.1* Incentive Stock Option Plan
10.2* 1997 Stock Option Plan
10.3* Employment Agreement dated May 9, 1997 with Daniel M. Fine
10.4* Employment Agreement dated May 9, 1997 with James P.
Chamberlin
10.5A* Loan Agreement dated March 31, 1997 with U.S. Bank of
Washington
10.5B* Promissory Note in principal amount of $750,000 dated March
31, 1997
10.5C* Commercial Security Agreement dated March 31, 1997 for
$750,000 revolving line of credit
10.5D* Commercial Guaranty of Daniel M. Fine dated March 22, 1997
with U.S. Bank of Washington
10.6A* Office Lease Agreement dated February 28, 1996 with Grand
Pacific Limited Partnership (former corporate headquarters)
10.6B* Personal Guaranty of Daniel M. Fine dated February 29, 1997
10.6C* First Amendment to Office Lease Agreement dated March 1997
10.6D Sublease Agreement dated September 15, 1997 with Data Base
Designs, Inc.
10.7A Lease Agreement dated November 19, 1997 with Third Avenue
Associates (current corporate headquarters)
10.7B Amendment No. 1 to Lease Agreement, dated December 29, 1997
10.7C Personal Guaranty of Daniel M. Fine for Office Lease, dated
November 20, 1997
10.8A Lease Agreement dated August 31, 1995 between Pacific
Analysis and Computer Corporation and Amber Jack Ltd.
10.8B Sublease Agreement dated July 31, 1997 with Haralson & Co.,
P.C.
10.9* Form of Representative's Warrant Agreement
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
11.1 Statement Regarding Computation of Net Income per Share
(included in Note 10 to "Notes to Financial Statements.")
21.1 List of Subsidiaries of fine.com International Corp.
27.1 Financial Data Schedule
</TABLE>
- --------
* Incorporated herein by reference from Item 27 of Registrant's Form SB-2
(No. 333-26855).
** Incorporated herein by reference from Exhibit to Form 8-K filed April 13,
1998.
(b) No reports on Form 8-K were filed during the last quarter of the fiscal
year ended January 31, 1998.
35
<PAGE>
SIGNATURES
IN ACCORDANCE WITH SECTION 13 OR 15(d) OF THE EXCHANGE ACT, THE REGISTRANT
CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED ON APRIL 30, 1998.
fine.com International Corp.
/s/ Daniel M. Fine
By: _________________________________
Daniel M. Fine, Chief Executive
Officer
IN ACCORDANCE WITH THE EXCHANGE ACT, THIS REPORT HAS BEEN SIGNED BELOW BY
THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES
INDICATED ON APRIL 30, 1998.
/s/ Daniel M. Fine /s/ James P. Chamberlin
- ------------------------------------- -------------------------------------
Daniel M. Fine James P. Chamberlin
Chairman, Chief Executive Officer Chief Financial Officer, Chief
and Director Operating Officer and Director
(principal executive officer) (principal financial and accounting
officer)
/s/ Herbert L. Fine /s/ Frank Hadam
- ------------------------------------- -------------------------------------
Herbert L. Fine Frank Hadam
Director Director
/s/ Norman W. Lauchner /s/ Anthony C. Naughtin
- ------------------------------------- -------------------------------------
Norman W. Lauchner Anthony C. Naughtin
Director Director
36
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -----------------------------------------------------------------------------
<C> <S>
3.1* Articles of Incorporation, as amended
3.1A** Amendment to Articles of Incorporation filed April 2, 1998
3.2* Bylaws
4.1* Specimen Common Stock Certificate
4.2* Form of Representative's Warrant (included as Exhibit A to
Representative's Warrant Agreement filed as Exhibit 10.9)
10.1* Incentive Stock Option Plan
10.2* 1997 Stock Option Plan
10.3* Employment Agreement dated May 9, 1997 with Daniel M. Fine
10.4* Employment Agreement dated May 9, 1997 with James P. Chamberlin
10.5A* Loan Agreement dated March 31, 1997 with U.S. Bank of Washington
10.5B* Promissory Note in principal amount of $750,000 dated March 31, 1997
10.5C* Commercial Security Agreement dated March 31, 1997 for $750,000
revolving line of credit
10.5D* Commercial Guaranty of Daniel M. Fine dated March 22, 1997 with U.S.
Bank of Washington
10.6A* Office Lease Agreement dated February 28, 1996 with Grand Pacific
Limited Partnership (former corporate headquarters)
10.6B* Personal Guaranty of Daniel M. Fine dated February 29, 1997
10.6C* First Amendment to Office Lease Agreement dated March 1997
10.6D Sublease Agreement dated September 15, 1997 with Data Base Designs,
Inc.
10.7A Lease Agreement dated November 19, 1997 with Third Avenue Associates
(current corporate headquarters)
10.7B Amendment No. 1 to Lease Agreement, dated December 29, 1997
10.7C Personal Guaranty of Daniel M. Fine for Office Lease, dated November
20, 1997
10.8A Lease Agreement dated August 31, 1995 between Pacific Analysis and
Computer Corporation and Amber Jack Ltd.
10.8B Sublease Agreement dated July 31, 1997 with Haralson & Co., PC
10.9* Form of Representative's Warrant Agreement
11.1 Statement Regarding Computation of Net Income per Share (included in
Note 10 to "Notes to Financial Statements.")
21.1 List of Subsidiaries of fine.com International Corp.
27.1 Financial Data Schedule
</TABLE>
- --------
* Incorporated herein by reference from Item 27 of Registrant's Form SB-2 (No.
333-26855).
** Incorporated herein by reference from Exhibit to Form 8-K filed April 13,
1998.
<PAGE>
EXHIBIT 10.6D TO FORM 10-KSB
SUBLEASE AGREEMENT
1. PARTIES. This Sublease is entered into as of the 15th day of
September, 1997 by and between FINE.COM CORPORATION, "Sublessor," and DATA BASE
DESIGNS, INC., "Sublessee," as a Sublease under the Master Lease dated February
28, 1996, entered into by Grand Pacific Limited Partnership, as Landlord, and
fine.com Corporation, as Tenant. A copy of said Master Lease is attached hereto,
marked Exhibit A, and incorporated herein by reference.
2. PROVISIONS CONSTITUTING SUBLEASE.
(a) This Sublease is subject to all of the terms and conditions of the
Master Lease in Exhibit A, except as specifically exempted herein and Sublessee
shall assume and perform the obligations of Sublessor and Tenant in said Master
Lease, to the extent said terms and conditions are applicable to the premises
subleased pursuant to this Sublease. Sublessee shall not commit nor permit to be
committed on the subleased premises any act or omission which shall violate any
term or condition of the Master Lease. In the event of the termination of
Sublessor's interest as Tenant under the Master Lease for any reason, then this
Sublease shall terminate coincidentally therewith without any liability of
Sublessor to Sublessee.
(b) All of the terms and conditions contained in the Master Lease in
Exhibit A are incorporated herein, except for paragraphs N/A , as terms and
conditions of this Sublease (with each reference therein to Landlord and Tenant
to be deemed to refer to Sublessor and Sublessee) and along with all of the
following paragraphs set out in this Sublease, shall be the complete terms and
conditions of this Sublease.
3. PREMISES. Landlord subleases to Sublessee and Sublessee hires from
said Sublessor the following described premises in Exhibit B situated in the
City of Seattle, County of King, State of Seattle, and described as 1118 Post
Avenue (Grand Pacific Building), consisting of approximately 6,118 rentable
square feet.
4. TERM.
4.1 TERM. The term of this Sublease shall be for a period commencing
on February 1, 1998 and ending on April 15, 2001, unless sooner terminated
pursuant to any provision hereof.
4.2 DELAY IN COMMENCEMENT. Notwithstanding said commencement date,
if for any reason Sublessor cannot deliver possession of the Premises to
Sublessee on said date, Sublessor shall not be subject to any liability
therefor, nor shall such failure affect the validity of this Sublease or the
obligations of Sublessee hereunder or extend the term hereof, but in such case
Sublessee shall not be obligated to pay rent until possession of the Premises is
tendered to Sublessee; provided, however, that if Sublessor shall not have
delivered possession of the Premises within thirty (30) days from said
commencement date, Sublessee may, at Sublessee's option, by notice in writing to
Sublessor within ten (10) days thereafter, cancel this Sublease. If this
Sublease is canceled as herein provided, Sublessor shall return any monies
previously deposited by Sublessee and the parties shall be discharged from all
obligations hereunder. Tenant shall have reasonable access to space seven (7)
days prior to commencement, without obligation of payment for Purposes or
painting, wiring and equipment installation for preparation of space for
conducting business.
4.3 EARLY POSSESSION. In the event that Sublessor shall permit
Sublessee to occupy the Premises prior to the commencement date of the term,
such occupancy shall be subject to all of the provisions of this Sublease. Said
early possession shall not advance the termination date of this Sublease.
<PAGE>
5. RENT.
5.1 The annual base rental rate shall be Sixteen and No/100 Dollars
($16.00) per rentable square foot. Sublessee shall pay to Sublessor as rent for
the Premises equal monthly installments of Eight Thousand One Hundred Fifty
Seven and 73/100 Dollars ($8,157.73 , in advance, on the first day of each month
of the term hereof (rent shall be adjusted during months one through six to
reflect the space pocket - see paragraph 5.2 below). Sublessee shall pay
Sublessor upon the execution hereof the sum of Six Thousand Two Hundred Sixty
and NO/100 Dollars ($6,260.00) as rent for February 1998. Rent for any period
during the term hereof which is for less than one (1) month shall be a pro-rata
portion of the monthly installment. Rent shall be payable without notice or
demand and without deduction, offset, or abatement, in lawful money of the
United States of America to Sublessor at the address stated herein or to such
other persons or at such other places as Sublessor may designate in writing.
5.2 SPACE POCKET. Sublandlord shall pocket 742 R.S.F. (reference
Exhibit A) for months one through three of the Sublease term and 681 R.S.F.
(reference Exhibit A) for months one through six the Sublease term.
5.3 Subtenant shall be responsible for excess expenses after the
initial base year of the Sublease term as set forth in Sections 5.3 and 5.4 of
the Master Lease.
6. SECURITY DEPOSIT. Sublessee shall deposit with Sublessor upon
execution hereof the sum of Two Thousand Seven Hundred Nineteen and 24/100
Dollars ($2.719.24), equal to one-third of the total deposit, as security for
Sublessee's faithful performance of Sublessee's obligations hereunder. The
remaining two-thirds shall be Paid one-third upon occupancy and one-third on
March 1. 1998. If Sublessee fails to pay rent or other charges due hereunder, or
otherwise defaults with respect to any provision of this Sublease, Sublessor may
use, apply or retain all or any portion of said deposit for the payment of any
rent or other charge in default or for the payment of any other gum to which
Sublessor may become obligated by reason of Sublessee's default, or to
compensate Sublessor for any loss or damage which Sublessor may suffer thereby.
If Sublessor so uses or applies all or any portion of said deposit, Sublessee
shall within ten (10) days after written demand therefore deposit cash shall be
a breach of this Sublease, and Sublessor may at its option terminate this
Sublease. Sublessor shall not be required to keep mud deposit separate from its
general accounts. If Sublessee performs all of Sublessee's obligations
hereunder, said deposit or so much thereof as has not theretofore been applied
by Sublessor, shall be returned, without payment of interest or other increment
for its use, to Sublessee (or, at Sublessor's option, to the last assignee, if
any, or Sublessee's interest hereunder) within fifteen (15) days after the
expiration of the term hereof, or after Sublessee has vacated the Premises,
whichever is later.
7. USE. The Premises shall be used and occupied only for general office
use and for no other purpose without prior written consent of Sublessor and
Landlord. Sublessee's business shall be established and conducted throughout the
term hereof in a first class manner. Sublessee shall not use the Premises for,
or carry on, or permit to be carried on, any offensive, noisy, or dangerous
trade, business, manufacture or occupation or permit any auction sale to be held
or conducted on or about the Premises. Sublessee shall not do or suffer anything
to be done upon the Premises which will cause structural injury to the Premises
or the building of which the Premises form a part. The Premises shall not be
overloaded and no machinery, apparatus or other appliance shall be used or
operated in or upon the Premises which will in any manner injure, vibrate, or
shake the Premises or the building of which it is a part. No use shall be made
of the Premises which will in any way impair the efficient operation of the
sprinkler system (if any) within the building containing the Premises. Sublessee
shall not leave the Premises unoccupied or vacant during the term. No musical
instrument of any sort, or any noise-making device will be operated or allowed
upon the Premises for the purpose of attracting trade or otherwise. Sublessee
shall not use or permit the use of the Premises or any part thereof for any
purpose which will increase the existing rate of insurance upon the building in
which the premises are located, or cause a cancellation of any insurance policy
covering the building or any part thereof. If any act on the part of Sublessee
or use of the Premises by Sublessee shall cause, directly or indirectly, any
increase of Sublessor's or Landlord's insurance expense, said additional expense
shall be paid by Sublessee to Sublessor upon demand. No such payment by
Sublessee shall limit Sublessor in the exercise of any other rights or remedies,
or constitute a waiver of Sublessor's right to require Sublessee to discontinue
such act or use.
8. NOTICES. All notices. or demands of any kind required or desired to be
given to Sublessor or Sublessee hereunder shall be in writing and shall be
deemed delivered forty-eight (48) hours after depositing the
<PAGE>
notice or demand in the United States mail, certified or registered, postage
prepaid, addressed to the Sublessor or Sublessee, respectively, at the addresses
set forth after their signatures at the end of this Sublease. All rent and other
payments due under this Sublease or the Master Lease shall be made by Sublessee
to Sublessor at the same address.
9. COMMISSION. Upon execution of this Sublease, Sublessor shall pay
Kidder, Mathews & Segner, Inc. a real estate commission in the amount of Twenty-
Two Thousand Nine Hundred Twenty-Three and 04/100 Dollars ($22,923.04). payable
one-half (1/2) within thirty (30) days of a fully executed Sublease and one-half
(1/2) within thirty (30) days of Subtenant's occupancy. Upon receipt of
commission. Kidder, Mathews & Segner, Inc. shall immediately deposit an amount
equal to two-thirds of the above commission with CB Commercial.
<TABLE>
<CAPTION>
<S> <C> <C>
Address: 1520 Third Avenue, Suite 800 SUBLESSOR:
Seattle, Washington 98101
fine.com CORPORATION
By: /s/ James C. Chamberlin
------------------------------
Its: Chief Executive Officer
--------------------------
Date: November 19, 1997
------------------------------
Address: 1118 Post Avenue SUBLESSEE:
Seattle, Washington 98101
DATA BASE DESIGNS, INC.
By: /s/ Susan Rogers
------------------------------
Its: Executive Vice President
--------------------------
Date: November 19, 1997
------------------------------
</TABLE>
[NOTARY BLOCKS AFFIXED HERE]
[EXHIBITS OMITTED]
<PAGE>
EXHIBIT 10.7A TO FORM 10-KSB
CENTURY TOWER BUILDING
LEASE AGREEMENT
LANDLORD: THIRD AVENUE ASSOCIATES
TENANT: fine.com CORPORATION
DATE: NOVEMBER 19, 1997
<PAGE>
CENTURY TOWER BUILDING
LEASE AGREEMENT
THIS LEASE is made as of this 19th day of November, 1997, by and between
THIRD AVENUE ASSOCIATES, a Washington limited partnership (hereinafter referred
to as "Landlord"), and FINE.COM CORPORATION, a Washington corporation
(hereinafter referred to as "Tenant").
LEASE SUMMARY
Section 1.01
The Building
(a) Name: Century Tower Building
(b) Address: 520 Third Avenue
Seattle, WA 98101
(c) Total Rentable Area of Building: 41,728 sq. ft.
The Premises
(a) Total Rentable Area: 10,434 sq. ft.
(b) Floor Location: 7th and 8th Floors
(c) Suite Number: Suite 800
Section 2.01 Use of Premises and Tenant's Trade Name
(a) Tenant's Trade Name: fine.com
(b) Use of Premises: General office use only.
Section 3.01 Lease Term
(a) Eighty-eight (88) Months
(b) Target Lease Commencement Date: February 1, 1998
Section 4.01 Basic Rent
Monthly Rent Per
Month(s) Rentable Sq. Ft. Rent Installment
-------- ---------------- ----------------
1-12* $14,738.02 $16.95
13-64 $15,216.25 $17.50
65-88 $16,085.75 $18.50
*Notwithstanding the above to the contrary, Tenant shall not be obligated
to pay Basic Rent for months 1 through 4 of the Lease Term for the 5216 rentable
square feet of space located on the 7th floor, which equals $7,367.60 per month.
Section 4.02 Operating Expenses
(a) Tenant's Proportionate Share: 25.005%
(b) Base Year: 1998
-i-
<PAGE>
Section 5.01 Security Deposit
(a) Security Deposit: $ 0.00
Section 5.02 Prepaid Rent
(a) Prepaid Rent: $ 0.00
(b) Month(s) to which the Prepaid Rent is applied: N/A
Section 19.01 Addresses for Notices
(a) Landlord:
(b) Tenant:
Third Avenue Associates fine.com CORPORATION
P.O. Box 12328 1525 Fourth Avenue, Suite 800
Seattle, WA 98111-4328 Seattle, Washington 98101
Section 21.13 Broker's Commission
(a) Landlord's Leasing Representative: Betsy Sutherland/Patrick Pendergast
CB Commercial
1420 Fifth Avenue, Suite 1700
Seattle, Washington 98101
(b) Tenant's Leasing Representative: Craig Wrench
Lowe Enterprises Northwest, Inc.
600 University Street, Suite 2820
Seattle, Washington 98101
And
Chris Moe
Kidder Mathews & Segner
601 Union Street, Suite 4720
Seattle, Washington 98101
Exhibits:
(A) Tenant Floor Plan
(B) Legal Description
(C) Tenant Improvements
(D) Rules and Regulations
(E) Parking Agreement
(F) Personal Guaranty
-ii-
<PAGE>
OFFICE LEASE AGREEMENT
ARTICLE I
PREMISES
Section 1.01 Premises Defined. Landlord hereby leases to Tenant, and
Tenant hereby leases from Landlord, upon the terms and conditions hereinafter
set forth, those certain premises and improvements consisting of the floor area
and the location described in the Lease Summary and shown in crosshatching on
the floor plan attached hereto as Exhibit A (hereinafter referred to as the
"Premises"). The Premises are located in the building known as the Century Tower
Building (the "Building") which is situated in the City of Seattle, County of
King, State of Washington and located upon the real property described in
Exhibit B (the "Property"). During the initial Term (excluding the Renewal Term
as defined in Section 3.04 below), the floor area of the Premises set forth in
Section 1.01 of the Lease Summary is an agreed upon floor area and shall not be
adjusted or re-measured during the Lease Term.
Section 1.02 Alterations. Tenant acknowledges that Exhibit A sets forth
the floor plan for the Building and the location of the Premises therein,
Landlord may in its sole discretion increase, decrease, or change the number,
locations and dimensions of any hallways, lobby areas and other improvements
shown on Exhibit A that are not within the Premises. Landlord reserves the right
from time to time (a) to install, use, maintain, repair, relocate and replace
pipes, ducts, conduits, wires, and appurtenant meters and equipment for service
to the Premises or to other parts of the Building which are above the ceiling
surfaces, below the floor surfaces, within the walls and in the central core
areas of the Building which are located within the Premises or located elsewhere
in the Building; (b) to alter or expand the Building; and (c) to alter, relocate
or substitute any of the Common Areas, as defined in Section 1.04 below,
provided that such alterations do not interfere with Tenant's use of the
Building or the Premises or result in an increase in Tenant's Operating
Expenses.
Section 1.03 Condition of Premises. The Premises are leased by Landlord
and accepted by Tenant in an "as is" condition, subject to any improvements,
alterations or modifications to be made pursuant to Article VII below, and the
requirement of Landlord to complete the improvements specified therein.
