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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM ________ TO ________.
COMMISSION FILE NUMBER 0-18708
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MICROGRAFX, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-1952080
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1303 E. ARAPAHO ROAD, RICHARDSON, TEXAS 75081
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 234-1769
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Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of Class)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates of the
registrant at August 31, 1998, was approximately $98,812,917.
On August 31, 1998, there were 11,123,607 shares outstanding of the registrant's
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to stockholders in
connection with the Annual Meeting of Stockholders to be held November 5, 1998
are incorporated by reference into Part III.
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MICROGRAFX, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
TABLE OF CONTENTS
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PAGE
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PART I.
<S> <C> <C>
Item 1. Business......................................................................1
Item 2. Properties...................................................................10
Item 3. Legal Proceedings............................................................11
Item 4. Submission of Matters to a Vote of Security Holders..........................11
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters..........................................................11
Item 6. Selected Financial Data......................................................12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .........................................13
Item 8. Financial Statements and Supplementary Data..................................27
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..........................................46
PART III.
Item 10. Directors and Executive Officers of the Registrant...........................46
Item 11. Executive Compensation.......................................................46
Item 12. Security Ownership of Certain Beneficial Owners
and Management...............................................................46
Item 13. Certain Relationships and Related Transactions...............................46
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............46
Item 14 (a) Index to Financial Statements and Financial Statement Schedules..............46
Signatures...................................................................50
Financial Statement Schedule ................................................52
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PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
Except for the historical information contained in this Annual Report, the
matters discussed herein are forward-looking statements that involve risks and
uncertainties. These statements reflect management's best judgment based on
factors known to them at the time of such statements. The Company's actual
results may differ materially from the results discussed in these
forward-looking statements. There are several important factors that could cause
actual results to differ materially from those anticipated by the
forward-looking statements contained in the following discussion. Readers should
pay particular attention to the risk factors set forth in this section and in
the section of this report entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Trends and Risk Factors."
GENERAL
Micrografx, Inc. ("Micrografx" or the "Company") develops and markets graphics
software that serves to make complex problems simple by making graphics
intelligent so people can gain insight and visualize solutions. The Company is
focusing on graphics applications software products for business use in three
target categories: process management, corporate graphics, and network design
applications, which are capable of managing all the graphic imagery for the
world's largest corporations. Additionally, the Company seeks to leverage its
strong technology base by partnering with organizations to maximize the
distribution and value of its intellectual property.
Historically, in addition to its business graphics software, the Company has
also developed and marketed products for the personal creativity consumer
market. Micrografx has been one of the premier companies competing in this
market with such popular titles as Crayola(TM) Art Studio(TM), Hallmark
Connections(TM) Card Studio(TM), American Greetings(R) CreataCard(R) Plus(TM)
and CreataCard(R) Gold(TM), and Windows Draw(R). In light of recent
consolidation in the consumer software market, as well as extremely aggressive
retail programs from competitors, the Company has chosen to shift its resources
to the more rapidly growing enterprise graphics market.
As a result and in line with its objective to leverage its strong technology
base, the Company formed a strategic relationship with Cendant Software
Corporation ("Cendant") effective June 30, 1998, whereby Micrografx has licensed
Cendant a series of core personal creativity graphics technologies, information
relating to the customers who have purchased products based on the
aforementioned technologies, marketing information related to those products,
and certain associated intellectual property rights. Additionally, Micrografx
has entered into a combination of worldwide publishing and distribution
agreements with Cendant for two personal creativity software titles, Windows
Draw(R)Print Studio(R) and Micrografx SnapShot(R). The agreements with Cendant
allow the Company to make significant progress in de-emphasizing the consumer
software market.
Effective August 31, 1998, Micrografx entered into an agreement that assigned
the Company's distribution rights to American Greetings CreataCard Gold and
CreataCard Plus to The Learning Company ("TLC"). This assignment of rights to
TLC concludes all contractual responsibilities and settles all contractual
issues between Micrografx and American Greetings Corporation ("American
Greetings"). With this assignment, the Company has completed its de-emphasis of
the consumer marketplace in order to focus on its business graphics software.
The Company was initially organized as a partnership in June 1982 and was
subsequently incorporated in the State of Texas in March 1984. The principal
executive offices of the Company are located at 1303 E. Arapaho Road,
Richardson, Texas, 75081, and its telephone number is (972) 234-1769. The
Company's U.S. operations are based in Richardson, Texas, with development
offices located in Los Angeles, California and Portland, Oregon. International
subsidiaries are located in the United Kingdom, France, Germany, Italy, The
Netherlands, Australia, and Japan.
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BUSINESS STRATEGY AND PRODUCTS
The Company competes in the business graphics segment of the software market
with products that are targeted toward corporate needs for process management,
corporate graphics, and network design. Additionally, the Company seeks to
partner with organizations to maximize the value of its technology base. The
Company's products are designed for personal computers utilizing the Microsoft
Windows(R) operating environments, which include Windows 3.1, Windows 95,
Windows 98, and Windows NT.
Due to the rapid change in technology related to personal computers and
competitive market conditions, the Company is continually updating and refining
its products. To keep pace with the market, the Company seeks to release new
versions of its products every 18 to 24 months. Significant versions and the
release date for English versions of the Company's products are discussed below
with the product to which it relates.
PROCESS MANAGEMENT
Every business has key processes that can be broken down into smaller processes,
each eventually describing specific activities across the organization. Business
process management tools exist to help management supervise this key sequence of
events and to assist the organization perform at optimal levels. Benefits of
this effort may include faster time to market with products, improved cost
effectiveness, and increased product quality. Today, most businesses address
these issues in the context of a single department or project. While this
by-department or by-project methodology can yield short-term success, it is a
self-limiting approach. Strategic process management delves deeper by providing
a disciplined, systematic approach with the potential to yield greater long-term
benefits across departments and functional areas of the organization.
The Company believes that graphical visualization software tools provide the
best way to document and communicate process information, allowing people to
comprehend more information, and mentally process more complexity, than was
possible before. Sophisticated process management tools - when used to their
fullest potential - can add significant value, extending far beyond electronic
processes. These tools can be used to assess all of the critical factors (such
as cycle times, costs, etc.) tied to each step in any kind of process, and can
reveal ways to make the system faster, more cost-effective, more efficient or
quality oriented, or any combination of these.
Process management is a cycle that occurs in three stages: documentation,
improvement, and management. The purpose of the documentation stage is to create
a snapshot of how the business operates today. This stage can be the most
labor-intensive, often requiring a great deal of information gathering and data
entry. The best tools for this stage make input intuitive and fast.
Documentation can be made far more efficient by drawing the process rather than
manually writing out each process. Also, when the process must be communicated
to others, the Company believes that it is far easier for the human mind to
digest and understand the flow of a process when it is presented visually.
The improvement stage addresses such issues as lowering costs, reducing
time-to-market, and improving quality. In some cases, just the act of
documentation identifies obvious inefficiencies that can be easily remedied.