Section 1.04 Common Areas. So long as Tenant occupies the Premises under
the terms of this Lease, Tenant, its licensees, invitees, customers and
employees shall have the non-exclusive right to use all entrances, lobbies, and
other public areas of the Building (the "Common Areas") in common with Landlord,
other Building tenants, and their respective licensees, invitees, customers and
employees. The use of the Common Areas shall be subject to the terms and
conditions of this Lease.
Section 1.05 Right of First Refusal. Landlord agrees that, to the extent
that such space becomes available to lease, and subject to the extension rights
of tenants existing as of the date hereof, prior to leasing any space located on
floors 5 and 6 of the Building (the "Right of First Refusal Space") to a third
party, Landlord shall notify Tenant in writing that Landlord has received a
written offer to lease all or a portion of the Right of First Refusal Space from
a third party (the "Offer") which Landlord has accepted and Tenant shall have
the right ("Right of First Refusal") to rent the portion of the Right of First
Refusal Space covered by the Offer on the terms set forth in this Section 1.05.
Provided that Tenant is not in default under this Lease, Tenant may exercise the
Right of First Refusal by sending Landlord, within five (5) business days of
receipt by Tenant of the Offer, a notice stating that Tenant elects to lease the
Right of First Refusal Space upon the terms and conditions set forth in this
Section 1.05. If Tenant duly and timely exercises a Right of First Refusal, the
Right of First Refusal Space shall become part of the Premises and Landlord and
Tenant shall promptly enter into an amendment to this Lease incorporating the
Right of First Refusal Space upon the terms set forth herein, but the First
Refusal Space shall become subject to this Lease on the terms set forth herein
whether or not such an amendment is signed.
(a) Terms of Right of First Refusal Space Lease. Provided that
Tenant timely and properly exercises a Right of First Refusal, Tenant's lease of
the applicable Right of First Refusal Space shall commence on the date Landlord
tenders possession of the applicable portion of the Right of First Refusal Space
to Tenant (the
<PAGE>
"Right of First Refusal Commencement Date") and shall be on terms identical to
those set forth in this Lease, except that (i) except as expressly provided in
this Section 1.05, Tenant shall not be entitled to any concessions with respect
to the Right of First Refusal Space including, without limitation, commissions
or allowances, (ii) the lease term for such Right of First Refusal Space shall
be co-terminus with the Term (including any renewal options) of this Lease, and
(iii) rent for the Right of First Refusal Space shall be at the rent per
rentable square foot rate then in effect under this Lease and shall be subject
to any increases as set forth in this Lease. If for any reason Tenant fails to
duly and timely exercise its Right of First Refusal, Landlord shall be free to
lease the portion of the Right of First Refusal Space covered by the Offer to
the third party on the terms of the Offer. Should Landlord not lease the Right
of First Refusal Space to the third party on the Offer terms, or if the Right of
First Refusal Space leased to a third party in accordance with this provision
becomes available again during the Lease Term, Tenant's Right of First Refusal
shall continue in accordance with the foregoing provisions until the expiration
of the Term (including any renewal options), upon which date this Right of First
Refusal shall automatically expire.
(b) Allowances. If Tenant exercises a Right of First Refusal under
this Section 1.05, Landlord shall provide Tenant with a pro-rated allowance with
respect to each Right of First Refusal exercised (the "Right of First Refusal
Allowance") for Tenant Improvements, Design Costs, and Moving Costs (all as
defined in this Lease). The Right of First Refusal Allowance shall be equal to
$17.00 per sq. ft. of Right of First Refusal Space for Tenant Improvements,
$1.00 per sq. ft. for Design Costs, and $1.00 per sq. ft. for Moving Costs,
divided by eighty-eight (88) months, multiplied by the number of months
remaining on the initial Lease Term. For example, if Tenant exercises a Right
of First Refusal with respect to 1,000 rentable square feet at a time when there
are 24 months remaining in the initial lease term, the Right of First Refusal
Allowance will be $5,181.60 (1,000 x 19 = 19,000 + 88 = 215.90 x 24 = 5,181.60).
The Right of First Refusal Allowance shall be applied by Landlord exclusively
toward the cost of Right of First Refusal Space Improvements and Design Costs
and Moving Costs related to the Right of First Refusal Space. Tenant shall
submit to Landlord working drawings for Tenant's proposed tenant improvements to
the Right of First Refusal Space (the "Right of First Refusal Improvements") and
such drawings shall be subject to Landlord's approval, which approval shall not
be unreasonably withheld or delayed. Landlord shall contract with a contractor
selected by Landlord for the construction of the Right of First Refusal
Improvements. To the extent the cost of the Right of First Refusal Improvements
exceeds the amount of the Right of First Refusal Allowance, the balance, if any,
shall be paid directly by Tenant to Landlord's contractor promptly upon receipt
of invoices for such costs.
Section 1.06 Access through 1525 Fourth Avenue Building. Tenant shall
have the right to access the Building through the 1525 Fourth Avenue building
pursuant to the provisions of that certain Skybridge Easement executed on March
26, 1979, and recorded in the official records of King County under Recording
No. 7907310892. Landlord represents that such access will be available during
the Lease Term and any renewals thereof.
ARTICLE II
BUSINESS PURPOSE AND USE
Section 2.01 Permitted Uses. Tenant shall use the Premises solely for the
purposes and under the trade name specified in the Lease Summary, and for no
other business or purpose without the prior written consent of the Landlord,
which consent shall not be unreasonably withheld.
Section 2.02 Prohibited Uses. Tenant shall not do or permit anything to
be done in or about the Premises, nor bring or keep anything therein, which will
(a) in any way increase the existing rate of or affect any policy of fire or
other insurance upon the Building or any of its contents, or cause a
cancellation of any insurance policy covering any part thereof or any of its
contents; (b) obstruct or interfere in any way with the rights of other tenants
or occupants of the Building or injure or unreasonably annoy any of them; or (c)
use or allow the Premises to be used for any improper, unlawful or objectionable
purposes. Tenant shall not cause, maintain or permit any nuisance in, on or
about the Premises, nor shall Tenant commit or suffer to be committed any waste
in, on or about the Premises. Tenant shall not place upon or install in windows
or other openings any signs, symbols, drapes, or other material
<PAGE>
without written approval of Landlord. Tenant shall not place any object or
barrier within, or otherwise obstruct, any of the Common Areas.
Section 2.03 Compliance with Laws. Tenant shall at all times comply with
all laws, ordinances and any regulations promulgated by any governmental
authority having jurisdiction over the Building and/or the Premises. To the
extent Landlord is required by the City of Seattle to maintain carpooling and
public transit programs, Tenant shall cooperate in the implementation and use of
these programs by and among Tenant's employees, provided that this shall not
require Tenant to relinquish its five parking spaces. Except with respect to
matters which relate to Tenant's particular use of the Premises, it shall be
Landlord's responsibility to maintain the Building in compliance with applicable
building codes and the Americans With Disabilities Act. Notwithstanding the
preceding sentence to the contrary, the initial cost of bringing the Premises
into compliance with all applicable codes shall be paid from the Allowance (as
defined in Exhibit C).
Section 2.04 Access to Premises. Tenant shall have access to the Premises
24 hours per day, 7 days per week, every day of the year.
ARTICLE III
TERM
Section 3.01 Term. The term of this Lease shall commence on the first day
of the calendar month in which the earlier of the following dates occurs (such
first day of the calendar month shall be referred to as the "Lease Commencement
Date"):
(a) The date upon which Landlord has notified Tenant that the
Premises are substantially complete and the Landlord tenders delivery of the
Premises to Tenant as provided in Section 3.03 (a) below;
(b) The date that Tenant takes possession or beneficial occupancy of
the Premises; provided, that if the first to occur of (a) or (b) above falls on
a day other than the first day of a calendar month, Tenant's rent and other
obligations pursuant to this Lease for the first month of the Lease Term (as
defined below) shall be prorated based upon the number of days from and
including the first to occur of (a) or (b) above to the end of such first month.
From the Lease Commencement Date, the term of this Lease shall continue for
the time period specified in the Lease Summary, the expiration of which shall be
the Termination Date of this Lease, unless this Lease is sooner terminated as
hereinafter provided. The period between the Lease Commencement Date and the
Termination Date shall be referred to as the "Lease Term" or "Term." The
Landlord and Tenant acknowledge that certain obligations under the provisions of
this Lease may be binding upon them prior to the Lease Commencement Date, such
as, but not limited to, the provisions of Exhibit C, and Landlord and Tenant
shall be bound by such provisions prior to the Lease Commencement Date.
Section 3.02 Lease Year. "Lease Year" shall mean that period of twelve
(12) consecutive months which ends on December 31st of each year and which falls
within the Term of this Lease; provided, however, the first Lease Year (which
may be a partial Lease Year) shall mean that period from the Lease Commencement
Date until the December 31st first occurring after the Lease Commencement Date
and the last Lease Year (which may be a partial Lease Year) shall mean that
period from the January 1st last occurring during the Term of this Lease until
the Termination Date.
Section 3.03 Possession by Tenant.
(a) Landlord shall deliver to Tenant, and Tenant shall accept from
Landlord, possession of the Premises, upon the date of substantial completion of
the standard "Tenant Improvements" described as "Landlord's Work" in Exhibit C.
The term "substantial completion of the Premises" as used in this Lease, shall
mean the date of substantial completion of the Landlord's Work as specified in
Exhibit C such that Tenant's contractor may
<PAGE>
commence the construction and/or installation of "Tenant's Work" as specified in
said Exhibit C. With the understanding that installation of any heating, air
conditioning and sprinkler systems by Landlord within the Premises may not be
completed until construction of the Tenant's Work, as specified in Exhibit C has
commenced. Certification by Landlord's architect (the "Project Architect") as to
the substantial completion of the Premises shall be conclusive and binding upon
Landlord and Tenant. Tenant shall commence construction and/or installation of
the Tenant's Work as described in Exhibit C promptly upon the substantial
completion of the Landlord's Work and shall diligently prosecute that work to
completion.
(b) If Landlord cannot deliver possession of the Premises to Tenant
by the Target Lease Commencement Date, as specified in the Lease Summary, then
this Lease shall not be void or voidable, nor shall Landlord be liable to Tenant
for any loss or damage resulting therefrom, but in that event all Rent shall be
abated until the Landlord delivers possession of the substantially completed
Premises to Tenant (excepting to the extent any such delay is caused by Tenant
or anyone acting through or on behalf of Tenant). If Landlord is delayed in
delivering the Premises to Tenant until after March 1, 1998, and such delay is
not the result of a Delaying Cause (as defined in Section 11.01) and is not
caused by Tenant or anyone acting through or on behalf of Tenant, then Tenant
shall receive two (2) days of free rent for each day after March 1, 1998, that
delivery of possession is delayed.
Section 3.04 Option to Renew.
(a) Landlord hereby grants Tenant the right to renew the term of this
Lease for one period of five (5) years (the "Renewal Term") on the same terms
and conditions contained in the Lease, except that (i) Basic Rent for the
Renewal Term shall be as set forth hereinbelow, (ii) except as expressly
provided in this Section 3.04, Tenant shall not be entitled to any concessions
with respect to the Renewal Term including, without limitation, commissions or
allowances, and (iii) no additional options to renew shall apply following the
expiration of the Renewal Term. Written notice (the "Tenant's Election") of
Tenant's exercise of its option to renew ("Option to Renew") the Term of this
Lease for a Renewal Term must be given to Landlord no less than nine (9) months
but no more than twelve (12) months prior to the date the Term of the Lease
would otherwise expire. Tenant shall have no right to renew this Lease if
Tenant is in default at the time of Tenant's Election or at any time thereafter
before the commencement of the Renewal Term.
(b) In the event Tenant validly exercises its Option to Renew the
Term of this Lease as herein provided, Basic Rent shall be adjusted as of the
commencement date of the Renewal Term as follows:
(1) Commencing within ten (10) days after Landlord's receipt of
Tenant's Election, Landlord and Tenant shall attempt to agree upon Basic Rent
for the Premises for the Renewal Term, such rent to equal the estimated fair
market rental value of the Premises for the Renewal Term. If the parties are
unable to agree upon the rent within thirty (30) days, then within thirty (30)
days thereafter each party, at its own cost and by giving notice to the other
party, shall appoint a real estate appraiser with at least five (5) years full-
time commercial real estate appraisal experience in the area in which the
Premises are located to appraise and set rent for the Renewal Term. If a party
does not appoint an appraiser within ten (10) days after the other party has
given notice of the name of its appraiser, the single appraiser appointed shall
be the sole appraiser and shall set rent for the Renewal Term. If each party
shall have so appointed an appraiser, the two appraisers shall meet promptly and
attempt to set the rent for the Renewal Term. If the two appraisers are unable
to agree within thirty (30) days after the second appraiser has been appointed,
they shall attempt to select a third appraiser meeting the qualifications herein
stated within ten (10) days after the last day the two appraisers are given to
set rent. If the two appraisers are unable to agree on the third appraiser
within such ten (10) day period, either of the parties to this Lease, by giving
five (5) days notice to the other party, may apply to the then presiding judge
of the Superior Court of King County for the selection of a third appraiser
meeting the qualifications stated in this paragraph. Each of the parties shall
bear one-half (1/2) of the cost of appointing the third appraiser and of paying
the third appraiser's fee. The third appraiser, however selected, shall be a
person who has not previously acted in any capacity for either party
(2) Within thirty (30) days after the selection of the third
appraiser, a majority of the appraisers shall set rent for the Renewal Term. If
a majority of the appraisers are unable to agree upon the rent within the
stipulated period of time, the three appraisals shall be added together and
their total divided by three (3).
<PAGE>
The resulting quotient shall be the rent for the Premises during the Renewal
Term. If, however, the low appraisal and/or the high appraisal is/are more than
five percent (5%) lower and/or higher than the middle appraisal, the low
appraisal and/or the high appraisal shall be disregarded. If only one (1)
appraisal is disregarded, the remaining two (2) appraisals shall be added
together and their total divided by two (2), and the resulting quotient shall be
rent for the Premises during the Renewal Term.
(3) For purposes of determining the rent for the Renewal Term,
including the determination of rent by the appraisers, the "fair market rental
value" shall be based on the actual rental rates which ready and willing renewal
tenants are paying or would pay, as of the Renewal Term commencement date, as
annual rent for a primary renewal premises (as distinguished from the rent
payable for a sublet premises or with respect to an assignment of an interest in
an existing lease) to a ready and willing landlord of such primary renewal
premises for space comparable to the Premises in a building comparable to the
Building, taking into consideration any allowances, concessions or other special
benefits being offered to such renewal tenants. Rental rates quoted or used
under sublease agreements shall be considered rates of special circumstances and
shall be excluded from the definition of "fair market rental value" under this
Section 3.04. During the Renewal Term, the Base Year for Operating Expenses
shall not change.
(c) The Option to Renew may not be assigned or transferred by Tenant
except in connection with an assignment of this Lease.
(d) In the event Tenant timely and properly exercises the Option to
Renew, Landlord and Tenant shall within fifteen (15) days after the
determination of rent for the Renewal Term, execute an amendment to this Lease
extending the Lease Term on the terms and conditions set forth in this Section
3.05, but this Lease will be extended in accordance with Tenant's exercise of
the Option to Renew whether or not the amendment is signed.
Section 3.05 Option to Terminate. Tenant shall have a one-time right to
terminate this Lease (the "Termination Option") effective as of the end of the
sixty-fourth (64th) month of the Term subject to and on the following terms and
conditions
(a) Tenant shall notify Landlord in writing between the fifty-second
(52nd) month and the fifty-fifth (55th) month of the Term that Tenant needs to
expand the Premises (the "Expansion Notice"). Such notice shall designate the
exact amount of square footage of expansion space Tenant needs (the "Expansion
Space"). The Expansion Notice shall constitute an irrevocable notice to
Landlord that (1) Tenant desires to expand the Premises by the amount of
Expansion Space set forth in the Expansion Notice, and (2) if the Expansion
Space is not made available by Landlord pursuant to the provisions of subsection
(b) below, Tenant desires to terminate the Lease Term at the end of the sixty-
fourth (64th) month of the Term (the "Early Termination Date"). If Tenant fails
to provide Landlord with the Expansion Notice in a timely manner, Tenant's
Termination Option shall be void and of no further force or effect.
(b) Landlord shall have until the Early Termination Date to make the
Expansion Space available to Tenant. The Expansion Space shall be located on
floor(s) 3, 4, 5, and/or 6 of the Building and Landlord shall use its best
reasonable efforts to locate the Expansion Space on a floor which is contiguous
with the Premises. If the Expansion Space consists of more than 3,500 rentable
square feet, Landlord may, at its option, separate the Expansion Space between
two different spaces in the Building. If Landlord is able to made the Expansion
Space available to Tenant by the Early Termination Date, then (1) Tenant's
Termination Option shall be void and of no further force or effect, and (2) the
Expansion Space shall become part of the Premises on the date that it is made
available to Tenant by Landlord. The Expansion Space shall be leased on the
same terms and conditions as this Lease at the Basic Rent rate in effect for the
period of the Term applicable to the Expansion Space. Landlord shall provide
Tenant with a pro rated allowance for the Expansion Space in the same manner as
the allowance for the Right of First Refusal Space under subsection 1.05(b)
above. The Expansion Space shall be deemed "available" to Tenant under the
terms of this subsection when it is vacant and ready for the construction of
tenant improvements.
(c) If Landlord is unable to make the Expansion Space available to
Tenant by the Early Termination Date and Tenant has timely provided Landlord
with the Expansion Notice, then the Lease Term shall termi-
<PAGE>
nate on a date selected by Tenant which shall be no sooner than the Early
Termination Date but no later than 180 days after Landlord notifies Tenant that
it will not be able to make the Expansion Space available and, notwithstanding
the provisions of Section 3.04 to the contrary, Tenant shall have no Options to
Renew the Term beyond the Early Termination Date. If the Lease Term terminates
pursuant to this subsection (c), Tenant shall notify Landlord of the selected
termination date at least 30 days in advance and shall pay Landlord, on or
before the date the Lease terminates, an amount equal to the unamortized portion
of the Tenant Improvement Allowance in an original principal balance of
$177,378, Architectural and Design Allowance in an original principal balance of
$2.50 per sq. ft., and Moving Allowance in an original principal balance of
$3.00 per sq. ft., which shall be amortized on a straight-line basis over
eighty-eight (88) months, together with the unamortized portion of the Right of
First Refusal Allowance.
ARTICLE IV
RENT
Section 4.01 Basic Rent. Tenant shall pay to Landlord as minimum rental
for the use and occupancy of the Premises the "Basic Rent" as specified in the
Lease Summary. Basic Rent shall be payable in Monthly Rent Installments of the
amount specified in the Lease Summary, on or before the first day of each month
of the Lease Term beginning on the Lease Commencement Date. Basic Rent for any
partial year shall be prorated based upon the actual number of months left in
such partial year. The Monthly Rent Installment for any partial month shall be
prorated based upon the actual number of days in that partial month.
Section 4.02 Operating Expenses.
(a) This is a fully serviced, gross Lease. All Operating Expenses
shall be included in the Basic Rent from the Lease Commencement Date through the
Base Year. With respect to each Lease Year following the Base Year, the Tenant
shall pay, in monthly installments and as "Additional Rent," an amount equal to
the "Tenant's Proportionate Share" (as hereinafter defined) of actual "Total
Operating Expenses" (as hereinafter defined) minus Tenant's Proportionate Share
of actual Total Operating Expenses for the Base Year. The Base Year is set
forth in the Lease Summary. To the extent that the Building is less than
ninety-five percent (95%) occupied during the Base Year, the Operating Expenses
with respect to the Base Year shall be "grossed up" to reflect a minimum
occupancy of ninety-five percent (95%). Notwithstanding anything herein to the
contrary, Tenant shall in no event pay less than the Basic Rent in any calendar
year.
(b) "Tenant's Proportionate Share" shall be computed by dividing the
Total Rentable Area of the Premises by the Total Rentable Area of the Building
with respect to any particular Operating Expense. Tenant's Proportionate Share
upon the Lease Commencement Date for the entire Premises is as specified in the
Lease Summary.
(c) "Rentable Area of the Building" and "Rentable Area of the
Premises" are defined as those areas obtained by measuring the Building and
Premises in accordance with the method of measuring rentable office space
specified in the most recent American National Standards Institute Publication
(otherwise known as "BOMA Standard"), The Total Rentable Area of the Building
and Total Rentable Area of the Premises, as of the Lease Commencement Date, are
as specified in the Lease Summary. The Total Rentable Area of the Premises
exceeds the usable area of the Premises to include a pro rata share of hallways,
restrooms, and other common elements located on the floor on which the Premises
are located.
(d) Landlord shall provide Tenant with a written estimate of Total
Operating Expenses for the succeeding year within thirty (30) days after the
start of each Lease Year during the Lease Term, following the first full Lease
Year (first full calendar year) of the Lease Term. Tenant shall then pay to
Landlord, monthly in advance, one-twelfth (1/12) of Tenant's Proportionate Share
of the estimated Total Operating Expenses for the said Lease Year in excess of
Tenant's Proportionate Share of the Total Operating Expenses for the Base Year.
In the event any item of actual Operating Expenses, including without limitation
those items identified in subparagraph (f) below,
<PAGE>
increases five percent (5%) or more in price or cost over any twelve (12) month
period, Landlord shall have the option to pass through to Tenant Tenant's
Proportionate Share of any increase in the actual Operating Expenses upon thirty
(30) days' written notice from Landlord to Tenant.
(e) Within one hundred twenty (120) days after the end of every Lease
Year during the Lease Term, Landlord shall provide the Tenant with a written
statement of the actual Total Operating Expenses for that Lease Year. If the
actual Total Operating Expenses should exceed the estimated amount with respect
to such Lease Year, then Tenant shall pay Landlord the additional amount due to
the Landlord within sixty (60) days and, if actual Total Operating Expenses
should be less than the estimated Total Operating Expenses for that Lease Year,
then Landlord shall credit, against future Additional Rent due under this
Article, the amount of any overpayment by Tenant.
(f) "Operating Expenses" as used herein shall mean all costs,
expenses and other charges incurred by Landlord in connection with the operation
and maintenance of the Property and the Building as a first class mixed use
retail/office building complex in the Central Business District of Seattle,
Washington, including but not limited to:
(i) Wages, salaries and fringe benefits of all employees and
contractors engaged in the operation and maintenance of the Property and/or the
Building; employer's Social Security taxes, unemployment taxes or insurance, and
any other taxes which may be levied against Landlord on those wages and
salaries; and the cost to Landlord of disability and hospitalization insurance
and pension or retirement benefits for these employees;
(ii) All supplies and materials used in the operation and
maintenance of the Property and/or the Building;
(iii) Cost of water and power, and cost of heating, lighting,
air conditioning and ventilating the Building, the Common Areas and the
Premises, which costs shall be based on either Tenant's Proportionate Share or
separately allocated to the Premises, at Landlord's option, based upon either
direct usage, if separately metered, or an appropriate allocation among all
tenants consuming those services as measured from the meter monitoring this
usage;
(iv) The electrical costs incurred in the operation of the
"chiller' for the Building, which shall be allocated monthly among the Building
tenants based upon relative use of electricity. The "chiller' shall be
maintained upon a separate electrical meter which will measure the "chiller's"
electrical usage, There shall be allocated to Tenant a pro rata share of the
"chiller' electrical cost which shall be equal to a fraction, the numerator of
which is Tenant's electrical usage for the Premises and the denominator of which
is the entire metered electrical usage for the Building (excluding the "chiller'
electrical usage), on a monthly basis;
(v) Cost of maintenance, depreciation and replacement of
machinery, tools and equipment (if owned by Landlord) and for rental paid for
such machinery, tools and equipment (if rented) used in connection with the
operation or maintenance of the Building;
(vi) All premiums and deductibles on policies of compensation,
public liability, property damage, automobile, garage keepers, rental loss and
any other policies of insurance maintained by Landlord with respect to the
Property, Building or any insurable interest therein. Cost of casualty and
liability insurance applicable to the Property and/or the Building, the
improvements therein, and Landlord's personal property used in connection
therewith;
(vii) Cost of janitorial services, repairs and general
maintenance;
(viii) Any capital improvements made or installed for purposes
of saving labor or otherwise reducing applicable operating costs amortized over
the useful life of such improvements, as determined by Landlord in accordance
with generally accepted accounting principles and practices in effect at the
time of acquisition of the capital item;
<PAGE>
(ix) Intentionally deleted;
(x) All taxes and assessments and governmental charges
whether federal, state, county or municipal and any other taxes and assessments
attributable to the Property and/or the Building or its operation, including
without limitation real property taxes and assessments and any tax or other
levy, however denominated, on or measured by the rental collected by the
Landlord with respect to the Building, or on Landlord's business of leasing the
Building, but excluding federal and state taxes on income;
(xi) The cost of maintaining any public transit system,
vanpool, or other public or semi-public transportation imposed upon Landlord's
ownership and operation of the Building;
(xii) Cost of all accounting and other professional fees
incurred in connection with the operation of the Property and/or the Building;
(xiii) A management fee, not to exceed current market rates,
which may be payable to the Landlord;
(xiv) Cost of replacing nonspecialty lamps, bulbs, starters and
ballasts used in the Building, other than those for which the cost is billed
directly to a tenant.
Operating Expenses shall not include expenses for which the Landlord is
reimbursed or indemnified (either by an insurer, condemnor, tenant or
otherwise); expenses incurred in leasing or procuring tenants (including,
without limitation, lease commissions, legal expenses, and expenses of
renovating space for tenants); legal expenses arising out of disputes with
tenants or the enforcement of the provisions of any lease of space in the
Building; interest or amortization payments on any mortgage or mortgages, and
rental under any ground or underlying lease or leases; costs of any work or
service performed for or facilities furnished to a tenant at the tenant's cost;
the cost of correcting defects (latent or otherwise) in the construction of the
Building, except those conditions (not occasioned by construction defects)
resulting from wear and tear shall not be deemed defects; and costs of capital
improvements and depreciation and amortization (except as provided in Section
4.02(f)(viii) or otherwise above). Landlord and Tenant shall each from time to
time upon request of the other sign a written memorandum confirming the amount
of the Additional Rent as adjusted from time to time hereunder. Notwithstanding
the above to the contrary, the expenses described in subsections (i), (xii), and
(xiii) above shall not exceed six percent (6%) of the Total Operating Expenses
in any year.
Section 4.03 Rent. The terms "Rent" and "Rental" as used in this Lease
shall mean all amounts to be paid hereunder by Tenant whether those sums are
designated as Basic Rent or Additional Rent and as adjusted by the terms of this
Lease. Failure by Tenant to pay any sum of Rent due under this Article IV shall
entitle Landlord to pursue any or all remedies specified in this Lease as well
as remedies specified in RCW Chapter 59.12 or otherwise allowed by law.
Section 4.04 Place of Payment. All Rent shall be paid to the Landlord on
or before the first day of each calendar month at the address to which notices
to Landlord are to be given. All Rental payments to be made hereunder, whether
Basic Rent, or Additional Rent or otherwise, are to be made without deduction,
setoff, prior notice or demand by Landlord.
ARTICLE V
SECURITY DEPOSIT AND PREPAID RENT
Section 5.01 Security Deposit. Intentionally deleted.
Section 5.02 Prepaid Rent. Intentionally deleted.
<PAGE>
ARTICLE VI
TAXES
Section 6.01 Personal Property Taxes. Tenant shall pay before delinquency
all license fees, public charges, property taxes and assessments on the
furniture, fixtures, equipment and other property of or being used by Tenant at
any time situated on or installed in the Premises.
Section 6.02 Business Taxes. Tenant shall pay before delinquency all
taxes and assessments or license fees levied, assessed or imposed by law or
ordinance, by reason of the use of the Premises for the specific purposes set
forth in this Lease.
ARTICLE VII
MAINTENANCE, REPAIRS AND ALTERATIONS
Section 7.01 Landlord's and Tenant's Improvements. Landlord and Tenant
shall, each at its own expense, complete and install in a good and workmanlike
manner within the Premises those items specified as the "Landlord's Work" and
`Tenant's Work," respectively, specified on Exhibit C attached hereto.
Section 7.02 Services to be Furnished by Landlord. Provided Tenant is not
in default under any of the provisions of this Lease, and subject to
reimbursement pursuant to Section 4.02 above, Landlord shall provide the
following services during standard hours of operation of the Building. These
standard hours of operation are 7 a.m. to 7 p.m., Monday through Friday,
Saturdays 8 a.m. to 5 p.m., and Sundays 12 noon to 6 p.m. (excluding national
holidays).
(a) Public utilities shall be caused to furnish the Premises with
electricity and water utilized in operating any and all facilities serving the
Premises;
(b) Hot and cold water at those points of supply provided for general
use of other tenants in the Building, central heat and air conditioning in
season, at such times as Landlord normally furnishes these services to other
tenants in the Building and at temperatures and in amounts as are considered by
Landlord to be standard, but this service at times during the weekdays at other
than standard hours of operation for the Project, on Saturday afternoons,
Sundays and holidays shall be furnished only upon request of Tenant, who shall
bear the entire costs thereof;
(c) Routine maintenance, painting and electric lighting service for
all Common Areas and special service areas of the Building in the manner and to
the extent deemed by Landlord to be standard and consistent with the operation
and maintenance of the Building as a first-class office building in the Central
Business District (BCD) of Seattle;
(d) Janitorial service on a five (5) day week basis, excluding
Fridays, Saturdays, and legal holidays;
(e) Electrical facilities to provide sufficient power for
typewriters, personal computers and other small office machines of similar low
electrical consumption, but not including electricity required for electronic
data processing equipment, special lighting in excess of building standard, and
any other item of electrical equipment which (itself) consumes more than .5
kilowatts per hour at rated capacity. If any electrical equipment installed in
the Premises requires air conditioning capacity above that provided by the
building standard system, then the additional air conditioning installation and
corresponding operating costs will be the separate obligation of the Tenant;
<PAGE>
(f) Initial lamps, bulbs, starters and ballasts used within the
Premises;
(g) Security for the Building; provided, however, Landlord shall not
be liable to Tenant or any employee, invitee, licensee or subleases of Tenant
for losses due to theft or burglary, or for damages done by unauthorized persons
in the Building;
(h) Elevator service; and
(i) HVAC facilities during standard Building hours.
In the event Tenant desires any of the aforementioned services in amounts
in excess of those reasonably deemed by Landlord to be "standard" and in the
event Landlord elects to provide these additional services, Tenant shall pay
Landlord as Additional Rent hereunder the cost of providing these additional
services. Failure by Landlord to any extent to furnish any of the above
services, or any cessation thereof, resulting from causes beyond the control of
Landlord, shall not render Landlord liable in any respect for damages to either
person or property, nor shall that event be construed as an eviction of Tenant,
nor result in an abatement of Rent, nor relieve Tenant from any of Tenant's
obligations hereunder (including, but not limited to, the payment of Rent).
Should any of the equipment or machinery utilized in supplying the services
listed herein for any cause cease to function properly, Landlord shall use
reasonable diligence to repair that equipment or machinery promptly, but Tenant
shall have no right to terminate this Lease, and shall have no claim for a
reduction, abatement or rebate of Rent or damages on account of any interruption
in service occasioned thereby or resulting therefrom.
Section 7.03 Tenant's Maintenance and Repairs. Tenant shall be obligated
to maintain and to make all repairs, replacements or additions of any kind
whatsoever to all personal property located within the Premises and to all trade
fixtures, furnishings and carpet located within the Premises. Tenant also shall
be responsible for maintaining and replacing all specialty lamps, bulbs,
starters and ballasts as indicated on the Tenant's Space Plan referred to in
Exhibit C.
Section 7.04 Tenant's Alterations. Subject to Landlord's prior written
approval, Tenant may make, at its expense, additional improvements or
alterations to the Premises which it may deem necessary or desirable. Any
repairs or new construction by Tenant shall be done in conformity with plans and
specifications approved by Landlord and shall be performed by a licensed
contractor approved by Landlord. If requested by Landlord, Tenant shall post a
bond or other security satisfactory to Landlord to protect Landlord against
liens arising from work performed for Tenant. All work performed shall be done
in a workmanlike manner and with materials of the quality and appearance as
exist throughout the Building. Landlord may require Tenant to remove and restore
any improvements or alterations on the termination of this Lease in accordance
with Section 13.02 below. Landlord will notify Tenant upon giving its consent if
any such improvements or alterations need to be restored at the end of the Lease
Term.
Section 7.05 Liens. Tenant shall keep the Premises and the Property free
from any liens arising out of any work performed, material furnished, or
obligations incurred by Tenant. If Tenant disputes the correctness or validity
of any claim of lien, Tenant shall, within ten (10) days after written request
by Landlord, post or provide security in a form and amount acceptable to
Landlord to insure that title to the Property remains free from the lien
claimed.
ARTICLE VIII
INSURANCE
Section 8.01 Use; Rate. Tenant shall not do anything in or about the
Premises which will in any way tend to increase insurance rates paid by Landlord
on policies of liability or casualty insurance maintained with respect to the
<PAGE>
Building and/or Property. In no event shall Tenant carry on any activities which
would invalidate any insurance coverage maintained by Landlord.
Section 8.02 Liability Insurance. Tenant shall during the Lease Term, at
its sole expense, maintain in full force a policy or policies of comprehensive
liability insurance issued by one or more insurance carriers, insuring against
liability for injury to or death of persons and loss of or damage to property
occurring in or on the Premises and any portion of the Common Area which is
subject to Tenant's exclusive control. Said liability insurance shall be in an
amount not less than $1,000,000.00 combined single limit for bodily and personal
injury and property damage.
Section 8.03 Worker's Compensation Insurance. Tenant shall at all times
maintain Compensation Insurance in compliance with Washington law.
Section 8.04 Casualty Insurance. Tenant shall pay for and shall maintain
in full force and effect during the Term of this Lease a standard form policy or
policies of property and all-risk coverage with an extended coverage endorsement
covering all interior and storefront glass, whether plate or otherwise, stock in
trade, trade fixtures, equipment, tenant improvements installed at Tenant's cost
and expense, and other personal property located in the Premises and used by
Tenant in connection with its business.
Section 8.05 Compliance With Regulations. Tenant shall, at its own
expense, comply with all requirements, including installation of fire
extinguishers, or automatic dry chemical extinguishing systems, required by
insurance underwriters or any governmental authority having jurisdiction
thereover, necessary for the maintenance of reasonable fire and extended
insurance for the Premises. The cost of initial compliance with fire codes
within the Premises shall be paid from the Allowance (as defined in Exhibit C).
Section 8.06 Waiver of Subrogation. Any property and all-risk coverage
insurance carried by Landlord or Tenant insuring, in whole or in part, the
Building and/or the Premises, including improvements, alterations and changes in
and to the Premises made by either of them, and Tenant's trade fixtures therein
shall be written in such a manner as to permit the waiver of rights of
subrogation prior to loss by either party against the other in connection with
loss or damage covered by the policies involved. So long as the policy or
policies can be so written and maintained in effect, neither Landlord nor Tenant
shall be liable to the other for any such loss or damage. Either party shall,
upon request by the other party, furnish such other party evidence of its
compliance with this Section 8.06.
Section 8.07 General Requirements.
(a) All policies of insurance required to be carried hereunder by
Tenant shall be written by companies licensed to do business in Washington and
which are rated A:XIII or better in the "Best's Key Rating Guide." Tenant shall,
when requested by Landlord, furnish Landlord with a certificate evidencing
insurance required to be maintained by Tenant pursuant to this Article VIII and
shall satisfy Landlord that each such policy is in full force and effect.
(b) The policy of public liability insurance required to be carried
under Section 8.02 above shall be primary and non-contributing with the
insurance carried by Landlord.
(c) Each policy required under Sections 8.02 and 8.04 shall expressly
include, severally and not collectively, as named or additionally named insured
thereunder, the Landlord and any person or firm designated by the Landlord and
having an insurable interest thereunder, hereinafter called "Additional
Insured," as their respective interests may appear.
(d) All insurance policies maintained by Tenant shall not be subject
to cancellation or reduction in coverage except upon at least thirty (30) days'
prior written notice to Landlord. The policies of insurance or duly executed
certificates evidencing them, together with satisfactory evidence of the payment
of premiums thereon, shall be deposited with Landlord on the Lease Commencement
Date and not less than thirty (30) days prior to the expiration of the term of
such coverage.
<PAGE>
(e) If the Tenant fails to procure and maintain insurance as required
by this Article VIII, the Landlord may obtain such insurance and keep it in
effect, and the Tenant shall pay to Landlord the premium cost thereof, upon
demand and as Additional Rent, with interest as provided in Section 21.07 below
from the date of payment by the Landlord to the date of repayment by the
(f) The limits of any insurance maintained by Tenant pursuant to this
Article VIII shall in no way limit the liability of Tenant under this Lease.
Section 8.08 Blanket Insurance. The Tenant may fulfill its insurance
obligations hereunder by maintaining a so-called "blanket" policy or policies of
insurance in a form that provides by specific endorsement coverage not less than
that which is required hereunder for the particular property or interest
referred to herein; provided, however, that the coverage required by this
Article VIII will not be reduced or diminished by reason of use of such blanket
policy of insurance.
Section 8.09 Landlord's Insurance. Landlord shall keep in full force and
effect all-risk insurance on the Building in such amounts as Landlord reasonably
deems necessary.
ARTICLE IX
DESTRUCTION AND CONDEMNATION
Section 9.01 Total or Partial Destruction.
(a) In the event the Building and/or the Premises is damaged by fire
or other perils covered by Landlord's insurance, Landlord shall:
(i) In the event of total destruction, at Landlord's option,
as soon as reasonably possible thereafter, commence repair, reconstruction and
restoration of the Building and/or the Premises and prosecute the same
diligently to completion, in which event this Lease shall remain in full force
and effect; or within sixty (60) days after the discovery of such damage, elect
not to so repair, reconstruct or restore the building and/or the Premises, in
which event this Lease shall terminate. In either event, Landlord shall give
Tenant written notice of its intention within said sixty (60) day period. In the
event Landlord elects not to restore the building, and/or the Premises, this
Lease shall be deemed to have terminated as of the date of such total
destruction.
(ii) In the event of partial destruction of the Building
and/or the Premises, to an extent not exceeding twenty-five percent (25%) of the
full insurable value thereof, and if the damage thereto is such that the
Building and/or the Premises may be repaired, reconstructed or restored within a
period of ninety (90) days from the date of the discovery of such casualty, and
if Landlord will receive insurance proceeds sufficient to cover the cost of such
repairs, then Landlord shall commence and proceed diligently with the work of
repair, reconstruction and restoration and this Lease shall continue in full
force and effect. If such work of repair, reconstruction and restoration shall
require a period longer than ninety (90) days or exceeds twenty-five percent
(25%) of the full insurable value thereof, or if said insurance proceeds will
not be sufficient to cover the cost of such repairs, then Landlord either may
elect to so repair, reconstruct or restore and the Lease shall continue in full
force and effect or Landlord may elect not to repair, reconstruct or restore and
the Lease shall then terminate. Under any of the conditions of this Section 9.01
(a)(ii), Landlord shall give written notice to Tenant of its intention within
thirty (30) days after the discovery of such partial destruction. In the event
Landlord elects not to restore the Building and/or the Premises, this Lease
shall be deemed to have terminated as of the date of such partial destruction.
If the damage exceeds twenty-five percent (25%) of the full insurable value of
the Building, Tenant may elect to terminate this Lease by giving Landlord
written notice thereof within twenty (20) days of the discovery of the damage.
<PAGE>
(b) Upon any termination of this Lease under any of the provisions of
this Section 9.01, the parties shall be released without further obligation to
the other from the date possession of the Premises is surrendered to Landlord
except for items which have therefore accrued and are then unpaid.