Aside from the obvious process flaws that reveal themselves, however, process
simulation is the cornerstone of process improvement initiatives. Process
simulation tools allow users to enter key variables and constraints into a
process flow, run the simulation, then see where inefficiencies lie. Simulation
also allows for "what-if" analysis to determine the optimal solution in a
process.
The highest level of sophistication in process management is the management of
all an organization's process information by providing efficient storage,
access, and distribution systems across an organization. At this point, the
question is no longer "What is the best process?" but rather "How can I apply
this best process so that it is utilized across my organization consistently?"
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Micrografx provides the tools for each stage of the cycle:
FLOWCHARTER(R) provides a solid, leading-edge technology base for Micrografx's
ongoing process management tool development initiatives. Below the surface,
FlowCharter incorporates one of the industry's most advanced graphics engines,
with superior display and printing technologies designed specifically for the
needs of process management. FlowCharter creates powerful, interactive diagrams
of business processes, workflow, computer networks, Web sites, and databases
among others. FlowCharter also incorporates Living FlowChart(TM) technology that
transforms static diagrams into dynamic, interactive processes. FlowCharter
version 7 was released in January 1997, with significant features added in
September 1997.
ENTERPRISECHARTER(TM) illustrates the customizability that is available through
the FlowCharter product. EnterpriseCharter provides a true process management
front end to SAP R/3, giving management an accessible tool that facilitates the
process management needs demanded by the typical R/3 deployment.
EnterpriseCharter eases the implementation, improves communication, and provides
an integrated and powerful set of graphical tools for visualizing, documenting,
and implementing SAP R/3. EnterpriseCharter is a plug-in module for FlowCharter
that gives users the ability to generate, view, modify, customize, save, and
distribute Event-driven Process Chain (EPC) diagrams from the R/3 reference
model - independent of the actual R/3 system. With EnterpriseCharter, users have
full access to comprehensive diagrams of SAP R/3 business practices, or EPCs,
for configuration, communication, training, documentation, and more.
EnterpriseCharter version 1 was released in February 1998 and version 4 (for SAP
R/3 version 4) was released in June 1998.
OPTIMA(R) is the first process management tool that wraps an easy-to-use
interface around a high-end process simulation engine. Optima provides robust
modeling and simulation capabilities for companies striving to improve internal
processes. Optima is designed to model business processes and perform "what-if"
simulations on most business scenarios, allowing the management team to analyze
and experiment with company processes without directly impacting the business.
Customers are using Optima to communicate about processes, reduce cycle times,
eliminate bottlenecks, understand capacity constraints, re-deploy limited
resources, and more. Optima 2.5 was released in March 1998.
ISOCHARTER(TM) is a knowledge extension for the FlowCharter product family,
adding a wealth of pre-designed archetypal process maps to greatly increase the
speed of process documentation for ISO registration. The Company has partnered
with EtQ to create this product that contains volumes of real-world ISO
registration. ISOCharter is a complete, all-in-one-box solution for companies
involved in any step of the registration process.
ISOCharter was released in April 1998.
CORPORATE GRAPHICS
The computer graphics industry blossomed in the mid- to late-80's with
professional graphics software for the Macintosh-centric desktop publishing,
advertising, and graphic design markets. Then, graphics required high powered
and high-priced computers that were specific to the needs of graphics, but
lacked the software, networking functionality, configurations, and pricing that
were required by the enterprise.
Much has changed in the landscape of enterprise computing landscape since then,
and today, technology has reached the point where the idea of enterprise
graphics can now become a reality. Today, even entry-level computers have the
processing power required to create sophisticated, high-quality graphics.
Furthermore, the graphical user interface of the standardized 32-bit Microsoft
desktop has made it possible for any level of user to be able to investigate and
use graphics to convey information and data.
The advent of low-cost, high-quality color printing, scanning, and photography
has also placed every imaginable graphics input tool within easy, affordable
reach of the average user--even for occasional use. And perhaps most
importantly, the Internet has emerged as a global graphical communications
conduit, allowing people to publish to the entire globe for pennies, instead of
thousands of dollars. The need for computer-based visual communications
solutions is now more apparent than ever.
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In order to reach the enterprise markets with graphics software, however, the
tools must conform to the special needs of the enterprise, rather than the
single-user creative artist. Business users are accustomed to using
best-of-breed products, but have neither the time, nor the job description,
required to support tools taken from the professional graphics world. Micrografx
provides best-of-breed solutions for every graphics need, while maintaining the
ease of use and full Microsoft Office compatibility demanded by the enterprise
buyer. Plus, the product provides full support for deployment via the network,
offering a variety of options that give the IT manager the highest possible
level of control over enterprise computing resources.
Future developments of Micrografx's applications will allow the product to reach
greater user constituency, providing relevant solutions for an even wider
variety of users across the enterprise. Micrografx's strategy to reach the
corporation involves addressing a number of distinct needs, including
interoperability with mission-critical applications (including, but not limited
to, Microsoft Office), the requirement for a corporation to maintain internal
graphics standards, powerful desktop learning systems, and customizability, so
that every organization can deploy graphics tools specific to their needs.
Micrografx provides the following corporate graphics tools:
GRAPHICS SUITE(TM) is a robust suite of four state-of-the-art software
applications: Picture Publisher(R), Simply3D(TM), Designer(TM), and FlowCharter.
Graphics Suite 2 Enterprise was released in December 1997.
PICTURE PUBLISHER, the long-time leader in easy-to-use, yet powerful,
full-featured image editing, now provides full functionality for creating
compelling Web pages. Picture Publisher contains 10,000 stock photos and clip
art images, 500 seamless Internet textures, 250 TrueType(TM) fonts, as well as
effects, filters, creative macros, templates, interactive wizards, and on-line
tutorials. Picture Publisher 8 was released in February 1998.
SIMPLY3D, an innovative, intuitive tool, takes three-dimensional ("3D")
technical power from simple logos to complex, micron-accurate technical
illustrations, with rendering and animation easy enough for the occasional user.
Simply3D allows the user to create professional-quality 3D text, Web graphics,
and animations for all kinds of projects, including web sites, print, video,
multimedia, and even interactive 3D scenes for Microsoft PowerPoint(R)
presentations. Simply3D contains 1,000 3D drag-and-drop objects and 800
professional-quality textures as well as many lighting setups, animations, and
deformations. Simply3D 3 was released in February 1998.
WEBTRICITY(TM) is a suite of four powerful, professional-level applications that
give users the ability to make compelling graphics and animation for the Web.
The Suite includes Picture Publisher, Simply3D, Windows Draw, and Media
Manager(R). Webtricity 2 was released in May 1998.
NETWORK DESIGN
The universal shortage of qualified network support staff is among the most
recognized information technology ("IT") problems in corporate America today.
Lean network organizations often lack comprehensive and accurate information
about their networks. Without this basic knowledge, the frequency and length of
network downtime often increases, and troubleshooting becomes difficult,
time-consuming, and costly.
Complicating matters is an ever-growing demand to support more network-based
applications with rapidly evolving network technologies and increasing network
complexity. There is no systematic way to plan for network changes or select
products to be sure they will meet future network requirements. This insatiable
demand for change and the proliferation of new products can overwhelm the best
run networking organization, relegating to the back burner the fundamental need
to know a network's composition.