(c) In the event of repair, reconstruction and restoration by
Landlord as herein provided, the rental payable under this Lease shall be abated
proportionately with the degree to which Tenant's use of the Premises is
impaired during the period of such repair, reconstruction or restoration;
provided that there shall be no abatement of rent if such damage is the result
of Tenant's negligence or intentional wrongdoing. Tenant shall not be entitled
to any compensation or damages for loss in the use of the whole or any part of
the Premises and/or any inconvenience or annoyance occasioned by such damage,
repair, reconstruction or restoration. Tenant shall not be released from any of
its obligations under this Lease except to the extent and upon the conditions
expressly stated in this Section 9.01. Notwithstanding anything to the contrary
contained in this Section 9.01, if Landlord is delayed or prevented from
repairing or restoring the damaged Premises within one (1) year after the
discovery of such damage or destruction by reason of acts of God, war,
governmental restrictions, inability to procure the necessary labor or
materials, or other cause beyond the control of Landlord, Landlord or Tenant
shall have the option to terminate this Lease, whereupon Landlord shall be
relieved of its obligation to make such repairs or restoration and Tenant shall
be released from its obligations under this Lease as of the end of said one year
period.
(d) If damage is due to any cause other than fire or other peril
covered by extended coverage insurance, Landlord may elect to terminate this
Lease.
(e) If Landlord is obligated to or elects to repair or restore as
herein provided, Landlord shall be obligated to make repair or restoration only
of those portions of the Building and the Premises which were originally
provided at Landlord's expense, and the repair and restoration of items not
provided at Landlord's expense shall be the obligation of Tenant.
(f) Notwithstanding anything to the contrary contained in this
Section 9.01, Landlord shall not have any obligation whatsoever to repair,
reconstruct or restore the Premises when the damage resulting from any casualty
covered under this Section 9.01 occurs during the last twelve (12) months of the
Term of this Lease or any extension hereof. In the event of any damage or
destruction to the Premises during the last twelve (12) months of the term which
materially interferes with Tenant's business operations at the Premises, Tenant
shall have the right to terminate this Lease by giving notice thereof to
Landlord within thirty (30) days of the date of discovery of the damage or
destruction.
(g) Landlord and Tenant hereby waive the provisions of any statutes
or court decisions which relate to the abatement or termination of leases when
leased property is damaged or destroyed and agree that such event shall be
exclusively governed by the terms of this Lease.
Section 9.02 Condemnation. If the whole of the Property or the Premises,
or such portion thereof as shall be required for its reasonable use, shall be
taken by virtue of any condemnation or eminent domain proceeding, this Lease
shall automatically terminate as of the date of the condemnation, or as of the
date possession is taken by the condemning authority, whichever is later.
Current Rent shall be apportioned as of the date of the termination. In case of
a taking of a part of the Premises or a part of the Property not required for
the reasonable use of the Premises, then this Lease shall continue in full force
and effect and the Rental shall be equitably reduced based upon the proportion
by which the Rentable Area of the Premises is reduced. This Rent reduction shall
be effective on the date of the partial taking. No award, settlement in lieu of
an award, or any partial or entire taking shall be apportioned, and Tenant
hereby assigns to Landlord any award or settlement in lieu of an award which may
be made in the taking or condemnation proceeding, together with any and all
rights of Tenant now or hereafter arising in or to the same or any part thereof;
provided that nothing herein shall prevent Tenant from making a separate claim
against the condemning authority for the taking of Tenant's personal property,
and/or moving costs so long as such claim in no way affects the award to be
received by Landlord.
<PAGE>
Section 9.03 Sale Under Threat of Condemnation. A sale by Landlord to any
authority having the power of eminent domain, either under threat of
condemnation or while condemnation proceedings are pending, shall be deemed to
be a taking under the power of eminent domain for all purposes under this
Article
ARTICLE X
INDEMNITY AND WAIVER
Section 10.01 Indemnity.
(a) Tenant, as a material part of the consideration to be rendered to
Landlord, and subject to subsection 10.01(b) below, hereby agrees to defend,
indemnify, and hold Landlord harmless against any and all claims, costs, and
liabilities, including reasonable attorneys' fees and costs (including costs and
fees associated with any lawsuit or appeal), arising by reason of any injury or
claim of injury to person or property, of any nature and howsoever caused,
arising out of the use, occupation and/or control of the Premises, or from any
breach of the terms of this Lease, or any violation of any governmental or
insurance requirements by Tenant, its sublessees, assignees, invitees, agents,
employees, contractors, or licensees, except and to the extent as may arise out
of the willful or negligent acts of Landlord or Landlord's agents, employees or
contractors.
(b) In the event of concurrent negligence of Tenant, its sublessees,
assignees, invitees, agents, employees, contractors, or licensees on the one
hand, and that of Landlord, its agents, employees, or contractors on the other
hand, which concurrent negligence results in injury or damage to persons or
property of any nature and howsoever caused, and relates to the construction,
alteration, repair, addition to, subtraction from, improvement to or maintenance
of the Premises, Common Areas, or Building, Tenant's obligation to indemnify
Landlord as set forth in this Section 10.01 shall be limited to the extent of
Tenant's negligence, and that of Tenant's sublessees, assignees, invitees,
agents, employees, contractors or licensees, including Tenant's proportional
share of costs, attorneys' fees and expenses incurred in connection with any
claim, action or proceeding brought with respect to such injury or damage.
Tenant agrees that it will not assert its industrial insurance immunity if such
assertion would be inconsistent with Landlord's right to Indemnification from
Tenant pursuant to this Section 10.01. The parties agree that this provision
was mutually negotiated.
Section 10.02 Waiver. All property kept, stored or maintained on the
Premises shall be so kept, stored or maintained at the sole risk of Tenant.
Except in the case of Landlord's negligence or willful misconduct, Landlord
shall not be liable, and Tenant waives all claims against Landlord, for damages
to persons or property sustained by Tenant or by any other person or firm
resulting from the Building or by reason of the Premises or any equipment
located therein becoming out of repair, or through the acts or omissions of any
persons present in the Building (including the Common Areas) or renting or
occupying any part of the Building (including the Common Areas), or for loss or
damage resulting to Tenant or its property from burst, stopped or leaking
sewers, pipes, conduits, or plumbing fixtures, or for interruption of any
utility services, or from any failure of or defect in any electric line,
circuit, or facility, or any other type of improvement or service on or
furnished to the Premises or the Common Areas or resulting from any accident in,
on or about the Premises or the Common Areas.
ARTICLE XI
DELAYS
Section 11.01 Delays. If either party is delayed in the performance of
any covenant of this Lease because of any of the following causes (referred to
elsewhere in this Lease as a "Delaying Cause"): acts of the other party, action
of the elements, war, riot, labor disputes, inability to procure or general
shortage of labor or materials in the normal channels of trade, delay in
transportation, delay in inspections, or any other cause beyond the reasonable
control of the party so obligated, whether similar or dissimilar to the
foregoing, financial inability excepted, then
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that performance shall be excused for the period of the delay but shall in no
way affect Tenant's obligation to pay Rent or the length of the Lease Term.
ARTICLE XII
ASSIGNMENT, SUBLEASE AND SUCCESSION
Section 12.01 Consent Required. Tenant shall neither assign this Lease or
any interest herein, nor sublet, license, grant any concession, or otherwise
give permission to anyone other than Tenant to use or occupy all or any part of
the Premises without the prior written consent of Landlord, which consent shall
not be unreasonably withheld or delayed. Landlord may condition its consent upon
an increase in the Basic Rent payable hereunder in an amount equal to any
subrental or other consideration received by Tenant as a result of the
subletting or assignment (less reasonable and actual expenses associated with
the assignment or sublease including tenant improvements, leasing commissions,
and legal fees) which is in excess of the Basic Rent provided for in Section
4.01 above. Landlord shall require a $250 payment to cover its handling charges
for each assignment or sublease it is requested to approve. The sale,
assignment, transfer, sublease or disposition, whether for value, by operation
of law, gift, will, or intestacy, of (a) 25% or more of the issued and
outstanding stock of Tenant if Tenant is a corporation, or (b) of the interest
of any general partner, joint venturers, or associate of Tenant, if Tenant is a
partnership, joint venture, or association, shall be deemed an assignment of
this Lease under this Section 12.01.
Section 12.02 General Conditions. In the event of any assignment or
sublease approved by Landlord pursuant to Section 12.01 above, Tenant shall
remain primarily liable on its covenants hereunder unless released in writing by
Landlord. In the event of any assignment or sublease, the assignee or sublessee
shall agree in writing to perform and be bound by all of the covenants of this
Lease required to be performed by Tenant. Any one assignment or subletting
approved by Landlord pursuant to Section 12.01, shall not be deemed to allow any
further assignment or subletting without Landlord's prior written consent.
Section 12.03 Succession. Subject to any limitations on assignment and
subletting set forth herein, all the terms and provisions of this Lease shall
inure to the benefit of and be binding upon the successors and assigns of each
of the parties hereto.
ARTICLE XIII
SURRENDER OF POSSESSION
Section 13.01 Surrender. At the expiration of the Lease created
hereunder, whether by lapse of time or otherwise, Tenant shall surrender the
Premises to Landlord.
Section 13.02 Condition at Time of Surrender. Furnishings, trade fixtures
and equipment installed by Tenant shall be the property of Tenant. Upon
termination of this Lease, Tenant shall remove any such property. Tenant shall
repair or reimburse Landlord for the cost of repairing any damage to the
Premises and/or Common Areas resulting from the installation or removal of
Tenant's property, and Tenant shall deliver the Premises to Landlord in clean
and good condition ex for reasonable wear and tear.
ARTICLE XIV
HOLDING OVER
Section 14.01 Holding Over. This Lease shall terminate without further
notice at the expiration of the Lease Term. Any holding over by Tenant without
the express written consent of Landlord shall not constitute the renewal or
extension of this Lease or give Tenant any rights in or to the Premises. In the
event of such a holding
<PAGE>
over by Tenant without the express written consent of Landlord, the monthly Rent
payments to be paid by Tenant shall be subject to increase at the sole
discretion of Landlord in an amount equal to 125% of the then applicable Rental
rate, provided, however, no payment of such increased Rental by Tenant shall be
deemed to extend or renew the Term of this Lease, and such Rental payments shall
be fixed by Landlord only to establish the amount of liability for payment of
Rent on the part of Tenant during such period of holding over. In the event
Landlord shall give its express written consent to Tenant to occupy the Premises
beyond the expiration of the Term, that occupancy shall be construed to be a
month-to-month tenancy upon all the same terms and conditions as set forth
herein unless modified by Landlord in such written consent; provided that Rent
charged during any period of holding over shall be as stated above.
ARTICLE XV
ENTRY BY LANDLORD
Section 15.01 Entry by Landlord. Landlord reserves, and shall at any and
all times have, the right to enter the Premises during business hours to inspect
the same, to show the Premises to prospective purchasers or lessees, to post
notices of nonresponsibility, to repair the Premises and any portion of the
Building that Landlord may deem necessary or desirable, without abatement of
Rent, and may for that purpose erect scaffolding and other necessary structures
where reasonably required by the character of the work to be performed;
provided, that the entrance to the Premises shall not be blocked unreasonably
thereby and, provided, further that the business of the Tenant shall not be
interfered with unreasonably. Tenant hereby waives any claim for damages, injury
or inconvenience to or interference with Tenant's business, any loss of
occupancy or quiet enjoyment of the Premises, and any other loss occasioned by
Landlord's exercise of its rights pursuant to this Section 15.01, except and to
the extent any such damage, injury or interference results from the negligence
or willful misconduct of Landlord. Landlord shall at all times have and retain a
key with which to unlock all of the doors in, upon and about the Premises,
excluding Tenant's vaults, safes and files, and Landlord shall have the right to
use any and all means which Landlord may deem proper to open the doors to or in
the Premises in an emergency, in order to obtain entry to the Premises without
liability to Tenant. Any entry to the Premises obtained by Landlord by any of
these means, or otherwise, shall not under any circumstances be construed or
deemed to be a forcible or unlawful entry into, or a detainer of, the Premises,
or an eviction of Tenant from the Premises or any portion thereof.
Section 15.02 Failure to Surrender. If Tenant fails to surrender the
Premises upon the expiration or termination of this Lease, Tenant shall
indemnify and hold Landlord harmless from loss and liability resulting from that
failure, including, without limiting the generality of the foregoing, any claims
made by any succeeding Tenant.
ARTICLE XVI
SUBORDINATION
Section 16.01 Lease Subordinate To Mortgages. This Lease shall
automatically be subordinate to any existing mortgages or deeds of trust which
affect the Property, the Building and/or the Premises; to any first mortgages or
deeds of trust hereafter affecting the Property, the Building and/or the
Premises, and to all renewals, modifications, consolidations, replacements or
extensions thereof. This provision shall be self-operative and no further
instrument of subordination shall be required by any existing or first mortgagee
or beneficiary of a deed of trust; provided, that Tenant shall have the
continued enjoyment of the Premises free from any disturbance or interruption by
any existing or first mortgagee or beneficiary of a deed of trust, or any
purchaser at a foreclosure or private sale of the Property as a result of
Landlord's default under a mortgage or deed of trust, so long as Tenant is not
then in default under the terms and conditions of this Lease. Immediately upon
execution of this Lease by both parties, Landlord shall use its best efforts to
obtain a non-disturbance agreement from Landlord's exiting lender in a form
reasonably acceptable to Tenant.
<PAGE>
Section 16.02 Estoppel Certificates. Tenant shall, within fifteen
(15) days of presentation, acknowledge and deliver to Landlord (a) any
subordination or non-disturbance agreement or other instrument that Landlord may
require to carry out the provisions of this Article, and (b) any estoppel
certificate requested by Landlord from time to time in the standard form of any
mortgagee or beneficiary of and deed of trust affecting the Building and
Premises certifying, if such be true, that Tenant is in occupancy, that this
Lease is unmodified and In full force and effect, or if there have been
modifications, that the Lease as modified is in full force and effect, and
stating the modifications and the dates to which the Rent and other charges
shall have been paid, and that there are no Rental offsets or claims.
ARTICLE XVII
DEFAULT AND REMEDY
Section 17.01 Events of Tenant's Default. The occurrence of any one
or more of the following events shall constitute a material default in breach of
this Lease by Tenant:
(a) Vacation or abandonment of the Premises;
(b) Failure by Tenant to make any payment required as and when due,
where that failure shall continue for a period of five (5) days;
(c) Failure by Tenant to observe or perform any of the covenants,
conditions or provisions of this Lease, other than making any payment when due,
where that failure shall continue for a period of twenty (20) days after
Landlord gives written notice to Tenant of that failure; and
(d) Making by Tenant of any general assignment or general arrangement
for the benefit of creditors; the filing by or against Tenant of a petition in
bankruptcy, including reorganization or arrangement, unless, in the case of a
petition filed against Tenant, the petition is dismissed within thirty (30)
days; or the appointment of a trustee or receiver to take possession of
substantially all of Tenant's assets located at the Premises, or of Tenant's
interest in this Lease.
Section 17.02 Remedies. In the event of any breach or default by Tenant
under the terms or provisions of this Lease, Landlord, in addition to any other
rights or remedies that it may have, shall have the immediate right of reentry.
Should Landlord elect to reenter or take possession of the Premises, it may
either terminate this Lease, or from time to time, without terminating this
Lease, relet the Premises or any part thereof for the account and in the name of
the Tenant or otherwise, for any term or terms and conditions as Landlord in its
sole discretion may deem advisable, with the right to complete construction of
or make alterations and repairs to the Premises and/or improvements installed by
Tenant. Tenant shall pay to Landlord in the event of reletting, as soon as
ascertained, the costs and expenses incurred by Landlord in the reletting,
completion of construction, or in making any alterations and repairs. Rentals
received by Landlord from any reletting shall be applied: first, to the payment
of any indebtedness, other than Rent, due hereunder from Tenant to Landlord;
second, to the payment of Rent due and unpaid hereunder and to any other
payments required to be made by the Tenant hereunder; and the residue, if any,
shall be held by Landlord as payment of future Rent or damages in the event of
termination as the same may become due and payable hereunder; and the balance,
if any, at the end of the Term of this Lease shall be paid to Tenant. Should
rental received from time to time from the reletting during any month be a
lesser Rental than herein agreed to by Tenant, the Tenant shall pay the
deficiency to Landlord. The Tenant shall pay the deficiency each month as the
amount thereof is ascertained by the Landlord. Notwithstanding the foregoing,
Landlord shall also have the right upon Tenant's default to terminate this
Lease, accelerate all Basic Rent payments due under this Lease for the remaining
Term hereof, or if Tenant has been granted an option to extend and that option
has been exercised, for the remainder of the option term, and shall be entitled
to recover from Tenant the total amount of unpaid Rent together with all past
due Rent and any other payment due hereunder, less the amount which is
established to be the reasonable rental value of the Premises for the remaining
Term discounted to the present value at the prime rate then being
<PAGE>
charged by Seafirst Bank's Seattle main branch after taking into consideration
normal duration of vacancy periods, tenant improvement costs and Landlord's
reasonably anticipated costs of reletting the Premises.
Section 17.03 Reletting. No reletting of the Premises by Landlord
permitted under Section 17.02 shall be construed as an election on Landlord's
part to terminate this Lease unless a notice of Landlord's intention to
terminate is given to Tenant, or unless the termination of the Lease is decreed
by a court of competent jurisdiction. In the event of reletting without
termination, Landlord may at any time thereafter elect to terminate this Lease
for a previous breach, provided it has not been cured. Should Landlord at any
time terminate this Lease for any breach, in addition to any other remedy it may
have, it may recover from Tenant all damages it may incur by reason of that
breach.
Section 17.04 Default of Landlord. Landlord shall not be in default
unless Landlord fails to perform its obligations under this Lease within thirty
(30) days after written notice by Tenant, or if such failure is not reasonably
capable of being cured within such thirty (30) day period, Landlord shall not be
in default unless Landlord has failed to commence the cure and diligently pursue
the cure to completion.
Section 17.05 Non-Waiver. Failure by Landlord to take action or declare a
default as a result of any breach of any term, covenant or condition herein
contained shall not be deemed to be a waiver of that term, covenant, or
condition, or of any subsequent breach of any term, covenant or condition herein
contained. The subsequent acceptance of Rent hereunder by Landlord shall not be
deemed to be a waiver of any preceding breach by Tenant of any term, covenant or
condition of this Lease, other than the failure of Tenant to pay the particular
Rental so accepted, regardless of Landlord's knowledge of that preceding breach
at the time of acceptance of th6 Rent.
Section 17.06 Mortgagee Protection. In the event of any uncured default
on the part of Landlord, which default would entitle Tenant to terminate this
Lease, Tenant shall not terminate this Lease unless Tenant has notified any
mortgagee or beneficiary of deed of trust, whose address shall have been
furnished to Tenant, at least sixty (60) days in advance of the proposed
effective date of the termination. During the sixty (60) day period the
mortgagee or beneficiary shall be entitled to commence to cure the default. If
the default is not capable of being cured with due diligence within the sixty
(60) day period, the Lease shall not be terminated if the mortgagee or
beneficiary of a deed of trust shall have commenced to cure the default within
the sixty (60) day period and shall pursue the cure with due diligence
thereafter. If the default is one which is not capable of cure by the mortgagee
or beneficiary of a deed of trust within the sixty (60) day period because the
mortgagee or beneficiary of a deed of trust is not in possession of the Building
or Property, the sixty (60) day period shall be extended to include the time
needed to obtain possession of the Premises by the mortgagee or beneficiary of a
deed of trust by power of sale, judicial foreclosure, or other legal action
required to recover possession, provided that these avenues are pursued with due
diligence.