Network professionals lack sufficient time to prudently implement and maintain
quality network documentation, despite its critical role in the network
implementation process.
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Though most network professionals would admit the importance of having
up-to-date, accurate network information at their fingertips, time constraints
and the lack of control over changes make this virtually impossible.
In many cases, they just do not have the time to create diagrams and
comprehensive databases. While some have used generic drawing tools to establish
a snapshot of the network design, they rarely have the opportunity to keep them
current. Others use a variety of software designed to do everything from asset
to network management. Unfortunately, one integrated solution to documenting the
network does not exist. Combinations of drawing and database tools are often
poorly integrated, require customization, lack a single support interface, and
may be cost prohibitive.
Today's haphazard network mapping and tracking strategies hinder network
professionals' efforts to simplify the task of meeting their users' demands for
greater capacity, higher speeds and more uptime. The resulting stress placed on
these professionals causes higher cost across the network design and maintenance
spectrum. To improve the situation, network professionals need tools that:
o Allow them to automatically and accurately inventory and track the network
composition;
o Provide a single source for comprehensive technical and configuration
information for each device within the network that is tightly coupled to
all diagrams and tables;
o Offer basic design assistance, validation, and documentation to select the
best technology and accelerate a project's deployment;
o Generate advanced reports needed to facilitate interaction with
organizational procedures and share network knowledge throughout the
organization's intranet; and
o Enable easy editing, navigation, and validation all within a network-aware
context.
Though the challenges facing most network professionals are daunting, properly
designed network documentation will simplify the many tasks required to maintain
and meet the ever-increasing demands placed on the network. At risk are not only
the effectiveness of a valuable professional, but also, the ability of an
organization to compete.
NETWORKCHARTER(TM) is the first product to integrate network discovery, design,
and documentation understandably and affordably. This intelligent tool, which
includes a 10,000+ device library, simplifies planning and reporting and extends
the network expertise of network managers. It also enables consistent
administration and reporting by local network managers. NetworkCharter
incorporates high-end discovery capabilities with an object-oriented, data-rich
device profiling system. Diagrams created in NetworkCharter are automatically
enhanced with key device attributes and configuration rules, providing
intelligent design assistance and problem assessment before a single cable is
connected. NetworkCharter is geared for IT professionals, systems integrators,
systems resellers, or others charged with maintaining, designing, configuring -
or reconfiguring - computer networks. NetworkCharter will be released in the
first half of the Company's fiscal year 1999.
TECHNOLOGY DEVELOPMENT AND LICENSING
Micrografx is using its library of graphics software in selective licensing and
in the creation of solutions for specific market niches in response to client
demand. As opportunities come along, Micrografx will continue to look for ways
to build relationships with companies by licensing them the use of
Micrografx-developed technologies for use in markets in which the Company does
not compete. In doing so, the Company's strategy is not to sell the asset that
has been developed, but only license the technology. In all cases thus far, the
Company has retained the right to software source code that the Company has
developed. The previously mentioned agreements with Cendant are representative
of the type of transactions that fall into this business category.
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LICENSING AND DISTRIBUTION AGREEMENTS
American Greetings Licensing and Development Agreement. Until August 31, 1998,
the Company maintained a licensing agreement with American Greetings for
products in the consumer greeting card market, pursuant to which the Company
developed American Greetings CreataCard Plus and American Greetings CreataCard
Gold. Under this agreement, the Company was required to pay American Greetings a
quarterly fee for the right to use the trademark and certain creative content
based upon sales of the American Greetings products. Effective August 31, 1998,
Micrografx entered into an agreement that assigned the Company's distribution
rights to American Greetings CreataCard Gold and CreataCard Plus to TLC. This
assignment of rights to TLC concludes all contractual responsibilities and
settles all contractual issues between Micrografx and American Greetings.
Cendant License Agreement. On June 30, 1998, the Company granted to Cendant a
nonexclusive, irrevocable, perpetual, worldwide right and license to (a) a
series of personal creativity graphics technologies, (b) information relating to
the customers who have purchased products based on the aforementioned
technologies, (c) marketing information related to those products, and (d)
certain associated intellectual property rights. The Company retains ownership
of all items licensed to Cendant but the Company has agreed not to compete with
the products licensed to Cendant other than products marketed to business users.
Cendant Distribution Agreements. On June 30, 1998, the Company entered into two
distribution agreements with Cendant; one in which Cendant guaranteed a minimum
amount of revenue to the Company for its CreataCard products and the Company
outsourced various production, sales, and marketing activities to Cendant; the
other in which Cendant pays a fixed amount for the right to solely distribute
the Company's Windows Draw product. The agreements expire on February 28, 2000.
Subsequently, Micrografx and Cendant amended the CreataCard distribution
agreement and Micrografx entered into an agreement with TLC which resulted in
the transfer of distribution rights for the CreataCard products to TLC.
TLC License Agreement. Effective August 31, 1998, the Company entered into a
license agreement with TLC for the Company's CreataCard software products. The
agreement grants TLC the perpetual right to publish and distribute the
CreataCard software products. The agreement, along with a parallel consent and
settlement agreement entered into with American Greetings, assigned to TLC all
of Micrografx's rights and responsibilities under its agreements with American
Greetings.
ImageNet License Agreement. The Company has entered into a licensing agreement
with ImageNet, Inc., ("ImageNet") for Network Design products NetworkCharter and
NetworkCharter Pro. The Company has the right to distribute the products to end
users and resellers but the Company does not own the source code. The Company
pays ImageNet a quarterly fee for the right to distribute the software based
upon sales of the NetworkCharter products, with provisions for certain minimum
payments regardless of sales volume. The Company and ImageNet have also agreed
to make a good faith effort to develop NetworkCharter products that utilize the
Company's FlowCharter graphics engine. The agreement expires on April 30, 2001,
and automatically renews for successive terms of one year each, unless
terminated by either party prior to the expiration of the initial term.
LOCALIZATION
The Company localizes its business products for distribution in countries other
than the United States, generally by translating user interfaces, packaging and
marketing materials, and product documentation. Most of the Company's products
have been localized into various languages including German, French, Japanese,
Italian, and Spanish.
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MARKETING AND DISTRIBUTION
The Company maintains sales organizations in most major markets of the world,
including the United States, Germany, France, the United Kingdom, Italy,
Australia and Japan. In addition, the Company has appointed agents in the
Netherlands, Denmark, Switzerland, Spain and Poland. Approximately 47 percent of
the Company's revenues were generated outside the United States in fiscal 1998,
with 35 percent from Europe and 10 percent from Asia Pacific. See "Segment
Information" in Notes to Consolidated Financial Statements included under Item 8
for geographical segmentation of revenues, operating results and identifiable
assets.
The Company typically operates with very little backlog of unshipped orders, due
to its capability to ship product within a few days of receipt of a purchase
order. The Company distributes its products through the following channels:
distributors and resellers, corporate sales force, direct to end users, and
through original equipment manufacturers ("OEMs").
Distributors and resellers. The Company markets its products primarily through
independent, non-exclusive distributors and resellers located in 36 countries
around the world. Distributors include Computer 2000, Ingram Micro, Merisel,
Inc., and Tech Data Corporation. Resellers include Corporate Software, Inc.,
Gruber Consultrade, MicroCenter, Inc., Snapp LLC, and Softmart, Inc. In fiscal
1998, sales to Ingram Micro and Tech Data each accounted for 19 percent of the
Company's net revenues, while no other customer accounted for more than 10
percent of the Company's net revenues. In fiscal 1997, sales to Ingram Micro and
Tech Data accounted for 22 percent and 16 percent of the Company's net revenues,
respectively. The Company offers sales incentives, training, technical support,
and promotional aids to some resellers. The Company has distributorship
agreements with all distributors and resellers. These agreements are cancelable
by either party with specified prior written notice, and none of these
agreements contain minimum or required purchase commitments by the distributor
or reseller.
Corporate sales force. The Company has corporate sales representatives located
at the Company's corporate headquarters in the United States as well as in
Germany, France, the United Kingdom, Italy, the Netherlands, Australia, Japan,
Denmark, Switzerland, Spain and Poland. The Company's corporate sales
representatives provide sales support and assistance to the Company's resellers
and distributors. As such, sales made by the corporate sales force are generally
fulfilled through the distributor and reseller channels.
Direct sales to end users. The Company promotes its products through direct
marketing techniques designed to reach existing and potential customers, and
one-on-many seminars and trade show events. Fulfillment of product to the end
user is accomplished primarily through the services of third-party fulfillment
companies located in the United States, Europe, and Japan.
Original Equipment Manufacturers. The Company licenses certain of its products
to OEMs under agreements that grant the OEMs the right to distribute copies of
the Company's products with the OEM's equipment, typically personal computers,
printers and scanners. During fiscal 1998, the Company had OEM agreements for
its corporate graphics products with companies including Matrox Graphics, Landis
& Gyr Powers, Seiko Epson, Plustek USA, Inc., Mustek, Inc., and Hewlett-Packard.
PROMOTION AND ADVERTISING
The Company's marketing organization is responsible for worldwide product
marketing, planning, positioning, market strategy, and communicating marketing
plans to the Company's sales offices. Local personnel in each sales territory
develop the marketing mix by coordinating media placement, direct mail, public
relations, and channel sales management. The Company utilizes outside agencies
in the development of marketing literature, advertisements, brochures,
demonstration diskettes, and packaging, and also uses the services of an outside
public relations agency.
The Company routinely conducts promotions with resellers, distributors, OEMs,
and major customers in an effort to increase sales of its products. The Company
advertises in the personal computer industry trade press and certain
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other business publications. To build awareness, the Company offers trial and
preview versions with certain of its software products and participates in
industry trade events.
PRODUCT SUPPORT
The Company offers technical support to its customers through telephone support,
Internet support and fax response. Technical support for the Company's business
products is provided free for 30 days to customers beginning with the first
phone call. Technical support after the grace period is provided on a charged
basis through a priority access toll line, or by credit card charge or through a
pre-purchased annual support plan. Technical support for the Company's consumer
products is provided free on an unlimited basis. Technical support business
hours are from 7:00 a.m. to 5:00 p.m. Central Standard Time Monday through
Friday in the United States. Internet support is provided 24 hours a day, 7 days
per week. The Company generally outsources product support activities to
independent, third-party service providers in the United States, Europe, Japan,
and Australia.
PRODUCT DEVELOPMENT
The Company has a continuing program of product development directed toward the
enhancement of existing products based upon current and anticipated customer
needs. The Company's research and product development effort also emphasizes
introduction of new products to broaden the Company's product line and to reach
larger segments of the market.
In order to foster an entrepreneurial spirit among its developers and to assure
better quality control and encourage innovation, the Company adopted a program
to provide certain incentives to developers for the design and development of
versions of key products. Under the program, developers are eligible to receive
stock options under the Company's Incentive and Nonstatutory Stock Option Plan.
Options are granted based upon a formula involving quarterly gross margins and
the closing market price of the Company's common stock on the last day of each
such quarter.
See "Consolidated Statements of Operations" and "Intangible Assets" in the Notes
to Consolidated Financial Statements included under Item 8 for a discussion of
research and development expenditures.
COMPETITION
The personal computer graphics software market is highly competitive. The
Company's competitors include many independent applications software vendors,
such as Adobe Systems Incorporated ("Adobe"), Corel Systems Corporation
("Corel"), Macromedia, Inc. ("Macromedia"), and Visio Corporation ("Visio"). The
primary competitor for the Company's process management and network design
products is Visio; and the primary competitors for the Company's corporate
graphics products are Adobe, Corel, and Macromedia.
Most of the Company's existing competitors, as well as a number of potential
competitors, have larger technical staffs, more established and larger marketing
and sales organizations, and significantly greater financial resources than does
the Company. There can be no assurance that competitors will not develop
products that are superior to the Company's applications software products or
that will achieve greater market acceptance at the Company's expense, possibly
resulting in reduced sales of the Company's applications software products.
The Company believes that the principal competitive factors in the software
applications market include customer demand, product capabilities, ease of
understanding and operating the software, product reliability, price/performance
characteristics, name recognition, and availability and quality of support
services. The Company believes that its products currently compete favorably
with respect to these factors.
8
<PAGE> 11
See "Trends and Risk Factors" in Management's Discussion and Analysis of
Financial Condition and Results of Operations in Item 7.
PRODUCT PROTECTION
The Company attempts to protect its ownership rights in its software products
with patents, trademarks, copyrights, trade secret laws, and nondisclosure
safeguards, as well as contractual restrictions on copying, disclosure, and
transferability that are incorporated into its software license agreements.
Despite these restrictions, it may be possible for competitors or users to copy
aspects of the Company's products to obtain information that the Company regards
as proprietary. Existing laws protecting intellectual property are helpful but
imperfect aids in preventing unauthorized copying and use of the Company's
products. Monitoring and identifying unauthorized copying and use of software
can be difficult, and software piracy is a persistent problem for the software
industry.
The Company believes that because of the rapid technological change in the
computer software industry, trade secret and copyright protection are less
significant than factors such as the knowledge, ability, and experience of the
Company's personnel, name recognition, and ongoing product innovation.
TRADEMARKS
Micrografx, the Micrografx logo, Picture Publisher, PhotoMagic, Optima,
Micrografx FlowCharter, and Visual Reality are registered trademarks of
Micrografx, Inc. Webtricity, Small Business Graphics and Print Studio,
Micrografx Graphics Suite, Micrografx Media Manager, Micrografx Designer, ABC
ToolKit, Simply 3D and Instant 3D are trademarks of Micrografx, Inc. American
Greetings, CreataCard Gold, and CreataCard Plus are either registered trademarks
or trademarks of American Greetings Corporation. ABC SnapGraphics is a trademark
of Cardinal Technologies, used with permission. Crayola Amazing Art Adventure,
Crayola Art Studio, and Crayola Art Studio 2 are trademarks of Binney & Smith.