ARTICLE XVIII
LIMITATION OF LIABILITY
Section 18.01 Limitation of Landlord's Liability. In consideration of the
benefits accruing hereunder Tenant and all successors and assigns covenant and
agree that, in the event of any actual or alleged failure, breach or default
hereunder by Landlord:
(a) The sole and exclusive remedy shall be against the partnership
which is the Landlord and its partnership assets;
(b) No partner of Landlord shall be sued or named as a party in any
suit or action (except as may be necessary to secure jurisdiction over the
partnership);
(c) No service of process shall be made against any partner of
Landlord (except as may be necessary to secure jurisdiction over the
partnership);
<PAGE>
(d) No judgment will be taken against any partner of Landlord;
(e) No writ of execution will ever be levied against the assets of
any partner of Landlord other than the partnership assets; and
(f) These covenants and agreements are enforceable both by Landlord
and also by any
Section 18.02 Applicability. Tenant agrees that each of the covenants and
agreements contained in Section 18.01 above shall be applicable to any covenant
or agreement either expressly contained in this Lease or imposed by statute or
at common law.
ARTICLE XIX
NOTICES
Section 19.01 Notices. Any notice required or desired to be given under
this Lease shall be in writing with copies directed as indicated herein' and
shall be personally served or given by mail. Any notice given by mail shall be
deemed to have been given when seventy-two (72) hours have elapsed from the time
such notice was deposited in the United States mail, certified mail, return
receipt requested, and postage prepaid, addressed to the party to be served at
the last address given by that party to the other party under the provisions of
this section. As of the Lease Commencement Date, the addresses of the Landlord
and Tenant are as specified in the Lease Summary.
ARTICLE XX
HAZARDOUS SUBSTANCES
Section 20.01 Presence and Use of Hazardous Substances. Tenant shall not,
without Landlord's prior written consent, keep on or around the Premises, Common
Areas or Building, for use, disposal, transportation, treatment, generation,
storage or sale, any substances designated as, or containing components
designated as, hazardous, dangerous, toxic or harmful (collectively referred to
as "Hazardous Substances"), and/or are subject to regulation by any federal,
state or local law, regulation, statute or ordinance, other than ordinary
household cleaning materials and office supplies.
Section 20.02 Cleanup Costs, Default and Indemnification. Tenant shall be
fully and completely liable to Landlord for any and all cleanup costs and any
and all other charges, fees, penalties (civil and criminal) imposed by any
governmental authority with respect to Tenant's use, disposal, transportation,
treatment, generation, storage and/or sale of Hazardous Substances, in or about
the Premises, Common Areas, or Building, whether or not consented to by
Landlord. Tenant shall indemnify, defend and hold Landlord harmless from any and
all of the costs, fees, penalties, liabilities and charges incurred by, assessed
against or imposed upon Landlord (as well as Landlord's attorneys' fees and
costs) as a result of Tenant's use, disposal, transportation, treatment,
generation, storage and/or sale of Hazardous Substances.
ARTICLE XXI
MISCELLANEOUS
Section 21.01 Headings. The headings used in this Lease are for
convenience only. They shall not be construed to limit or to extend the meaning
of any part of this Lease.
<PAGE>
Section 21.02 Amendments. Any amendments or additions to this Lease shall
be in writing by the parties hereto, and neither Tenant nor Landlord shall be
bound by any verbal or implied agreements.
Section 21.03 Time of the Essence. Time is expressly declared to be of
the essence of this Lease.
Section 21.04 Entire Agreement. This Lease contains the entire agreement
of the parties hereto with respect to the matters covered hereby, and no other
agreement, statement or promise made by any party hereto, or to any employee,
officer or agent of any party hereto, which is not contained herein, shall be
binding or valid.
Section 21.05 Language. The words "Landlord" and "Tenant," when used
herein, shall be applicable to one (1) or more persons, as the case may be, and
the singular shall include the plural and the neuter shall include the masculine
and feminine, and if there be more than one (1) the obligations hereof shall be
joint and several. The word "persons" whenever used shall include individuals,
firms, associations and corporations and any other legal entity, as applicable.
The language in all parts of this Lease shall in all cases be construed as a
whole and in accordance with its fair meaning, and shall not be construed
strictly for or against Landlord or Tenant.
Section 21.06 Invalidity. If any provision of this Lease shall be deemed
to be invalid, void or illegal, it shall in no way affect, impair or invalidate
any other provision hereof.
Section 21.07 Late Charges. Tenant hereby acknowledges that late payment
by Tenant to Landlord of Rent or other sums due hereunder will cause Landlord to
incur costs not contemplated by this Lease, and the exact amount of the costs
include, but are not limited to, processing and accounting charges, and late
charges which may be imposed upon Landlord by the terms of any mortgage or deed
of trust covering the Premises. Therefore, in the event Tenant shall fail to pay
any installment of Rent or other sum due hereunder within ten (10) days after
notice of default of payment is given by Landlord, Tenant shall pay to Landlord
as Additional Rent a late charge equal to ten percent (10%) of each installment
or the sum of $25.00 per month, whichever is greater. A $20.00 charge will be
paid by the Tenant to the Landlord for each returned check. In the event
Landlord pays any sum or expense on behalf of Tenant which Tenant is obligated
to pay hereunder, or in the event Landlord expends any other sum or incurs any
expense, or Tenant fails to pay any sum due hereunder, Landlord shall be
entitled to receive interest upon that sum at the rate of eighteen percent (18%)
per annum until paid.
Section 21.08 Relocation. Intentionally deleted.
Section 21.09 Computation of Time. The word "day" means "calendar day"
herein, and the computation of time shall include all Saturdays, Sundays and
holidays for purposes of determining time periods specified herein.
Section 21.10 Applicable Law. This Lease shall be interpreted and
construed under and pursuant to the laws of the State of Washington.
Section 21.11 Attorneys' Fees. In the event either party requires the
services of an attorney in connection with enforcing the terms of this Lease or
in the event suit is brought for the recovery of any Rent due under this Lease
for the breach of any covenant or condition of this Lease, or for the
restitution of the Premises to Landlord, and/or eviction of Tenant during the
Term of this Lease or after the expiration thereof, the prevailing party will be
entitled to a reasonable sum for attorneys' fees, witness fees, and other court
costs, both at trial and on appeal.
Section 21.12 Termination. Upon the termination of this Lease by
expiration of time or otherwise, the rights of Tenant and all persons claiming
under Tenant in and to the Premises shall cease.
Section 21.13 Broker's Commission. Tenant represents and warrants that it
has incurred no liabilities or claims for brokerage commissions or finder's fees
in connection with the negotiation and/or execution of this Lease and that it
has not dealt with or has any knowledge of any real estate broker/agent or
salesperson in connection with this Lease except for those identified in the
Lease Summary. Tenant agrees to indemnify, defend, and hold Landlord harmless
from and against, all of such liabilities and claims (including, without
limitation, attorneys' fees and
<PAGE>
costs) made by any other broker/agent or salesperson claiming to represent
Tenant in connection with this Lease and against any commission owed to Tenant's
Leasing Representatives.
Section 21.14 Signs or Advertising. The Tenant will not inscribe any
inscription or post, place, or in any manner display any sign, notice, picture
or poster or any advertising matter whatsoever, anywhere in or about the
Premises or Building which can be seen from outside the Premises, without first
obtaining Landlord's written consent thereto. Any consent so obtained from
Landlord shall be with the understanding and agreement that Tenant will remove
these items at the termination of the tenancy herein created and repair any
damage or injury to the Premises or the Building caused thereby. Landlord will
install and maintain an Office Tower directory of tenants in the principal lobby
entrances of the Building, and Landlord may, as it may determine from time to
time, publish or advertise the Office tenancy list of Landlord's Building.
Tenant shall not use photographs, drawings, or other renderings of the Building,
the Building logo or tradename, or any other proprietary name, mark or symbol of
Landlord without first obtaining Landlord's prior written consent. Tenant shall
have the right to install a mutually acceptable exterior building sign on the
8th floor elevator tower of the Building. Landlord agrees that the sign on the
8th floor may occupy all of the surface of the east side of the elevator machine
room facing 4th Avenue and to the illumination of this sign. Landlord shall have
approval of the final design of this sign, which approval shall not be
unreasonably withheld or delayed.
Section 21.15 Transfer of Landlord's Interest. In the event Landlord
transfers its reversionary interest in the Premises or its rights under this
Lease, other than a transfer for security purposes only, Landlord shall be
relieved of all obligations occurring hereunder after the effective date of such
transfer provided that Landlord's obligations under this Lease are assumed by
the transferee.
Section 21.16 Counterparts. This Agreement may be executed by the parties
in counterparts, and each counterpart Agreement shall be deemed to be an
original hereof.
Section 21.17 Quiet Employment. Subject to the provisions of this Lease
and conditioned upon performance of all of the provisions to be performed by
Tenant hereunder, Landlord shall secure to Tenant during the Lease Term the
quiet and peaceful possession of the Premises and all rights and privileges
appertaining thereto.
Section 21.18 Authority. Each party hereto warrants that it has the
authority to enter into this Agreement and that the signatories hereto have the
authority to bind Landlord and Tenant, respectively.
Section 21.19 Name of Building. In the event Landlord chooses to change
the name of the Building, Tenant agrees that such change shall not affect in any
way its obligations under this Lease, and that, except for the name change, all
terms and conditions of this Lease shall remain in full force and effect. Tenant
agrees further that such name change shall not require a formal amendment to
this Lease, but shall be effective upon Tenant's receipt of written notification
from Landlord of said change.
Section 21.20 Rules and Regulations. Tenant agrees to abide by and adhere
to any reasonable rules and regulations for the Building, and all amendments
thereto, which may be promulgated from time to time by Landlord which do not
materially change the provisions of this Lease. The rules and regulations
currently in effect upon the date of execution of this Lease are set forth as
Exhibit D attached hereto.
Section 21.21 Agency Disclosure. At the signing of this Lease, the
Leasing Representative(s) identified in the Lease Summary represented the party
noted therein. Each party signing this document confirms that prior oral and/or
written disclosure of agency was provided to him/her in this transaction (as
required by WAC 308-124D-040).
Section 21.22 Lease Summary, Addendum and Exhibits. The Lease Summary,
set forth on pages (i) and (ii) of the Lease, as well as any Addenda and
Exhibits to this Lease are hereby incorporated herein by reference.
<PAGE>
Section 21.23 Survival. Those provisions of this Lease which, in order to
be given full effect, require performance by either Landlord or Tenant following
the termination of this Lease shall survive the Termination Date.
Section 21.24 Parking. Contemporaneously with the execution of this
Lease, Tenant is entering into an agreement with 1501 Fourth Avenue Limited
Partnership for the lease of five (5) parking stalls in the Second & Pike
Parking Garage on the terms and conditions of the Second & Pike Garage Parking
Agreement attached hereto as Exhibit F.
Section 21.25 Moving Expense Allowance. Landlord shall reimburse Tenant
for Tenant's Moving Costs (as defined below) in the amount of up to $3.00 per
rentable square foot of the Premises (the "Moving Expense Allowance"). Such
reimbursement shall be paid by Landlord within thirty (30) days of Tenant's
written request for reimbursement and receipt by Landlord of paid invoices
verifying the actual Moving Costs incurred by Tenant and any applicable lien
releases. "Moving Costs" as used in the Lease shall mean Tenant's actual out-of-
pocket costs associated with moving to or within any particular space in the
Building including moving, arranging and rearranging offices, furniture, and
equipment including the installation of phone and data lines (but shall not
include the cost of purchasing any furniture or equipment). Any portion of the
Moving Expense Allowance not used by Tenant may be used for the cost of the
Tenant Improvements under Exhibit C or Tenant's leasing commissions. It shall be
Tenant's responsibility to pay any commission due to the Tenant's Leasing
Representatives listed in paragraph 21.13 above.
Section 21.26 Architectural and Design Allowance. Landlord shall
reimburse Tenant for Tenant's reasonable out of pocket engineering,
architectural and design expenses ("Design Costs") with respect to the Premises
in the amount of up to $2.50 per rentable square foot of the Premises (the
"Architectural and Design Allowance"). Such reimbursement shall be paid by
Landlord within thirty (30) days of Tenant's written request for reimbursement
and receipt by Landlord of paid invoices verifying the actual expenses incurred
by Tenant. Any portion of the Architectural and Design Allowance not used by
Tenant may be used for the cost of the Tenant Improvements under Exhibit C. Any
portion of the Design Allowance not used by Tenant may be used for the cost of
the Tenant Improvements under Exhibit C or Tenant's leasing commissions.
IN WITNESS WHEREOF, this Lease Agreement is executed on the day and year
first written above.
TENANT: LANDLORD:
fine.com CORPORATION, a THIRD AVENUE ASSOCIATES,a
a Washington orporation Washington limited partnership
By /s/ James P. Chamberlin By /s/ Gary J. Carpenter
------------------------------ -------------------------------
Its Chief Financial Officer Its General Partner
-------------------------- ---------------------------
[NOTARY BLOCKS AFFIXED HERE]
[EXHIBITS OMITTED]
<PAGE>
EXHIBIT 10.7B TO FORM 10-KSB
AMENDMENT NO. 1 TO
CENTURY TOWER BUILDING LEASE AGREEMENT
THIS AMENDMENT NO. 1 TO CENTURY TOWER BUILDING LEASE AGREEMENT (this
"Amendment") is entered into as of December 29, 1997, by and between THIRD
AVENUE ASSOCIATES, a Washington limited partnership ("Landlord"), and fine.com
CORPORATION, a Washington corporation ("Tenant").
RECITALS
A. Landlord and Tenant entered into that certain Century Tower Building
Lease Agreement dated November 19, 1997 (the "Lease"), for the lease of certain
premises (the "Premises") located at the Century Tower Building, 1520 Third
Avenue, Seattle, Washington 98101, consisting of approximately 10,434 rentable
square feet and commonly known as Suite 800. Unless otherwise defined herein,
all capitalized terms used in this Amendment shall have the same meaning as they
are given in the Lease.
B. Pursuant to Section 1.05 of the Lease, Tenant has exercised its Right of
First Refusal to lease certain space (the "Right of First Refusal Space")
located on the sixth (6th) floor of the Building consisting of approximately
5,216 rentable square feet in the location shown on the floor plan attached
hereto as Exhibit A.
C. Landlord and Tenant desire to enter into this Amendment to set forth the
terms and conditions of Tenant's lease of the Right of First Refusal Space.
NOW, THEREFORE, the parties agree as follows:
1. Expansion of Premises. Commencing on March 1, 1998 (the "Right of First
Refusal Space Commencement Date"), the Premises shall be expanded to consist of
the Right of First Refusal Space (for a total rentable area of 15,650 square
feet). All references in the Lease to the Premises shall be deemed to include
the Premises as expanded by the Right of First Refusal Space.
2. Improvements to Expansion Space. Landlord agrees to construct certain
tenant improvements (the "Right of First Refusal Space Improvements") to the
Right of First Refusal Space. The Right of First Refusal Space Improvements
shall be constructed in accordance with a space plan and work letter to be
prepared by Landlord's space planner and approved by Landlord and Tenant. The
Right of First Refusal Space Improvements shall be similar to the initial Tenant
Improvements described in Exhibit C to the Lease. Landlord shall pay for the
cost of the Right of First Refusal Space Improvements up to a maximum of
$97,977.82 (the "Right of First Refusal Allowance"). The Right of First Refusal
Allowance shall be applied by Landlord exclusively toward the cost of Right of
First Refusal Space Improvements and Design Costs and Moving Costs related to
the Right of First Refusal Space. Tenant shall pay all costs in excess of the
Right of First Refusal Space Allowance directly to Landlord's contractor
promptly upon receipt of an invoice for such excess cost. Landlord agrees that
all subcontracts will be competitively bid to at least two contractors. If
Turner Construction bids on any of the major subtrades, those projects shall be
put out to bid to at least two additional contractors. Tenant shall prepare a
bid spreadsheet for Landlord and Tenant to review for all trades and
subcontracts. Unless mutually agreed upon by Landlord and Tenant, Turner
Construction shall select the lowest bidder for each trade and subcontract.
Landlord shall use its good faith efforts to substantially complete the Right of
First Refusal Space Improvements on or before March 1, 1998; provided, that if
Landlord has not substantially completed the improvements by March 1, 1998, then
this Amendment shall not be void or voidable, nor shall Landlord be liable to
Tenant for any loss or damage resulting therefrom, but in that event Tenant
shall not commence paying rent for the Right of First Refusal Space until
Landlord has substantially completed such improvements (except to the extent
that any delay is caused by Tenant.
<PAGE>
3. Basic Rent. Effective on the Right of First Refusal Space Commencement
Date, Section 4.01 of the Lease Summary shall be amended in part to add the
following:
RIGHT OF FIRST REFUSAL SPACE BASIC RENT:
---------------------------------------
Months of Monthly Rent Per
Lease Term Rent Installment Rentable Sq. Ft.
----------- ---------------- ----------------
3/1/98 - 12 $7,367.60 $16.95
13 - 64 $7,606.67 $17.50
65 - 88 $8,041.33 $18.50
4. Tenant's Proportionate Share.
(a) Effective on the Right of First Refusal Space Commencement Date,
Section 4.02(a) of the Lease Summary shall be amended as follows:
Tenant's Proportionate Share: 37.505%
5. Consent of Guarantor. The undersigned Guarantor hereby consents to the
provisions of this Amendment and agrees that the terms and conditions of the
Personal Guaranty affixed as Exhibit F to the Lease shall apply to Landlord's
costs of leasing commissions and brokerage fees, moving allowances, design
allowances, and tenant improvement allowances in connection with the Right of
First Refusal Space.
6. Ratification. Except as expressly set forth herein, the terms and
conditions of the Lease are hereby ratified.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first written above.
TENANT: LANDLORD:
fine.com CORPORATION, a THIRD AVENUE ASSOCIATES, a
Washington corporation Washington limited partnership
By: /s/ James P. Chamberlin By: /s/ Gary J. Carpenter
----------------------------- ----------------------------------
Its: Chief Financial Officer Its: General Partner
------------------------ -----------------------------
By: /s/ Richard C. Clotfelter
----------------------------------
Its: General Partner
-----------------------------
GUARANTOR:
/s/ Daniel M. Fine
- --------------------------------
DAN FINE, an individual
[NOTARY BLOCKS AFFIXED HERE]
[EXHIBIT OMITTED]
<PAGE>
EXHIBIT 10.7C TO FORM 10-KSB
PERSONAL GUARANTY
This Personal Guaranty is executed and delivered effective as of November
20, 1997, by DAN FINE, an individual ("Guarantor"), in favor of THIRD AVENUE
ASSOCIATION, a Washington limited partnership ("Landlord"), with respect to the
following facts:
a. Contemporaneously with the execution of this Personal Guaranty,
Landlord and fine.com CORPORATION, a Washington corporation, are entering into
that certain Century Tower Lease Agreement (the "Lease") for the lease of
certain space consisting of approximately 10,434 rentable square feet located in
the Century Tower Building in Seattle, King County, Washington.
b. As a condition to Landlord's agreement to enter into the Lease with
Tenant, Landlord has required that Guarantor personally and individually
guarantee certain of the Tenant's obligations under the Lease.
Therefore, in consideration of, and as an inducement for the granting,
execution and delivery of the Lease and other good and valuable consideration
paid by the Landlord, the Guarantor hereby personally and unconditionally
guarantees to the Landlord, its successors and assigns, the full, prompt and
timely payment of all Tenant's obligations under the Lease. The Guarantor hereby
covenants and agrees to and with Landlord, its successors and assigns, that if
default shall at any time be made by Tenant, its successors or assigns, in the
payment of any sums or in the performance of any of the terms, covenants,
provisions or conditions contained in the Lease, Guarantor shall forthwith pay
to Landlord, its successors or assigns, or, in the case of any non-monetary
term, covenant, provisions or condition, shall forthwith perform such
obligation.