Crayola is a registered trademark of Binney & Smith, used with permission.
Hallmark Connections and Card Studio are trademarks of Hallmark Licensing, Inc.
Microsoft, Windows, and Windows Draw are either registered trademarks or
trademarks of Microsoft Corporation in the United States and/or other countries.
All other products are trademarks or registered trademarks of their respective
holders.
MANUFACTURING
The Company assembles products in the United States and the Netherlands. The
principal materials and components used in the Company's products include disks,
books, other printed material and packaging. The Company outsources a portion of
its manufacturing activity to third parties, including disk duplication and
product assembly. The Company has multiple sources of raw materials, supplies,
and components, and the Company does not currently anticipate difficulty in
securing the raw materials required in connection with its operations.
EMPLOYEES
As of June 30, 1998, the Company employed 346 associates, of which 138 were in
product development, 152 in sales, marketing, and customer support, and 56 in
finance, operations, and administration. The Company's continued success is
dependent in part upon its ability to attract and retain qualified employees.
Competition for employees in the software industry is intense. To date, the
Company believes that it has been successful in its efforts to recruit and
retain highly qualified employees. None of the Company's employees is subject to
a collective bargaining agreement. The Company believes that its relations with
its employees are good.
9
<PAGE> 12
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
<S> <C> <C>
Douglas M. Richard 40 President, Chief Executive Officer, and Interim Chief Financial Officer
Robert E. Gutekunst 39 Chief Technology Officer
Frank W. Childers 47 Executive Vice President of Global Sales
R. Edwin Pearce 44 Vice President Corporate Development, General Counsel and Secretary
Darryl R. Halbert 33 Vice President of Finance, Controller and Chief Accounting Officer
</TABLE>
Douglas M. Richard was appointed Chief Executive Officer in February 1997 after
serving as the Company's Interim President since December 1996. A successful
entrepreneur with more than 10 years experience in the technology industry, Mr.
Richard founded Visual Software in 1991, which was acquired by Micrografx in
April 1996. Previously, Mr. Richard founded ITAL Computers, the largest CAD
systems integrator in California, in 1985.
Robert E. Gutekunst was appointed Chief Technology Officer in August 1998. Mr.
Gutekunst joined Micrografx in 1988 and has served in a number of development
positions including Vice President of Development and Development Services,
where he managed the overall research, development and design of new and
existing products.
Frank W. Childers joined the Company in July 1998, as Executive Vice President
of Global Sales. Prior to joining the Company, he spent 19 years in progressive
sales management roles for Mentor Graphics Corporation, an electronic hardware
and software design automation company.
R. Edwin Pearce joined the Company in June 1996 as Vice President Corporate
Development, General Counsel and Secretary. Prior to joining the Company, he
served since 1984 as Senior Vice President, General Counsel and Secretary for
Hogan Systems Inc., a developer and marketer of computer software systems for
the financial services and banking industries.
Darryl R. Halbert joined the Company in July 1996 as Controller, became
Controller and Chief Accounting Officer in September 1996, and was appointed
Vice President of Finance, Controller and Chief Accounting Officer in August
1998. Prior to joining the Company, he was a Senior Manager for Ernst & Young
LLP, where he spent nine years in progressive audit roles.
ITEM 2. PROPERTIES
The Company's headquarters are located in Richardson, Texas, and include
approximately 67,000 square feet of leased space under an agreement that expires
on August 31, 1999. The leased space is used for research and development, sales
and marketing, manufacturing, operations, and administration. The Company
currently leases office space for development and sales offices in Los Angeles,
California; Portland, Oregon; and international sales offices in Woking, United
Kingdom; Paris, France; Munich, Germany; Chatswood, Australia and Tokyo, Japan;
and has a production control office in Venlo, the Netherlands.
On August 31, 1998, the Company entered into a lease agreement commencing July
1, 1999, for a new headquarters building in Allen, Texas. The new facility
includes approximately 90,000 square feet and will be used in the same manner as
the current building.
10
<PAGE> 13
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to certain legal proceedings and claims which arise in
the ordinary course of business. In the opinion of management, the resolution of
these legal proceedings and claims will not have a material effect on the
Company's consolidated financial position and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the Company's security holders during the
fourth quarter ended June 30, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock is traded on NASDAQ/NMS under the symbol MGXI. As of
June 30, 1998, there were 199 holders of record, which represents approximately
2,700 beneficial shareholders of the Company's common stock.
The Company has not paid any cash dividends on its common stock in the three
most recent fiscal years and has no intention of paying cash dividends in the
foreseeable future.
The following are the high and low sale prices of the Company's stock per the
NASDAQ National Market System:
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
- ------------- ---- ---
<S> <C> <C>
September 30, 1996 $15.125 $ 5.625
December 31, 1996 $ 7.000 $ 5.000
March 31, 1997 $ 6.500 $ 4.000
June 30, 1997 $ 7.750 $ 4.500
September 30, 1997 $ 8.250 $ 5.750
December 31, 1997 $10.625 $ 6.500
March 31, 1998 $14.000 $ 8.000
June 30, 1998 $14.875 $10.500
</TABLE>
11
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
RESULTS OF OPERATIONS (in thousands, except per share data)(1)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
- ------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenues $ 71,792 $ 64,862 $ 72,919 $ 64,345 $ 61,505
Income (loss) from operations $ 373 $ (8,405) $ 1,078 $ 529 $ (6,355)
Net income (loss) $ 607 $ (6,187) $ 1,112 $ 695 $ (5,768)
Basic earnings (loss) per share $ .06 $ (0.60) $ 0.11 $ 0.07 $ (0.64)
Diluted earnings (loss) per share $ .05 $ (0.60) $ 0.11 $ 0.07 $ (0.64)
Shares used in computing basic earnings (loss)
per share 10,613 10,342 9,798 9,455 8,986
Shares used in computing diluted earnings
(loss) per share 11,055 10,342 10,136 9,480 8,986
</TABLE>
BALANCE SHEET DATA (in thousands)(1)
<TABLE>
<CAPTION>
AS OF JUNE 30,
- ------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash and short-term investments $ 28,067 $ 14,765 $ 18,634 $ 16,641 $ 18,098
Working capital $ 18,112 $ 12,937 $ 21,232 $ 16,726 $ 13,861
Total assets $ 55,141 $ 39,112 $ 40,098 $ 39,290 $ 38,577
Total long-term liabilities $ 410 $ 1,414 $ 684 $ 903 $ 1,152
Debt to banks $ -- $ -- $ -- $ 700 $ 1,687
Shareholders' equity $ 28,570 $ 23,528 $ 29,105 $ 25,976 $ 23,711
</TABLE>
- ----------
(1) On April 2, 1996, Micrografx, Inc. acquired Visual Software, Inc. in a
stock-for-stock acquisition accounted for as a pooling of interests. The
above financial data has been retroactively adjusted to include the
results of Visual for all periods presented. See Notes to Consolidated
Financial Statements.
12
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Micrografx, Inc. was founded in 1982 and incorporated in 1984 in the State of
Texas. Micrografx is a global graphics software leader focused on three business
categories: process management graphics, corporate graphics, and network design.
Additionally, the Company seeks to leverage its strong technology base by
partnering with organizations to maximize the distribution and value of its
intellectual property. The Company sells and distributes its products directly
and through a network of distributors, value-added resellers, OEM customers.
For the fiscal year ended June 30, 1998, the Company reported net revenues of
$71.8 million, an increase of 11 percent from the $64.9 million for the year
ended June 30, 1997. Net income for the year ended June 30, 1998 was $0.6
million, or $0.05 per diluted share. This compares to a net loss of $6.2
million, or $0.60 per diluted share, which includes the in-process research and
development charge of $2.3 million, for fiscal 1997.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to net revenues of certain items in the Company's Consolidated
Statements of Operations. Historical results and percentage relationships are
not necessarily indicative of operating results for any future period.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net revenues 100% 100% 100%
Cost of revenues 30% 31% 24%
Gross profit 70% 69% 76%
Operating expenses:
Sales and marketing 48% 53% 49%
General and administrative 10% 12% 11%
Research and development 12% 11% 10%
In-process research and development charge - 3% -
Restructuring charges - 3% -
Acquisition charges - - 5%
Total operating expenses 70% 82% 75%
Income (loss) from operations - (13%) 1%
Non operating (income) expense (1%) (1%) (1%)
Income (loss) before income taxes 1% (12%) 2%
Income taxes - (2%) 1%
Net income (loss) 1% (10%) 1%
</TABLE>
13
<PAGE> 16
FISCAL 1998 COMPARED TO FISCAL 1997
NET REVENUES
Net revenues for fiscal 1998 were $71.8 million, compared to net revenues for
fiscal 1997 of $64.9 million.
The following table sets forth net revenues by product category and the
percentage relationship to total net revenues. The process management category
includes Micrografx FlowCharter(R), Micrografx EnterpriseCharter(TM), Micrografx
ISOCharter(TM), and Optima(R). The corporate graphics category includes
Micrografx Graphics Suite(TM), Webtricity(TM), Simply3D(TM), Picture
Publisher(R), Micrografx Designer(R), Designer Power Pack, and Small Business
Graphics and Print Studio(R). The personal creativity category includes American
Greetings(R) CreataCard(R) Plus(TM), American Greetings(R) CreataCard(R)
Gold(TM), Crayola(TM)Art Studio(TM), and Hallmark Connections(TM) Card
Studio(TM). Revenues from Windows Draw(R) are categorized as either corporate
graphics or personal creativity depending on the Company's assessment of the
market or channel into which the product is sold. The technology category
results from the Company's use of its library of graphics software in selective
licensing. For fiscal 1998, the technology category consists of licensing of
certain personal creativity software source code to Cendant.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------------------
1998 % 1997 %
---------------------------------------------
<S> <C> <C> <C> <C>
Process management $ 15,786 22% $ 15,069 23%
Corporate graphics 31,310 44% 32,723 51%
Personal creativity 21,671 30% 17,070 26%
Technology 3,025 4% -- 0%
--------------------------------------------
Total revenues $ 71,792 100% $ 64,862 100%
</TABLE>
PROCESS MANAGEMENT
The five percent increase in process management revenues resulted from the
increasing focus the Company has placed on this area. To this end, the Company
started selling the Optima product at the beginning of the 1998 fiscal year,
which was acquired in the acquisition of AdvanEdge Technologies, Inc.
("AdvanEdge") on June 30, 1997. In the second half of the fiscal year, the
Company introduced EnterpriseCharter and ISOCharter, FlowCharter-based products
which are suited to fill specific needs in growing niches of the process
management market. Revenues from FlowCharter were down slightly from fiscal 1997
to fiscal 1998, however, during the second half of fiscal 1998 revenues from
FlowCharter grew more than 10 percent over the comparable period for the prior
year. Initial acceptance of the new products, the increase in multi-user
licensing, and the second-half growth of FlowCharter revenues all result from
the Company's decision to focus on corporate customers and their graphical
needs.
CORPORATE GRAPHICS
Corporate graphics declined four percent due to the continued decline of
products the Company no longer develops. During fiscal 1997, the Company
discontinued marketing activities for products such as Designer, Designer Power
Pack, Small Business Graphics and Print Studio, as well as products developed by
Visual Software, which merged with the Company in fiscal 1996. The Company chose
to focus its efforts on fewer products, resulting in new releases in fiscal 1998
of Simply3D, Picture Publisher, and Webtricity, all of which resulted in revenue
increases during the year. Further, the Company benefited from OEM agreements
signed at the end of fiscal 1997 and throughout 1998 for these products with
companies such as Hewlett-Packard and Matrox Graphics. An updated version of
Graphics Suite was released during the year with changes geared toward the
corporate customer. With the Company's focus on the corporate customers, the
Company's objective is to increase
14
<PAGE> 17
sales of multi-user licensing to corporate customers. However, the selling cycle
to corporate accounts is longer as new releases of the product do not appeal to
the impulse buyer in a retail computer software store, but rather, to larger,
multi-national companies that undergo a stringent and lengthier evaluation
process in order to make intelligent software choices regarding their graphical
needs.
PERSONAL CREATIVITY
The 27 percent growth in this category resulted from the continued growth of the
greeting card software market. The Company's CreataCard products continued its
market share leadership against stiff competition from products published by
Microsoft and Broderbund. The Company also released a new version of Windows
Draw resulting in a significant sales increase. These gains were partially
offset by declines in legacy products such as those licensed under the Crayola
brand name, for which the Company's license expired in the third quarter of
fiscal 1997.
In light of recent consolidation in the consumer software arena, as well as
extremely aggressive retail programs, the Company determined that for a company
with the size and resources of Micrografx, it was growing increasingly difficult
to compete effectively in the consumer retail product category. As a result, the
Company formed a strategic relationship with Cendant Software Corporation
("Cendant") effective June 30, 1998, whereby Micrografx has licensed Cendant a
series of core graphics technologies, information relating to the customers who
have purchased products based on the aforementioned technologies, marketing
information related to those products, and certain associated intellectual
property rights. Additionally, Micrografx has entered into a combination of
worldwide publishing and distribution agreements with Cendant for its personal
creativity software, including Windows Draw Print Studio and Micrografx
SnapShot, which was to be Micrografx's new entry into the consumer digital
imaging arena. The agreements also included the Windows Draw product sold into
corporate channels (shown in the corporate graphics category) which represented
revenue of $6.1 million and $5.4 million in fiscal 1998 and 1997, respectively.
The agreements with Cendant allow the Company to make significant progress in
de-empasizing the consumer software market.
Effective August 31, 1998, Micrografx entered into an agreement that assigns the
Company's distribution rights to American Greetings CreataCard Gold and
CreataCard Plus to TLC. This assignment of rights to TLC concluded all
contractual responsibilities and settles all contractual issues between
Micrografx and American Greetings. With this assignment, the Company has
completed its de-emphasis from the consumer marketplace in order to focus on its
higher value business graphics software.