This Personal Guaranty is an absolute and unconditional personal Guaranty
of payment and of performance. It shall be enforceable against the Guarantor,
his heirs, successors, assigns, personal estate and marital community, without
the necessity for any suit or proceedings on Landlord's part of any kind or
nature whatsoever against the Tenant, its successors and assigns, and without
the necessity of any notice of nonpayment, nonperformance or non-observance or
of any notice of acceptance of this Personal Guaranty, or of any other notice or
demand to which the Guarantor might otherwise be entitled, all of which the
Guarantor hereby expressly waives. The Guarantor hereby expressly agrees that
the validity of this Personal Guaranty and the obligations of Guarantor
hereunder shall in no way be terminated, affected or impaired by reason of the
assertion or the failure to assert by Landlord against the Tenant, or Tenant's
successors or assigns, of any of the rights or remedies reserved to Landlord
pursuant to the provisions of the Lease.
The Personal Guaranty shall be a continuing guaranty, and the liability of
the Guarantor hereunder shall in no way be affected, modified or diminished by
reason of any assignment, renewal, modification or extension of the Lease or by
reason of any modification or waiver of or change in any of the terms,
covenants, conditions or provisions of the Lease; or by reason of any extension
of time that may be granted by Landlord to Tenant, its successors or assigns; or
by reason of any dealings or transactions or matter or things occurring between
Landlord and Tenant, its successors or assigns, whether or not notice thereof is
given to Guarantor. This Personal Guaranty shall be construed under the
provisions of Washington law.
All of Landlord's rights and remedies under the Lease or under this
Personal Guaranty are intended to be distinct, separate and cumulative and no
such right and remedy therein or herein mentioned is intended to be in exclusion
of or a waiver of any of the others.
Notwithstanding the above provisions of this Personal Guaranty to the
contrary, Guarantor's liability hereunder shall not exceed the unamortized
portion of Landlord's costs of leasing commissions and brokerage fees, moving
allowances, design allowances, and tenant improvement allowances in connection
with the Lease plus an amount equal to the free rent granted to Tenant, and any
attorneys' fees and costs incurred by Landlord in enforcing
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<PAGE>
the Guarantor's obligations hereunder. In the event the Tenant provides Landlord
with a letter of credit in a form approved by Landlord covering the amounts
guaranteed by this Guaranty, this Guaranty shall be terminated.
DATED: November 20, 1997.
GUARANTOR:
/s/ Daniel M. Fine
----------------------------------------
DAN FINE, an individual
Address: 23619-104th Avenue W.
Edmonds, Washington 98020
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<PAGE>
EXHIBIT 10.8A TO FORM 10-KSB
KEY BANK BUILDING
AGREEMENT OF LEASE
THIS LEASE, dated the 31st day of August, 1995, is by and between
AMBERJACK, LTD., an Arizona corporation, hereinafter called "Lessor", and
PACIFIC ANALYSIS AND COMPUTER CORPORATION, a Washington corporation, hereinafter
called "Lessee".
1. NONSTANDARD PROVISIONS
The following entries constitute the nonstandard provisions of this lease
and are referred to elsewhere herein:
a. Floor(s) on which Premises are located: (5) Fifth
b. Approximate Floor area of Premises: 2,458 Rental Square Feet
c. The term of this lease shall be (60) Sixty months, and shall commence
on the 1st day of November, 1995, and end on the 31st day of October, 2000.
d. Base Monthly Rent: See Addendum Number One
e. Rent per day during any occupancy prior to commencement of term: N/A
f. Reimbursement for special improvements, lump sum: N/A
g. Uses permitted in Premises: General Office: Computer Consulting
h. Lessee's address for notices if other than Premises: N/A
2. PREMISES
Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, upon
the terms and conditions hereinafter set forth, those certain premises,
described in Article (a) and (b) and shown outlined in red on the standard floor
plan attached hereto marked Exhibit A and made a part hereof, in that certain
building known as the Key Bank Building situated in the City of Bellevue, County
of King, State of Washington, 98004, located at 10655-N.E. 4th, Suite 504,
hereinafter referred to as "Building". The legal description of the land upon
which the Building is situated is: The east half of the west half of Lot 2,
Block 3, Cheriton Fruit Gardens, Plat No. 1, according to plat recorded in
Volume 7 of Plats, page 47, in King County, Washington; EXCEPT the south 330
feet and except the north 13.5 feet thereof conveyed to the City of Bellevue for
street purposes by deed recorded as File No. 4806116, and EXCEPT roads.
The areas so leased are hereinafter called "Premises."
3. TERM
The term of this lease shall be as set forth in Article 1(c).
4. RENT
Lessee shall pay Lessor the monthly rental which is set forth in Article
1(d) in United States currency in advance of the eleventh day of each calendar
month during said term, at the office of Lessor of building or such
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<PAGE>
other place Lessor may from time to time designate in writing. Rent for a
partial month shall be prorated based upon the actual number of days in the
subject month. Any rent or other payment due from Lessee which is not paid
within ten (10) days of the eleventh day of each calendar month shall bear
interest from the due date until paid at the lesser of (a) twelve (12%) percent
per annum and (b) the highest rate permitted by law. Lessee hereby acknowledges
that late payment by Lessee to Lessor of rent and other sums due hereunder will
cause Lessor to incur costs not contemplated by this Lease, the exact amount of
which may be extremely difficult to ascertain. Accordingly, if any installment
of rent or any other sum due from Lessee shall not be received by Lessor or
Lessor's designee within ten (10) days after such amount shall be due, Lessee
shall pay to Lessor, in addition to the interest due on such late payment as
otherwise provided in this Lease, a late charge equal to five (5) percent or
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.
5. USE
Premises may be used and occupied only for the purposes set forth in
Article 1(g) and for no other purpose or purposes without the written consent of
Lessor. No use shall be made of Premises, nor act done in or about Premises,
which is illegal, unlawful, or which will increase the existing rate of
insurance upon Building. Lessee shall not commit or allow to be committed any
waste upon Premises, or any public or private nuisance or other act or thing
which disturbs the quiet enjoyment of any other tenant in Building, nor shall
Lessee, without the written consent of Lessor, use any apparatus, machinery or
device in or about Premises which shall cause any substantial noise or
vibration. If any of Lessee's office machines and equipment should disturb the
quiet enjoyment of any other tenant in Building, then Lessee shall provide
adequate insulation, or take such action as may be necessary to eliminate the
disturbance. If chairs with rollers are used by Lessee then a chair pad shall
be placed over the floor covering occupying the spaces over which the chairs
will be moved or rolled. Lessee shall observe the Building Rules and
Regulations described in Exhibit B which are incorporated herein by reference,
and which may be modified by Lessor from time to time without prior notice.
6. POSSESSION
In the event of Lessor's inability to deliver possession of Premises ready
for occupancy at the commencement of the lease term, Lessor shall not be liable
for any damage caused thereby, except as otherwise expressly stated herein, nor
shall this lease become void or voidable, nor shall the lease term be extended,
but in such event, no rental shall be payable by Lessee to Lessor for any
portion of the lease term prior to actual delivery to Lessee of possession of
Premises ready for occupancy by Lessee unless Lessee shall have failed to meet
its obligations under Article 23. If Lessee, with Lessor's permission, enters
into possession of Premises prior to commencement of lease term, all of the
terms and conditions of this lease shall apply during such prior period, except
that rental shall be the amount set forth in Article 1 (e) for each calendar day
during such prior period.
7. SERVICES PROVIDED BY LESSOR
Lessor shall, at its sole cost and expense, maintain all of the public and
common areas of Building, such as lobbies, stairs, landscaping, corridors and
restrooms, in reasonably good order and condition except for damage occasioned
by the act of Lessee. Lessor, at its sole cost, shall furnish Premises during
reasonable and usual business hours with electricity for lighting and the
operation of office machines, heat and air conditioning as may be reasonably
required for the comfortable occupation of Premises, elevator service, lighting
replacement, toilet room supplies, window washing with reasonable frequency, and
daily janitorial service on the basis of a normal five-day work week during the
times and in the manner that such janitorial services are customarily furnished
in general office buildings in the area. Lessor shall not be liable for
damages, nor shall the rental herein reserved be abated for failure to furnish
or delay in furnishing any of the foregoing services, when such failure or delay
is caused by accident or conditions beyond the control of Lessor, or by labor
disturbances or labor disputes of any character, or by inability to secure fuel,
supplies, machinery, equipment or labor after reasonable efforts to do so, or by
the making of necessary repairs or improvements to Premises or to Building, nor
shall the temporary failure to furnish any of
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<PAGE>
such services be construed as an eviction of Lessee or relieve Lessee from the
duty of observing and performing any of the provisions of this lease. If
Lessee's future use of Premises results in a material increase in the amount of
electricity required as related to the rental space occupied over that amount
required at the commencement of the term, or for typical office use from 7 A.M.
through 6 P.M., five days per week, then Lessee shall, on demand by Lessor, pay
for such excess when the same becomes due and payable to the public utility
furnishing the same.
8. REPAIRS AND ALTERATIONS
Lessee agrees by taking possession of Premises that Premises are then in a
tenantable and good condition and that Lessee will take good care of Premises.
Lessee shall not make changes to locks on doors or add, disturb or in any way
change any plumbing or wiring without first obtaining written consent of Lessor.
Lessee shall make no alterations, additions or improvements to Premises without
the prior written consent of Lessor, and Lessor may impose as a condition of
such consent, such requirements as Lessor in its sole discretion may deem
reasonable or desirable, including, without limiting the generality of the
foregoing, requirements as to the manner in which, the time or times at which,
and the contractor by whom such work shall be done. All such alterations,
additions, or improvements shall become the property of Lessor and shall be
surrendered with Premises, as a part thereof, at the end of the term hereof,
except that Lessor may, by written notice to Lessee given at least thirty (30)
days prior to the end of the term, require Lessee to remove all partitions,
counters, railing and the like installed by Lessee, and to repair any damages to
Premises from such removal. All damage or injury done to Premises by Lessee,
its employees or invitees, shall be paid for by Lessee and Lessee shall pay for
all damage to the Building caused by Lessee's misuse of Premises. Lessee shall
pay for the replacement of doors or windows of Premises which are cracked or
broken by Lessee, its employees, agents or invitees and Lessee shall not put any
curtains, draperies or other hangings on or beside the windows in Premises
without first obtaining Lessor's consent. Lessor may make any alterations of
improvements which Lessor may deem necessary for the preservation, safety or
improvement of Premises or Building. Lessee shall, at the termination of this
lease by expiration of term or otherwise, surrender and deliver up Premises to
Lessor in as good condition as when received by Lessee from Lessor, reasonable
use and wear and damage by fire or other casualty excepted.
9. ENTRY AND INSPECTION
Lessee will permit Lessor and its agents to enter into Premises at all
reasonable times for the purpose of inspecting the same or for the purpose of
cleaning, repairing, altering or improving Premises or Building and when
reasonably necessary may close entrances, doors, corridors, elevators or other
facilities without liability to Lessee by reason of such closure and without
such action by Lessor being construed as an eviction of Lessee or relieve the
Lessee from the duty of observing and performing any of the provisions of this
lease. Lessor shall have the right to enter Premises for the purpose of showing
Premises to prospective tenants for a period of 180 days prior to the expiration
date of the lease term.
10. DAMAGE OR DESTRUCTION
If Premises or Building are damaged by fire or other casualty, the damage
shall be repaired by and at the expense of Lessor, provided such repairs can be
made within ninety (90) days after the occurrence of such damage without the
payment of overtime or extraordinary costs to expedite, and until such repairs
are completed, the rent shall be abated in proportion to the part of Premises
which is unusable by Lessee in the conduct of its business (but there shall be
no abatement of rent by reason of any portion of Premises being unusable for a
period equal to three days or less).
If such repairs cannot be made within ninety (90) days Lessor may, at its
option, make them within a reasonable time, and in such event this lease shall
continue in effect and the rent shall be abated in the manner provided above.
Lessor's election to make repairs must be evidenced by written notice to Lessee
within thirty (30) days after the occurrence of the damage. If Lessor does not
so elect to make such repairs which cannot be made within ninety (90) days then
Other party may, by written notice to the other, cancel this lease. A total
destruction of Building shall automatically terminate this lease.
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<PAGE>
11. ADVERTISING AND SIGNAGE
Lessee shall not inscribe any inscription or post, place, or in any manner
display any sign, notice, picture, placard or poster, or any advertising matter
whatsoever, anywhere in or about Premises or Building at places visible (either
directly or indirectly as an outline or shadow on a glass pane) from anywhere
outside Premises without first obtaining Lessor's written consent thereto.
12. DAMAGE TO PROPERTY: INJURY TO PERSONS
Lessee shall indemnify and hold Lessor harmless from any and all claims
arising from Lessee's use of the Premises or the conduct of its business or from
any activity, work, or thing done, permitted or suffered by Lessee in or about
the Premises, and shall further indemnify and hold Lessor harmless from any and
all claims 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 negligence of Lessee or of its agents or employees, and
from all costs, attorneys' fees, expenses and liabilities incurred as a result
of any such claim or any action or proceeding brought thereon; and in case any
action or proceeding be brought against Lessor by reason of any such claim.
Lessee, upon notice from Lessor, shall defend the same at Lessee's expense by
counsel satisfactory to Lessor. Lessee, as a material part of the consideration
to Lessor, hereby assumes all risk of damage to property or injury to persons,
in, upon, or about the Premises from any cause which does not result from the
negligence of Lessor and Lessee hereby waives all claims in respect thereof
against Lessor.
Lessor or its agents shall not be liable for any damage to property
entrusted to employees of the Building, nor for loss of or damage to any
property by theft or otherwise, nor for any injury or damage to persons or
property resulting from fire, explosion, falling plaster, steam, gas,
electricity, water or rain which may leak from any part of the Building or from
the pipes, appliances or plumbing works therein, or from the roof, street or
subsurface, or from any other place resulting from dampness or any other cause
whatsoever which does not result from the negligence of Lessor. Lessor or its
agents shall not be liable for interference with the natural light, nor shall
Lessor be liable for any latent defect in the Premises or in the Building.
Lessee shall give prompt notice to Lessor of any fire, accident or defect
discovered within the Premises or the Building.
13. LIENS AND INSOLVENCY
Lessee shall keep Premises and Building free from any liens or incumbrances
arising out of any work performed by Lessee, materials furnished by Lessee, or
obligations incurred by Lessee. Upon the occurrence of any of the following
events, Lessor may immediately terminate this lease by giving Lessee notice of
its election to do so; (i) if Lessee files a voluntary petition of bankruptcy,
or for reorganization under the bankruptcy laws, or is adjudged or (iii) if a
receiver is appointed by a court of competent jurisdiction for Lessee's business
and it be established in the receivership proceedings that Lessee is insolvent.
If any lien is not released within a reasonable amount of time, Lessee shall be
considered in default under Article 14.
14. DEFAULT AND RE-ENTRY
Except for a default under the preceding paragraph for which immediate
right of termination is given to Lessor, if Lessee fails to make any monthly
rent payment within ten (10) days after written notice, or to perform any other
covenant under this lease within thirty (30) days after written notice from
Lessor stating the nature of the default, Lessor may cancel this lease and re-
enter and take possession of Premises using all legal means to do so; provided,
however, that if the nature of such default other than for non-payment of rent
is such that the same cannot reasonably be cured within such thirty (30) day
period. Lessee shall not be deemed to be in default if Lessee shall within such
period commence such cure and thereafter diligently prosecute the same to
completion. Notwithstanding such retaking of possession by Lessor, Lessee's
liability for tile rent provided herein shall not be extinguished for the
balance of the term of this lease. Upon such re-entry, Lessor may elect either
(i) to terminate this lease, in which event Lessee shall immediately pay to
Lessor a sum equal to that by which the then cash value of the total rent
reserved under this lease for the balance of the lease term exceeds the then
reasonable rental value of the Premises for the balance of the lease term; or
(ii) without terminating this lease, to relet all or any part of the Prem-
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<PAGE>
ises as the agent of and for the account of Lessee upon such terms and
conditions as Lessor may deem advisable, in which event the rents received on
such reletting shall be applied first to the expenses of reletting and
collection including necessary renovation and alterations of the Premises,
reasonable attorney's fees and leasing commissions paid, and thereafter to
payment of all sums due or to become due Lessor hereunder, and if a sufficient
sum shall not be realized to pay such sums and other charges, Lessee shall pay
Lessor any deficiency monthly, and Lessor may bring an action therefor as such
monthly deficiency shall arise.
In the event of any such retaking of possession of Premises by Lessor as
herein provided, Lessee shall remove all personal property located thereon and,
upon failure to do so upon demand of Lessor, Lessor may remove and store the
same in any place selected by Lessor, including but not limited to a public
warehouse, at the expense and risk of Lessee. If Lessee shall fail to pay the
cost of storing any such property after it has been stored for a period of
thirty (30) days or more, Lessor may sell any or all of such property at public
or private sale and shall apply the proceeds of such sale first, to the cost of
such sale, second, to the payment of the charges for storage, if any; and third,
to the payment of other sums of money which may be due from Lessee to Lessor
under the terms of this lease, and the balance, if any, to Lessee.
Lessee hereby waives all claims for damages that may be caused by Lessor's
lawfully re-entering and taking possession of Premises or lawfully removing and
storing the property of Lessee as herein provided, and will save Lessor harmless
from loss, costs or damages occasioned Lessor thereby, and no such lawful re-
entry shall be considered or construed to be a forcible entry.
15. SURRENDER OF POSSESSION
Upon expiration of the term of this lease, whether by lapse of time or
otherwise, Lessee shall promptly and peacefully surrender Premises to Lessor.
16. COSTS AND ATTORNEY'S FEES
If Lessee or Lessor shall bring any action for any relief against the
other, declaratory or otherwise, arising out of this lease, including any suit
by Lessor for the recovery of rent or possession of Premises, the losing party
shall pay the successful party a reasonable sum for attorneys' fees in such
suit, and such attorneys' fees shall be deemed to have accrued on the
commencement of such action.
17. NON WAIVER
Waiver by Lessor of any breach of any term, covenant or condition herein
contained shall not be deemed to be a waiver of subsequent breach of such term
covenant, or condition, or if any subsequent breach of the same or any other
term, covenant or condition herein contained.
The subsequent acceptance of rent hereunder by Lessor shall not be deemed
to be a waiver of any preceding breach by Lessee of any term, covenant, or
condition of this lease., other than the failure of Lessee to pay the particular
rental so accepted, regardless of Lessor's knowledge of such preceding breach at
the time of acceptance of such rent.
18. ASSIGNMENT AND SUBLETTING
Except for an assignment or subletting to a majority owned subsidiary or
affiliate of Lessee, Lessee may not assign this lease, or sublet all or any part
of Premises, without the Lessor's prior written consent, which consent shall not
be unreasonably withheld. Lessor reserves the right, should Lessee request such
assignment or subletting, to release Lessee from the terms and provisions of
this lease and Lessor shall have thirty (30) days to make such determination.
Should Lessor exercise this right, then the lease shall terminate. Until
termination hereof, Lessee will, however, still remain liable for the
performance of all the terms and conditions hereof. Consent to any such
assignment or subletting shall not operate as a waiver of necessity for a
consent to any subsequent assignment or subletting, and the terms of such
consent shall be binding upon any person holding by, under or through Lessee.
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If Lessee is a corporation, then any transfer of this lease by Merger,
consolidation or liquidation or the ownership of, or power to vote, the majority
of its outstanding voting stock shall constitute an a the purposes of this
article.
19. SUCCESSORS
All of the covenants, agreements, terms and conditions contained in this
lease shall apply to and be binding upon Lessor and Lessee and their respective
heirs, executors, administrators, successors and assignees.
20. OPERATING COST/LESSEE'S SHARE
In addition to the Base Monthly Rent provided in Article 1(d), hereof,
Lessee shall pay to Lessor as additional rent, its pro rata share of the Direct
Costs paid or incurred by Lessor on account of the operation and maintenance of
the Building, which pro rata share shall be determined and payable as follows:
BASE YEAR: The calendar year 1995.
COMPARISON YEAR: Each calendar year of the term after the Base Year.