TECHNOLOGY
The technology category contains the portion of the revenue recognized to date
related to the previously discussed Cendant and TLC relationships. The Company
expects to recognize additional revenue of approximately $18 million from the
relationships spread over the four quarters of fiscal 1999 based on contractual
obligations and risks assumed, with a higher proportion of the revenue to be
recognized in the first half of fiscal 1999. The impact on net income varies
each quarter depending on the costs to the Company of those obligations and
risks.
Net revenues by geographic region and as a percentage of total revenues are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------------------
1998 % 1997 %
---------------------------------------------
<S> <C> <C> <C> <C>
Americas $ 39,737 55% $ 33,287 51%
Europe 24,772 35% 20,839 32%
Asia Pacific 7,283 10% 10,736 17%
---------------------------------------------
Total net revenues $ 71,792 100% $ 64,862 100%
</TABLE>
15
<PAGE> 18
The revenue increase in the Americas resulted from the growth in personal
creativity, most of which is U.S. based. The growth in Europe resulted from the
focus on sales to corporate customers with more than 60 percent growth in
multi-user licenses, primarily from sales of Graphics Suite and FlowCharter. The
Asia Pacific decline resulted from the dramatic decline in the retail sector of
the Japanese economy.
COST OF REVENUES AND GROSS PROFIT
Cost of revenues includes the cost of documentation, diskettes or compact disks
(CDs), packaging and production overhead for the Company's application software
products; amortization of capitalized software development costs and acquired
product rights; and external product royalties. Cost of revenues in fiscal 1998
were $21.5 million, or 30 percent of net revenues, compared to $19.8 million or
31 percent of net revenues in fiscal 1997. The decrease in cost of revenues as a
percentage of net revenues for fiscal 1998 is attributable to the technology
category revenues which have no direct costs associated with them, partially
offset by the accelerated amortization of costs capitalized related to the
development of the personal creativity titles as well as increased royalties due
from the personal creativity revenues. Also contributing to the decline in cost
of revenues as a percent of revenues was a favorable shift in product mix from
boxed products which contain typical content (packaging, manuals, CDs or floppy
disks) to OEM and multi-user license revenues which require substantially less
content.
Regardless of revenue category, the cost to produce each of the Company's
software titles is relatively equal -- each product has CDs, manuals, and
packaging. Due to the specialized functionality in the process management and
corporate graphics titles, their unit prices are significantly higher than the
volume-driven personal creativity titles. As a result, the Company expects the
cost of revenues to continue to decline as a percent of revenue.
SALES AND MARKETING EXPENSE
Sales and marketing expenses include the cost of advertising, promotions,
cooperative and incentive programs with distributors, trade shows, marketing,
technical support, and the Company's sales force. Sales and marketing expenses
in fiscal 1998 were $34.0 million, or 48 percent of net revenues, compared to
$34.1 million, or 53 percent of net revenues, in fiscal 1997. The Company was
able to reduce expenses in absolute dollars despite growing revenue and adding a
significant number of corporate sales people. The additional cost of the sales
people was more than offset by reductions in variable marketing funds spent in
retail channels as well as reduced spending in Japan due to the continuing
economic decline there. The Company expects that sales and marketing expenses
will continue to decline as a percentage of revenue.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expenses include the costs of the Company's
information systems, human resources, finance, and administrative functions.
General and administrative expenses in fiscal 1998 were $7.4 million, or 10
percent of net revenues, compared to $7.9 million, or 12 percent of net
revenues, in fiscal 1997. The decline resulted from savings realized following
the restructuring in fiscal 1997, partially offset by outside legal and
professional fees resulting from the Cendant transaction. The Company expects
general and administrative expenses to remain at the current level for the near
term.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expenses include compensation, benefits, and incentives
paid to developers. In accordance with Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," the Company capitalizes certain software development costs incurred
after technological feasibility is achieved. These costs are amortized over the
estimated economic life of the products, generally 12 to 18 months. Amortization
of capitalized software development costs is included in cost of revenues.
Research and development expenses (net of amounts capitalized) in fiscal 1998
were $8.5 million, or 12 percent of net revenues, compared to $7.2 million, or
11 percent of net revenues, in fiscal 1997. Gross research and development
expenses, before capitalization, for fiscal 1998 were $12.7 million, or 18
percent of net revenues, compared to $11.0 million, or 17 percent of revenues
for fiscal 1997. The increased spending resulted from an increase in the number
of development employees as well as the ongoing development expenses resulting
from the acquisitions of AdvanEdge Technologies, Inc. ("AdvanEdge") on June 30,
1997, and WebKnight, Inc.
16
<PAGE> 19
("WebKnight"), on December 31, 1997. The Company expects research and
development expenses to continue to increase in absolute dollars in the near
term.
During fiscal 1998, the Company capitalized approximately $4.3 million in
software development costs and amortized $4.4 million in software development
costs. This compares to capitalization of $3.8 million and amortization of $4.0
million for fiscal 1997.
IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE
On June 30, 1997, the Company acquired AdvanEdge for approximately $3.7 million.
The purchase price consisted of $1 million in cash paid on June 30, 1997, $2.5
million to be paid in cash or Company stock over the subsequent 30 months, and
the assumption of certain liabilities. The acquisition was effected by a merger
of a wholly owned subsidiary of the Company into AdvanEdge Technologies, Inc. A
substantial portion of the purchase price was allocated to in-process research
and development based on an independent valuation study as technological
feasibility had not been established and no alternative commercial use had been
identified. The purchase price allocated to in-process research and development
resulted in a $2.3 million charge to expense, with no related tax benefit in
fiscal 1997. The technology acquired will be utilized in future products. The
Company allocated the total purchase price as follows (in thousands):
<TABLE>
<S> <C>
Tangible and intangible assets $ 1,016
Purchased in-process research and 2,250
development
Goodwill 481
-------
Total $ 3,747
</TABLE>
RESTRUCTURING CHARGES
Effective December 31, 1996, J. Paul Grayson resigned as Chairman of the Board
and Chief Executive Officer of the Company. An evaluation of the Company's
organization and operations resulted in the decision to make certain
organization changes. These changes resulted in a charge of $1.8 million for the
termination of seven members of management. The Company also recorded a $0.2
million charge related to the termination of commitments made by the previous
management for which no future benefit will be received. As of June 30, 1998,
the Company has paid approximately $1.7 million in termination benefits under
this restructuring. Approximately $0.2 million of this charge remains classified
as an accrued liability as of June 30, 1998. The Company expects that the
remaining liability will be paid out over the next six months.
EFFECT OF EXCHANGE RATES
Exchange rates during fiscal 1998 had an unfavorable impact on net revenues
reported by the Company. If exchange rates had not changed from their 1997
rates, the Company would have reported approximately $3.0 million more in net
revenues in fiscal 1998. This decrease resulted from the change in exchange
rates of European currencies and the Japanese yen versus the U.S. dollar. Since
European manufacturing costs and European and Japanese operating expenses are
also incurred in those local currencies, the relative translation impact of
exchange rates on net income (loss) is less than on revenues.