If the Direct Costs paid or incurred by Lessor for the Comparison Year on
account of the operation or maintenance of the Building of which the Premises
are a part are in excess of the Direct Costs paid or incurred for the Base Year,
then Lessee shall pay his pro-rata share as hereafter set forth.
Direct Costs shall include:
(i) Real estate taxes on the land and Building, or any other taxes or
assessments arising out of the existence of this lease except income, estate or
inheritance taxes. Lessee's initial prorata share for this provision is 2.65%.
(ii) Janitorial service as provided for in paragraph 7. Lessee's
initial prorata share for this provision is 3.23%.
(iii) All other costs of operation, maintenance and repair of the
Building including, without limiting the generality of the foregoing, the
following: all utility charges for heat, air conditioning, light power, water,
sewer, drainage and waste disposal, supplies, insurance, costs of services of
independent contractors, wages (including employment taxes and fringe benefits)
of all employees performing services uniformly available or to be performed for
substantially all Building tenants (but excluding administrative employees),
licenses and permits, equipment and tools, and professional fees incurred to
reduce or in an attempt to reduce operating costs. Lessees initial prorata share
for this provision is 3.01%.
Direct costs shall not include Lessee alterations, depreciation, interest,
leasing fees or capital expenditures required to be capitalized for federal
income tax purposes. However, capital expenditures made by Lessee to reduce
operating costs may be included in paragraph (iii) if allocated over the life of
the component or extended life of the Building.
Lessor shall endeavor to give to Lessee as soon as possible after the end
of each Comparison Year a statement of the increase in rent payable by Lessee
hereunder, but failure by Lessor to give such statement shall not constitute a
waiver by Landlord of its right to require an increase in rent. Upon receipt of
the statement for the first Comparison Year, Lessee shall pay in full the total
amount of increase due for the first Comparison Year, and in addition for the
then current year, the amount of any such increase shall be used as an estimate
for said current year and this amount shall be divided into twelve (12) equal
monthly installments and Lessee shall pay to Lessor, concurrently with the
regular monthly rent payment next due following the receipt of such statement,
an amount equal
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<PAGE>
to one (1) monthly installment multiplied by the number of months from January
in the calendar year in which said statement is submitted to the month of such
payment, inclusive.
Subsequent installments shall be payable concurrently with the regular
monthly rent payments for the balance of that calendar year and shall continue
until the next Comparison Year's statement is rendered. If the next succeeding
Comparison Year results in a greater increase in Direct Costs, then upon receipt
of a statement from Lessor, Lessee shall pay a lump sum equal to such total
increase in Direct Costs over the Base Year, less the total of the monthly
installments of estimated increases paid in the previous calendar year; and the
estimated monthly installments to be paid for the next year, following said
Comparison Year, shall be adjusted to reflect such increase. If in any
Comparison Year the Lessee's share of Direct costs is less than the preceding
year, then upon receipt of Lessor's statement, any overpayment made by Lessee on
the monthly installment basis provided above shall be credited towards the next
monthly rent failing due and the estimated monthly installments of Direct Costs
to be paid shall be adjusted to reflect such lower Direct Costs for the most
recent Comparison Year.
Even though the lease has terminated (by default or otherwise) and Lessee
has vacated the Premises, when the final determination is made of Lessee's share
of Direct Costs for the year in which this Lease terminates, Lessee shall
immediately pay any increase due over the estimated costs paid and conversely
any overpayment made in the event said costs decrease shall be immediately
rebated by Lessor to Lessee.
Notwithstanding anything contained in this Article, the rent payable by
Lessee shall in no event be less than the rent specified in Article 1(d)
hereinabove.
21. PRIORITY
This lease shall automatically be subordinate to any mortgage or deed of
trust heretofore or hereafter placed upon Building, to any and all advances made
or to be made thereunder, to the interest on the obligations secured thereby,
and to all renewals, replacements and extensions thereof; provided however, that
in the event of foreclosure of any such mortgage or deed of trust or exercise of
the power of sale thereunder, Lessee shall attorn to the purchaser of Building
at such foreclosure or sale and recognize such purchaser as Lessor under this
lease if so requested by such purchaser. If any mortgagee or beneficiary elects
to have this lease superior to its mortgage or deed of trust and gives notice of
its election to Lessee, then this lease shall thereupon become superior to the
lien of such mortgage or deed of trust, whether this lease is dated or recorded
before or after the mortgage or deed of trust. Within fifteen (15) days of
presentation, Lessee shall execute, acknowledge and deliver to Lessor (i) any
subordination or non-disturbance agreement or other instrument that Lessor may
require to carry out the provisions of this article, and (ii) any estoppel
certificate requested by Lessor from time to time in the standard form of any
such mortgagee or beneficiary certifying in writing, if such be true, that
Lessee shall be in occupancy, that this lease is unmodified and in full force
and effect (or if there have been modifications, and that the same is in full
force and effect as modified and stating the modifications) and the dates to
which the rent and other charges shall have been paid, and that there shall be
no rental offsets or claims.
22. CONDEMNATION
If the whole of Premises, or if such portion of either Premises or the
facilities in Building as may be required for the reasonable use of Premises
shall be taken by virtue of any condemnation or eminent domain proceeding, this
lease shall automatically terminate as of the date of such condemnation, or as
of the date possession is taken by the condemning authority, whichever is
earlier. Current rent shall be apportioned as of the date of such termination.
In case of a taking of a part of Premises or a portion of the facilities in
Building not required for the reasonable use of Premises, then this lease shall
continue in full force and effect and the rental shall be equitably reduced
based on the proportion by which the rentable area of Premises is reduced, such
rent reduction to be effective on the date of such partial taking. No award for
any partial or entire taking shall be apportioned, and Lessee hereby assigns to
Lessor any award which may be made in such taking or condemnation together with
any and all rights of Lessee now or hereafter arising in or to the same or any
part thereof, provided however, that nothing herein shall be deemed to give
Lessor any interest in or to require Lessee to assign to Lessor any award made
to Lessee for the taking of personal
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<PAGE>
property or fixtures belonging to Lessee, for the interruption of or damage to
Lessee's business or for Lessee's moving expenses.
23. SPECIAL IMPROVEMENTS
Before occupancy of Premises Lessee shall pay Lessor that certain sum which
is set forth in Article 1(f). In addition Lessee shall reimburse Lessor for
Lessor's costs of making all special improvements required by Lessee including
but not limited to counters, partitioning, electrical and telephone outlets and
plumbing connections other than as shown on Exhibit A as furnished by Lessor,
provided, however, Lessee shall not be obligated to pay for the costs of any
such special improvements made without a written request therefor by Lessee to
Lessor. Lessee shall give Lessor written notice of its final color selections
and all other details of its office layout in sufficient time to permit Lessor's
completion of all work by the commencement date hereunder using its normal crews
on a regular time basis, and such notice shall in any event be given not later
than fifteen (15) working days before such commencement date.
24. INSURANCE
Lessee agrees to carry at its own expense throughout the term of the lease,
comprehensive public liability insurance covering the Premises and Lessee's use
thereof with a combined single limit of liability of $1,000,000, in the
alternative, $1,000,000 per person and $1,000,000 per occurrence for bodily
injury or death and $1,000,000 per occurrence for property damage. Lessee shall
deliver a Certificate of Insurance to Lessor prior to the date of occupancy of
the Premises and said insurance policy shall list and protect Lessor and Lessee
as their interest may appear and shall contain an endorsement stating that the
insurer agrees to give no less than ten (10) days advance notice to Lessor in
the event of modification or cancellation thereof.
25. MUTUAL RELEASE/WAIVER OF SUBROGATION
Lessor and Lessee each hereby release the other from any and all liability
or responsibility for any direct or consequential loss injury or damage to the
Premises, or its contents, caused by fire or any other casualty, during the term
of this lease, even if such fire or other casualty may have been caused by the
fault or negligence (but not the willful act) of the other party or anyone for
whom such party may be responsible. Inasmuch as the above mutual waivers will
preclude the assignment of any aforesaid claim by way of subrogation (or
otherwise) to an insurance company (or any other person), each party hereto
agrees if required by said policies to give to each insurance company which has
issued to it fire and other property insurance, written notice of the terms of
said mutual waivers, and to have said insurance policies properly endorsed, if
necessary, to prevent the invalidation of said insurance coverage by reason of
said waivers.
26. NOTICES
All notices under this lease shall be in writing and delivered in person or
sent by registered or certified mail to Lessor at its offices in Building and to
Lessee at Premises, or to such other places as may be set forth in Article 1(h)
or after be designated by either party in writing.
27. NAME OF BUILDING
The building is known as the Key Bank Building but Lessor reserves the
right in its sole discretion to change such name.
28. CONSTRUCTION
The titles to paragraphs of this lease are not a part of this lease and
shall have no effect upon the construction or interpretation of any part
thereof. This lease shall be construed and governed by the law of the State of
Washington.
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<PAGE>
29. TIME OF ESSENCE
Time is of the essence of this lease.
30. SECURITY DEPOSIT
Concurrently with its execution of this lease, Lessee shall deliver to
Lessor the sum of $1,804.00 (see Article 7 of Addendum Number One), as security
for the performance by Lessee of every covenant and condition of this lease.
Upon payment of said deposit Lessee shall request and Lessor shall deliver to
Lessee a written receipt therefor. Said deposit may be commingled with other
funds of Lessor and shall bear no interest. If Lessee shall default with
respect to any covenant or condition of this lease, including but not limited to
the payment of rent, Lessor may apply the whole or any part of such security
deposit to the payment of any sum in default or any other sum which Lessor may
be required to spend by reason of Lessee's default. Should Lessee comply with
all of the covenants and conditions of this lease, the security deposit or any
balance thereof shall be returned to Lessee (or, at the option of Lessor, to the
last assignee of Lessee's interest in this lease) at the expiration of the term
hereof.
31. HOLDING OVER
If Lessee shall, with the written consent of Lessor, hold over after the
expiration of the term of this Lease, such tenancy shall be for an indefinite
period of time on a month to month tenancy, which tenancy may be terminated as
provided by the laws of the State of Washington. During such tenancy Lessee
agrees to pay Lessor the same rate of rental as set forth herein, unless a
different rate shall be agreed upon, and to be bound by all or the terms,
covenants and conditions herein specified, so far as applicable.
32. ENTIRE AGREEMENT
This lease embodies the entire agreement between the parties.
33. SPECIAL PROVISIONS
[none]
IN WITNESS WHEREOF, Lessor and Lessee have executed this lease on the day
and year first above written.
LESSOR: LESSEE:
AMBERJACK, LTD. PACIFIC ANALYSIS AND COMPUTING
CORPORATION, A WASHINGTON CORPORATION
By: SUHRCO MANAGEMENT INC.
By: /s/ E. Craig Suhrbier By: /s/ William G. Poole
------------------------------ ----------------------------------
Its: President Its: President
------------------------- -----------------------------
By: /s/ Steven A. Roselli
-----------------------------------
Its: Real Estate Operations Manager
------------------------------
[NOTARY BLOCKS ATTACHED HERE]
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<PAGE>
EXHIBIT A
PREMISES - FIFTH FLOOR OFFICE PLAN
[SITE MAP]
<PAGE>
EXHIBIT B
BUILDING RULES AND REGULATIONS
1. The sidewalks, entries, passages, court corridors, stairways and
elevators shall not be obstructed by and of the Lessees, their employees or
agents, or used by them for purposes other than ingress and egress to and from
their respective suites.
All safes or other heavy articles shall be carried up or into the premises
only at such times and in such manner as shall be prescribed by the Lessor and
the Lessor shall in all cases have the right to specify the proper weight and
position of any such safe or other heavy article. Any damage done to the
Building by taking in or removing any such equipment or from overloading any
floor in any way shall be paid by the Lessee. Defacing or injuring in any way
any part of the Building by the Lessee, his agents or employees, shall be paid
for by the Lessee.
2. Lessee will refer all contractors, contractors' representatives and
installation technicians rendering any service on or to the premises for Lessee
to Lessor for Lessor's approval and supervision before performance of any
contractual service. This provision shall apply to all work performed in the
Building, including installation of telephones, telegraph equipment, electrical
devices and attachments and installations of any nature affecting floors, walls,
woodwork, trim, windows, ceilings, equipment or any other physical portion of
the Building. Such approval, if given, shall in no way make Lessor, a party to
any contract between Lessee and any such contractor, and Lessor shall have no
liability therefor.
3. No sign, advertisement or notice shall be inscribed, painted or affixed
on any part of the inside or outside of the said Building unless of such color,
size and style and in such place upon or in said Building as shall first be
designated by Lessor; there shall be no obligation or duty on Lessor to allow
any sign, advertisement or notice to be inscribed, painted or affixed on any
part of the inside or outside of said Building. Signs on doors will be supplied
for the Lessee by a sign writer approved by Lessor, the cost of the sign to be
paid by the Lessee. A directory in a conspicuous place, with the names of the
Lessees, will be provided by Lessor; any necessary revision in this will be made
by Lessor within a reasonable time after notice from the Lessee of the error or
change making the revision necessary. No furniture shall be placed in front of
the Building or in any lobby or corridor without written consent of Lessor.
Lessor shall have the right to remove all other signs and furniture, without
notice to Lessee at the expense of Lessee.
4. Lessee shall have the non-exclusive use in common with the Lessor,
other tenants, their guests and invitees, of the automobile parking areas,
driveways and footways, subject to reasonable rules and regulations for the use
thereof as prescribed from time to time by Lessor. Lessor shall have the right
to designate parking areas for the use of the building tenants and their
employees, and the tenants and their employees shall not park in parking areas
not so designated, specifically including driveways, fire lanes,
loading/unloading areas, walkways and building entrances. Lessee agrees that
upon written notice from Lessor, it will furnish to Lessor, within five (5) days
from receipt of such notice, the state automobile license numbers assigned to
the automobiles of the Lessee and its employees. Lessor shall not be liable for
any vehicle of the Lessee or its employees that the Lessor shall have towed from
the premises when illegally parked. Lessor will not be liable for damage to
vehicles in the parking areas or for theft of vehicles, personal property from
vehicles, or equipment of vehicles. Lessor and Lessee understand that the City
of Bellevue has required (and Lessee agrees to be bound by said requirement)
that Lessee and employees of Lessee shall not park on off-site surrounding
property, whether publicly or privately owned, without the consent of the owner
of such surrounding property.
5. No Lessee shall do or permit anything to be done in said premises, or
bring or keep anything therein, which will in any way increase the rate of fire
insurance on said Building, or on property kept therein, or obstruct or
interfere with the rights of other Lessees, or in any way injure or annoy them,
or conflict with the laws relating to fire, or with any regulations of the fire
department, or with any insurance policy upon said buildings or any part
thereof, or conflict with any rules and ordinances of the local Board of Health
or any governing bodies.
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<PAGE>
6. The janitor of the Building may at all times keep a pass key, and he
and other representatives of the Lessor shall at all times be allowed admittance
to said Demised Premises.
7. No additional locks shall be placed upon any doors without the written
consent of the Lessor. All keys to the Demised Premises and Building Security
Keys shall be furnished by the Lessor in a reasonable number commensurate with
the square footage leased. Additional keys and Building Security Keys shall be
furnished at Lessee cost. Upon termination of this Lease, all keys and Building
Security Keys shall be surrendered, and the Lessee shall then give the Lessor or
his agents explanation of the combination of all locks upon the doors of vaults.
8. No windows or other openings that reflect or admit light into the
corridors or passageways, or to any other place in said Building, shall be
covered or obstructed by any of the Lessees.
9. No person shall disturb the occupants of the Building by the use of any
musical instruments, the making of unseemly noises, or any unreasonable use. No
dogs or other animals or pets of any kind will be allowed in the Building.
10. The water closets and other water fixtures shall not be used for any
purpose other than those for which they were constructed, and any damage
resulting to them from misuse, or the defacing or injury of any part of the
Building, shall be borne by the person who shall occasion it.
11. No bicycles or similar vehicles will be allowed in the Building.
12. Nothing shall be thrown out the windows of the building or down the
stairways or other passages.
13. Lessee shall not be permitted to use or to keep in the Building any
kerosene, camphene, burning fluid or other illuminating materials.
14. If any Lessee desires, at his cost, telegraphic, telephonic or other
electric connections, Lessor or its agents will direct the electricians as to
where and how the wires may be introduced, and without such directors, no boring
or cutting for wires will be permitted.
15. Lessor or its agents shall have the right to enter the premises to
examine the same or to make such repairs, alterations or additions as Lessor
shall deem necessary for the safety, preservation or improvement of the
Building; and the Lessor or its agents may show said premises and may place on
the windows or doors thereof, or upon the bulletin board, a notice "For Rent"
for one month prior to the expiration of the Lease.
16. No portion of the Building shall be used for the purpose of lodging
rooms or for any immoral or unlawful purposes.
17. All glass, locks and trimmings in or about the doors and windows and
all electric fixtures belonging to the Building shall be kept whole, and
whenever broken by anyone shall be immediately replaced or repaired and put in
order by Lessee under the direction and to the satisfaction of Lessor, and on
removal shall be left whole and in good repair.
18. Lessee shall not install or authorize the installation of any vending
machines or food preparation devices without Lessor's written approval. Lessor
shall have the right to rescind this approval, if given, without liability to
Lessee for reimbursement of any Lessee costs or expenses.
19. Lessor reserves the right at any time to take one elevator out of
service to Lessees for exclusive use by the Building management in servicing the
Building.
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<PAGE>
ADDENDUM NUMBER ONE
By and Between
AMBERJACK, LTD (LESSOR)
and
PACIFIC ANALYSIS & COMPUTING CORPORATION
A Washington Corporation
This ADDENDUM NUMBER ONE dated August 31, 1995 is attached to and forms a
part of the Agreement of Lease dated August 31, 1995 between AmberJack, Ltd.
(Lessor) and Pacific Analysis & Computing Corporation, A Washington Corporation
(Lessee).
The parties hereto agree as follows:
1. Total base monthly rent will be as follows:
A. For the Five (5) month period beginning November 1, 1995 and
ending March 31, 1996 the base monthly rent is free.
B. For the Nineteen (19) month period beginning April 1, 1996 and
ending October 31, 1997 the base monthly rent shall be Three Thousand Four
Hundred Eighty Two and 66/100 Dollars ($3,482.66).
C. For the Twenty Four (24) month period beginning November 1, 1997
and ending October 31, 1999 the base monthly rent shall be Three Thousand Five
Hundred Eighty Five and 00/100 Dollars ($3,585.00).
D. For the Twelve (12) month period beginning November 1, 1999 and
ending October 31, 2000 the base monthly rent shall be Three Thousand Six
Hundred Eighty Seven and 00/100 Dollars ($3,687.00).
2. Lessor shall make the following improvements to the leased premises:
Suite 504 shall be modified in accordance with attached Exhibit A. All
improvements shall be to building standard and shall include the following:
Closet at west end of interior corridor (30" deep)
Closet with shelves on south wall of work room (24" deep)
Reception counter to have P-lam counter and ledge
Lessor will relocate existing curtains from Suite 808
Lessor will provide building standard mini-blinds to all interior re-
lites
Separate light switch for Conference Room Locks on large office and
work room
3. Lessee shall have the use of three (3) reserved and nine (9)
unreserved parking stalls for the term of this lease. Use of said stalls shall
be during normal business hours Monday through Friday 8:00 AM - 5:00 PM.
Location of said stalls shall be determined by Lessor. Lessee agrees to abide by
all existing and future parking rules and regulations as prescribed by
Lessor/Lessor's representative.
4. Provided Lessee is not in default under the terms of this lease and is
in compliance with all of its obligations hereunder, Lessee but not an assignee
or subtenant, can notify Lessor of their intent to expand or relocate to larger
space in the Key Bank Building by providing the Lessor with written notice of
said intent. If the Lessor cannot find space in the building acceptable to
Lessee, Lessee may terminate this Agreement 120 days from Lessor's receipt of
the first notice of Lessee's intent to expand. As compensation for this early
termination, Lessee will pay to Lessor an amount equal to the unamortized tenant
improvements and leasing commissions associated with this lease transaction
until the end of the lease or until the space is leased to another tenant
whichever occurs first.
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<PAGE>
5. Tenant shall not cause or permit any Hazardous Substances to be used,
stored, generated or disposed of on, in or about the Premises by Tenant,
Tenant's agents, employees, contractors, or invitees without first obtaining
Landlord's written consent. If Hazardous Substances are used, stored,
generated, or disposed of on, in or about the Premises, or if the Premises
becomes contaminated in the manner, Tenant shall indemnify and hold harmless the
Landlord (and its agents and employees) for any and all claims, damages, fines,
judgments, penalties, costs, liabilities, or losses (including, without
limitation, a decrease in value of the premises or the land or building of which
they area a part, damages caused by loss or restriction of rentable or usable
space, or any damages caused by adverse impact on marketing of the space, and
any and all sums paid for settlement of claims, attorneys' fees, consultants,
and expert fees) arising during or after the Lease Term and arising as a result
of any use, storage, generation or disposal of any Hazardous Substance or any
such contamination by Tenant. This indemnification includes, without
limitation, any and all costs incurred because of any investigation of the site
or any cleanup, removal, restoration mandated by federal, state or local agency
or political subdivision. If the Tenant causes or permits the presence of any
Hazardous Substances on the Premises that results in contamination, Tenant shall
promptly, at its sole expense, take any and all necessary actions to return the
Premises to the condition existing prior to the presence of any such Hazardous
Substances on the Premises. Tenant shall first obtain Landlord's approval for
any such remedial action.
As used herein, "Hazardous Substances" means any substance that is toxic,
ignitable, reactive or corrosive regardless whether same is regulated by any
local government, the State of Washington, or the United States Government.
"Hazardous Substance" includes, but is not limited to any toxic or hazardous
substance and any and all material or substances that are defined as "hazardous
waste", "extremely hazardous waste", or a "hazardous substance" pursuant to
state, federal or local governmental law. "Hazardous Substance" includes but is
not restricted to asbestos, polychlorobiphenyls ("PCBs"),. petroleum and
petroleum products.
6. Article 8, Repairs and Alterations shall be amended to include the
following:
Lessee shall comply with and shall be responsible for the cost of any and
all improvements, modifications and alterations to the Premises required by any
Federal, State or local statute, law, rule, regulation or ordinance, including,
without limitation, the Americans with Disabilities Act.
7. Upon the latter of delivery of possession on 11/l/95, the existing
lease dated the 28th day of March, 1994 between Pacific analysis & Computing
Corporation and AmberJack, Ltd. for Suite 808 is terminated and shall become
null and void. The security deposit shall be paid to Pacific Analysis &
Computing Corporation or credited to the security deposit requested herein.
All other terms and conditions remain unchanged.
LESSOR: LESSEE:
AMBERJACK, LTD. PACIFIC ANALYSIS AND COMPUTING
CORPORATION, A WASHINGTON CORPORATION
By: SUHRCO MANAGEMENT INC.
By: /s/ E. Craig Suhrbier By: /s/ William G. Poole
------------------------------ ----------------------------------
Its: President Its: President
------------------------- -----------------------------
By: /s/ Steven A. Roselli
-----------------------------------
Its: Real Estate Operations Manager
------------------------------
[NOTARY BLOCKS ATTACHED HERE]
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<PAGE>
ADDENDUM NUMBER TWO
By and Between
AMBERJACK, LTD (Lessor)
and
PACIFIC ANALYSIS & COMPUTING CORPORATION (Lessee)
A Washington Corporation
This ADDENDUM NUMBER TWO dated June 26, 1997 is attached to and forms a
part of the Agreement of Lease and Addendum Number One dated August 31, 1995
between AmberJack, Ltd. (Lessor) and Pacific Analysis & Computing Corporation, A
Washington Corporation (Lessee).
The parties hereto agree as follows:
1. Beginning July 1, 1997 the Premises shall be expanded approximately
897 square feet to total approximately 3,355 square feet and the term of the
Lease shall be extended and expire on October 31, 2002.
2. Total base monthly rent will be as follows:
A. For the Four (4) month period beginning July 1, 1997 and ending
October 31, 1997 the base monthly rent shall be $4,941.78.
B. For the Twenty four (24) month period beginning November 1, 1997
and ending October 31, 1999 the base monthly rent shall be $5,044.12.
C. For the Twelve (12) month period beginning November 1, 1999 and
ending October 31, 2000 the base monthly rent shall be $5,146.12.
D. For the Twenty four (24) month period beginning November 1, 2000
and ending October 31, 2002 the base monthly rent shall be $6,150.83.
3. Lessor shall make the following improvements to the Premises:
Suite 504 shall be modified in accordance with attached Exhibit A. All
improvements shall be to building standard and shall include the following:
1. Demolition of walls.
2. New walls.
3. Reinstall one (1) relite with mini blind.
4. Change five (5) duplex outlets to fourplex outlets. Add one (1)
new duplex outlet.
5. Recarpet only the expansion space.
6. Repaint only the expansion space.
All costs of tenant improvement in excess of $10,500.00 will be amortized
over the lease ten at 10% and payable by Lessee as additional Base Monthly Rent.
4. Employee Parking: Beginning November 1, 2000, through October 31, 2002
Lessee shall be obligated to pay for three (3) reserved parking stalls at
prevailing retail monthly parking rates and nine (9) unreserved parking stalls
at prevailing retail monthly parking rates for each stall over the term of the
Lease. Use of said stalls shall be during normal business hours Monday through
Friday 8:00a.m.- 5:00 p.m. Location of said stalls shall be determined by
Lessor and may be relocated from time to time at Lessor's sole discretion.
Lessee agrees to abide by all existing and future parking rules and regulations
reasonably established by Lessor. The monthly rate may be changed from time to
time at the sole discretion of Lessor.
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<PAGE>
5. Operating Cost/Lessee's Share, Article 20 of the Lease, shall be
amended to increase Direct Cost percentages as follows:
(i) from 2.65% to 4.05%
(ii) from 3.23% to 4.93%
6. Operating Cost/Lessee's Share, Article 20 of the Lease shall be amended
as follows:
Beginning July 1, 1997 the Base Year shall be Calendar Year 1996.
7. Paragraph 4 of Addendum Number One shall be stricken from the Lease.
8. Lessee shall not cause or permit any Hazardous Substances to be used,
stored, generated, released, discharged or disposed of on, in, under or about
the Premises by Lessee, Lessee's agents, employees, agents, contractors, or
invitees without first obtaining Lessor's prior written consent. If Hazardous
Substances are used, stored, generated, or disposed of on, in or about the
Premises, or if the Premises becomes contaminated in the manner, Lessee shall
indemnify and hold harmless the Lessor (and its agents and employees) for any
and all claims, damages, fines, judgments, penalties, costs, liabilities or
losses (including, without limitation, a decrease in value of the premises or
die land or building of which they are a part, damages caused by loss or
restriction of rentable or usable space, or any damages caused by adverse impact
on marketing of the space, any and all sums paid for settlement of claims,
attorneys fees, consultants, and expert fees) arising during or after the Lease
Term and arising as a result of any use, storage, generation, release, discharge
or disposal of any Hazardous Substance or any such contamination by Lessee.
This indemnification includes, without limitation, any and all costs incurred
because of any investigation of the site or any cleanup, removal, restoration
mandated by federal, state or local agency or political subdivision. If the
Lessee causes or permits the presence of any Hazardous Substances on the
Premises that results in contamination, Lessee shall promptly, at its sole
expense, take any and all necessary actions to return the Premises to the
condition existing prior to the presence of any such Hazardous Substances on the
Premises. Lessee shall first obtain Lessor's approval for any such remedial
action.
Lessee further agrees and covenants as follows:
1. To comply with all Environmental Laws in effect, or may come into
effect, applicable to the Lessee or Lessee's use and occupancy of the Premises;
2. To immediately notify Lessor, in writing, of any existing, pending
or threatened (a) investigation, inquiry, claim or action by any governmental
authority in connection with any Environmental Laws; (b) third party claims; (c)
regulatory actions; and/or (d) contamination of the Premises;
3. Lessee shall at Lessee's expense, investigate, monitor, remediate,
and/or clean up any Hazardous Material or other environmental condition on,
about, or under the Premises required as a result of Lessee's use or occupancy
of the Premises; and
4. To keep the Premises free of any lien imposed pursuant to any
Environmental Laws.
The Lessee's obligations, responsibilities, and liabilities under this
Section shall survive the expiration of this Lease.
As used herein, "Hazardous Substances" means any substance that is toxic,
ignitable, reactive or corrosive regardless whether same is regulated by any
local government, die State of Washington, or the United States Government,
including, without limitation, (1) any "hazardous waste" and/or "hazardous
substance" defined pursuant to any Environmental Laws; (2) asbestos or any
substance containing asbestos; (3) polychlorinated biphenyl's; (4) lead; (5)
radon; (6) pesticides; (7) petroleum or any other substance containing
hydrocarbons; (8) any substance which, when on the Premises, is prohibited by
any Environmental Laws; and (9) any other substance, material, or waste which,
(i) by any Environmental Laws requires special handling or notification of any
governmental authority
-2-
<PAGE>
in its collection, storage, treatment, or disposal or
(ii) is defined or classified as hazardous, dangerous or toxic pursuant to any
legal requirement.
"Environmental Laws" shall mean: any and all federal, state and local laws,
statutes, codes, or ordinances, regulations, rules or other requirements,
relating to human health or safety or to the environment, including, but not
limited to, those applicable to the storage, treatment, disposal, handling and
release of any Hazardous Materials, all as amended or modified from time to
time.
All other terms and conditions shall remain unchanged.
LESSOR: LESSEE:
AMBERJACK, LTD. PACIFIC ANALYSIS AND COMPUTING
CORPORATION, A WASHINGTON CORPORATION
By: SUHRCO MANAGEMENT INC.
By: /s/ E. Craig Suhrbier By: /s/ William G. Poole
------------------------------ ----------------------------------
Its: President Its: President
------------------------- -----------------------------
By: /s/ Janice R. Oberholtzer
------------------------------
Its: Controller
-------------------------
[NOTARY BLOCKS ATTACHED HERE]
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<PAGE>
EXHIBIT 10.8B TO FORM 10-KSB
SUBLEASE AGREEMENT
AGREEMENT, made this 31st day of July, 1997 between PACIFIC ANALYSIS AND
COMPUTING, a corporation, having an office at 10655 NE 4th, Ste. 504
(hereinafter referred to as "PACC") and HARALSON & CO., PC, d.b.a. J.C. HARALSON
CPA, PC, having an office together with up to two other CPA's at same location
(hereinafter referred to as "Subtenant").
WHEREAS, pursuant to Lease dated August 31, 1995 between Amberjack, LTD
(hereinafter referred to as the Landlord) and Pacific Analysis and Computing, as
tenant, as amended by Addendum Number Two, a copy of which lease and addendum
arc attached hereto as Exhibit "A" (hereinafter referred to as the "Lease"),
covering a portion of the 5th floor of the building known as Key Bank
(hereinafter referred to as the "Leasehold"); and
WHEREAS, Subtenant desires to sublease from PACC and PACC desires to
sublease unto Subtenant the portion of the Leasehold indicated in red on Exhibit
"B" and,
NOW, THEREFORE, in consideration of the Premises and the mutual
undertakings, covenants, promises, and agreements of the parties, IT IS AGREED
AS FOLLOWS:
1. PREMISES. Providing all of the terms and conditions contained within
this Agreement are fulfilled, PACC shall sublease unto Subtenant and Subtenant
shall accept the sublease of, the Premises constituting the dedicated office
spaces covering #1, #3, #5 and sharing #6 including a like share of the
undivided common areas (hereinafter referred to as the "Sub-Premise"), as
indicated in Exhibit "B".
2. TERM. The commencement date, conditioned upon the execution of this
Agreement and the Landlord's approval of the Sublease in writing, shall begin
September 1, 1997 and coincide with the term of Exhibit "A" hereof through
October 31, 1999, subject to the rents, terms, covenants, conditions, and
provisions set forth in the Lease. This Agreement shall automatically
terminate on October 31, 2002, or unless otherwise terminated by either of the
parties upon giving 90 days notice. However, in any event, agreement may not be
canceled by either party prior to October 31, 1999. In the event that
Subtenant terminates or modifies the amount of space occupied in this Agreement
prior to October 31, 1999, Subtenant will be responsible for all rent through
the term, unless and until PACC re-occupies the space and, for any adjustment
of the rental rate as agreed to from time to time by the parties to this
Agreement.
3. RENT. In consideration for this Sublease, Subtenant shall pay PACC a
monthly rental for the Sub-Premise of Thirteen Hundred Fifteen and 00/100
Dollars ($1,315.00) to be paid in equal monthly payments in advance on the first
day of each and every month in the amount of $1,315.00. Subtenant's share of
any operating expense adjustments made under Exhibit "A" will be 26% of any such
total adjustment [up or down] prorated for the actual occupancy period, in
addition to the $1,315.00.
4. SECURITY DEPOSIT. Not applicable here.
5. OCCUPANCY. Subtenant agrees to occupy the Sub-Premises under and
abide by the conditions of Exhibit "A" and its rules and regulations. Subtenant
will not assign or sublet any portion of the Sub-Premise covered by the Sublease
without first obtaining prior written approval from PACC, other than B.
Kirschner and A. Kumar.
Subtenant agrees to indemnify and defend PACC, its owners, employees and
agents from any claim, liability, damage or loss occurring on the premises,
arising out of any activity by Subtenant, its agents or invitees or resulting
from Subtenant's failure to comply with any term of this Agreement. Neither
PACC not its owners, employees or agents shall have any liability to Subtenant
because of loss or damage to PACC's property or for death or bodily
-1-
<PAGE>
injury caused by the acts or omissions of other Tenants of the Leasehold, or by
third parties (including criminal acts).
Further, Subtenant agrees to pay, and to indemnify PACC against, all legal
costs and charges, including attorney fees, lawfully and reasonably incurred in
obtaining possession of the demised premises after default of the Subtenant or
upon the expiration or earlier termination of the term of this Agreement or in
enforcing any covenant or agreement of the Subtenant in this Agreement.
6. CONFIDENTIALITY. Since Subtenant and PACC will share the Premises,
each agrees to treat as confidential any information of the other that each is
exposed to during the normal course of occupying the spaces unless: (a) the
information is known prior to obtaining the same, directly or indirectly from
the other party, or otherwise in connection with the occupancy; (b) the
information is, at the time of disclosure, then in the public domain; or (c) the
information is obtained by the party from [any] third party who did not receive
the same, directly or indirectly from the other party, or otherwise in
connection with the occupancy. Both parties agree to exercise reasonable
control of their visitors to the Premises so that their visitors do not have
access to the other party's confidential information. If so requested by either
party, the other party shall require its employees, and others who have
unrestricted access to the space to execute a nondisclosure agreement in a form
approved by both parties. Subtenant agrees to exercise a similar mutual
confidentiality agreement with any other renters that might share the Premises.
PACC agrees to require other renters of the premises, if any, to exercise a
similar mutual confidentiality agreement with Subtenant, as a condition of their
rental agreement.
7. FURNISHING. PACC rents the Sub-Premises bare other than the carpet
and shades that were provided by the Landlord. Any furnishings that may be
provided in the Sub-Premises by PACC are at the convenience of PACC and may be
removed from the Sub-Premises by PACC at any time.
8. COMMON SPACES. Subtenant under the terms and conditions of Exhibit
"A" has access for use to common spaces, i.e., those areas in Exhibit "B", other
than the individual offices not marked 1, 3, 5 or 6, unless these spaces are
being used by PACC such as conference room, etc.
9. LIABILITY INSURANCE. Subtenant agrees to maintain liability insurance
in accordance with Exhibit "A", with PACC receiving the same protection as
Landlord.
10. OFFICE EQUIPMENT/PERSONNEL. PACC and Subtenant may each have "non-
duplicate" office equipment which can be shared as agreed. Unless PACC has
immediate use for its Fax machine, Subtenant will have access to it for
occasional outgoing local phone area use. All long distance use will be logged
and self assessed at the rate of $.30/page to cover long distance phone charges.
Unless Subtenant has immediate use for its copier, PACC will have access to it
for occasional use. Copies will be logged and self assessed at the rate of
$.06/page but, not paid except for any extraordinary volume project(s). In
addition, Subtenant may also have access to PACC secretarial personnel for
Subtenant projects on a case by case basis, at a flat billing rate of $15/hour.
11. RIGHT-OF-FIRST-REFUSAL. In the event that PACC decides to vacate the
Premises, PACC agrees to give Subtenant the opportunity to assume the lease with
Landlord, based upon the terms of the best offer that PACC has otherwise
received, or the terms of Exhibit "A", whichever PACC considers to be more
favorable.
12. PARKING. Parking provision is not included in this Sublease and it
will be the responsibility of the Subtenant to secure parking spaces with the
Landlord.
13. NONWAIVER. The failure of PACC to insist upon or enforce strict
performance by Subtenant of any of the provisions of this Agreement or to
exercise any rights under this Agreement shall not be construed as a waiver or
relinquishment to any extent of its right to assert or rely upon any such
provisions or rights in that or any other instance, rather the same shall be and
remain in full force and effect.
14. ENTIRE AGREEMENT. The rights and obligations of the parties hereunder
shall be subject to and governed by this Agreement. This Agreement sets forth
the entire agreement of the parties and supercedes any and
-2-
<PAGE>
all prior agreements with respect to the Services. This Agreement may not be
modified except by a writing executed contemporaneously herewithin or subsequent
hereto signed by both parties.
15. GOVERNING LAW. This Agreement and the rights and obligations of the
parties hereunder shall be governed by the laws of the State of Washington.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date, month, and year first above written.
<TABLE>
<CAPTION>
PACC:
PACIFIC ANALYSIS & COMPUTING CORP.
<S> <C> <C>
By: /s/ William G. Poole Title: President Date Signed: August 4, 1997
----------------------------------- ---------------- --------------------
SUBTENANT:
J.C. HARALSON, CPA, PC
By: /s/ J.C. Haralson Title: President Date Signed: August 4, 1997
----------------------------------- ---------------- --------------------
</TABLE>
[EXHIBITS OMITTED]
-3-
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF fine.com INTERNATIONAL CORP.
- ----------------------------------------------------
fine.com International Ltd.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> JAN-31-1998 JAN-31-1997 JAN-31-1996
<PERIOD-START> FEB-01-1997 FEB-01-1996 FEB-01-1995
<PERIOD-END> JAN-31-1998 JAN-31-1997 JAN-31-1996
<CASH> 1,419,591 198,317 15,668
<SECURITIES> 3,918,268 0 0
<RECEIVABLES> 942,243 476,766 63,855
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 4,309,509 715,711 103,436
<PP&E> 585,992 142,812 78,360
<DEPRECIATION> 150,271 61,985 32,194
<TOTAL-ASSETS> 7,351,508 868,537 149,602
<CURRENT-LIABILITIES> 617,726 413,983 57,871
<BONDS> 0 0 0
0 0 0
0 239,918 0
<COMMON> 6,542,960 75,000 75,000
<OTHER-SE> 190,822 139,636 15,362
<TOTAL-LIABILITY-AND-EQUITY> 7,351,508 868,537 149,602
<SALES> 3,448,084 1,485,869 531,800
<TOTAL-REVENUES> 3,448,084 1,485,869 531,800
<CGS> 2,292,206 774,242 258,532
<TOTAL-COSTS> 2,292,206 774,242 258,532
<OTHER-EXPENSES> 1,168,776 514,059 225,517
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 36,388 8,840 2,721
<INCOME-PRETAX> 127,249 188,728 45,030
<INCOME-TAX> 46,567 64,454 14,948
<INCOME-CONTINUING> 80,682 124,274 30,082
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 80,682 124,274 30,082
<EPS-PRIMARY> 0.05 0.12 0.03
<EPS-DILUTED> 0.05 0.12 0.03
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