The Company periodically enters into foreign exchange contracts to hedge against
certain exposure to changes in foreign currency exchange rates. This exposure
results from the Company's foreign operations in countries including Germany,
France, the United Kingdom, the Netherlands, and Japan that are denominated in
currencies other than the U.S. dollar. See "Foreign Forward Exchange Contracts"
under "Summary of Significant Accounting Policies" in Notes to Consolidated
Financial Statements.
NONOPERATING (INCOME) EXPENSE
Nonoperating (income) expense includes interest income, interest expense, and
other (income) expense. Other (income) expense, net includes the gain or loss
resulting from revaluation of receivables and payables denominated in foreign
currency, and gains or losses when receivables and payables denominated in
foreign currency are settled.
17
<PAGE> 20
Interest income decreased from $0.8 million in fiscal 1997 to $0.6 million in
fiscal 1998, while unfavorable exchange rate variations charged $0.1 million to
other expense in fiscal 1998 and $0.5 million in 1997.
INCOME TAXES
The Company recognized a tax provision of $0.3 million in fiscal 1998, compared
to a tax benefit of $1.9 million in fiscal 1997. For further information on
income taxes, see Notes to Consolidated Financial Statements.
FISCAL 1997 COMPARED TO FISCAL 1996
NET REVENUES
Net revenues for fiscal 1997 were $64.9 million, compared to net revenues for
fiscal 1996 of $72.9 million.
The following table sets forth net revenues by product category and the
percentage relationship to total net revenues. The process management category
includes Micrografx FlowCharter(R). The corporate graphics category includes
Micrografx Graphics Suite(TM), Micrografx Designer(R), Designer Power Pack,
Webtricity(TM), Simply3D(TM), Picture Publisher(R), Small Business Graphics and
Print Studio(R), PhotoMagic(R), Instant 3D(TM) and Visual Reality(R). The
personal creativity category includes American Greetings(R) CreataCard(R)
Plus(TM), American Greetings(R) CreataCard(R) Gold(TM), Crayola(TM) Amazing Art
Adventure(TM), Crayola(TM) Art Studio(TM), Crayola(TM)Art Studio(TM)2,
Crayola(TM)Art(TM), and Hallmark Connections(TM) Card Studio(TM). Revenues from
Windows Draw(R) are categorized as either corporate graphics or personal
creativity depending on the Company's assessment of the market or channel into
which the product is sold. Optima(R) was acquired on June 30, 1997 through the
acquisition of AdvanEdge and therefore did not contribute revenue in either
year.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------------------
1997 % 1996 %
---------------------------------------------
<S> <C> <C> <C> <C>
Process management $ 15,069 23% $ 18,750 25%
Corporate graphics 32,723 51% 37,654 52%
Personal creativity 17,070 26% 16,515 23%
---------------------------------------------
Total revenues $ 64,862 100% $ 72,919 100%
</TABLE>
PROCESS MANAGEMENT
The 20 percent decline in process management resulted from the timing of the
product release cycle as well as the Company's focus on the personal creativity
market. Due to the rapid change in technology related to personal computers and
software, the majority of sales for a version of a software product occur within
the first year following its release. During the first quarter of fiscal 1997,
the Company decided to shift the release of its process management and corporate
graphics software to the third quarter of fiscal 1997, after the close of the
Christmas season. The Company did release FlowCharter English version 7 in
January 1997 and localized versions followed one to two quarters behind. As a
result, the Company had between three and six months during the fiscal year to
generate revenue from the new release of FlowCharter.
CORPORATE GRAPHICS
The 13 percent decline in corporate graphics revenues resulted from the decline
in sales relating to products that the Company no longer actively marketed,
which was not fully offset by growth in the sales of products that the Company
continued to actively market. The lack of growth in sales of products the
Company actively marketed was also the result of the delayed product release
cycle in fiscal 1997. While the Company did release new versions
18
<PAGE> 21
of Graphics Suite, Simply3D, and Picture Publisher and introduced Webtricity
during the third and fourth quarters of fiscal 1997, the delay in introducing
these products meant that older titles such as Designer Power Pack, Instant 3D,
Visual Reality, and PhotoMagic had lost their prior year sales momentum. The
decline in revenue is also attributable to the delay in corporations adopting
Windows 95 and Windows NT, the operating systems for which the Company's
principal business products are designed. Additionally, the Company released the
Small Business Graphics and Print Studio in the first quarter and revenues for
Windows Draw sold through international corporate channels almost doubled
compared to the prior year.
PERSONAL CREATIVITY
The revenue growth in the Company's personal creativity products resulted from
the release of two new greeting card products partially offset by the
discontinuance of two products. The Company introduced American Greetings(R)
CreataCard(R) Plus(TM) and American Greetings(R) CreataCard(R) Gold(TM) in the
first and third fiscal quarters, respectively, while the Company's agreements to
market the Hallmark and Crayola products expired in the first and third
quarters, respectively. Revenues from the CreataCard products exceeded prior
year sales of the Company's Hallmark product despite lower prices and the
introduction and intense competition from Microsoft's Hallmark Greetings
Workshop. Fiscal 1997 revenues for Windows Draw remained constant with the prior
year. For the year, the CreataCard products represented more than half of the
Company's consumer product revenues. In this category, the Company also bundles
products with those of OEMs. See "Licensing Agreements" under "Trends and Risk
Factors."
Net revenues by geographic region and as a percentage of total revenues are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------------------
1997 % 1996 %
---------------------------------------------
<S> <C> <C> <C> <C>
Americas $ 33,287 51% $ 35,671 49%
Europe 20,839 32% 25,196 34%
Pacific Rim 10,736 17% 12,052 17%
--------------------------------------------
Total net revenues $ 64,862 100% $ 72,919 100%
</TABLE>
Revenue declines were across all geographic regions and resulted from the change
in the product release schedule as discussed earlier and the lack of localized
versions of personal creativity products. The effect of delaying the release
schedule approximately two quarters had a more severe impact on international
locations because of the effort required to "localize" the product. Localization
consists of modifying and translating the software, as well as the box and its
contents, to a suitable product for another market such as Germany, France, or
Japan. This additional work usually results in an international version of a
product being released the quarter following the product's English release.
COST OF REVENUES AND GROSS PROFIT
Cost of revenues includes the cost of documentation, diskettes or compact disks
(CDs), packaging and production overhead for the Company's application software
products, amortization of capitalized software development costs and acquired
product rights, and external product royalties. Cost of revenues in fiscal 1997
were $19.8 million, or 31 percent of net revenues, compared to $17.5 million, or
24 percent of net revenues in fiscal 1996. The increase in cost of revenues as a
percentage of net revenues for fiscal 1997 is attributable to lower selling
prices on the Company's greeting card software products, increased amortization
of acquired product rights, and increased external royalties. Also contributing
to the rise in cost of revenues as a percentage of revenues was an unfavorable
shift in product mix to boxed products, which contain typical content
(packaging, manuals, CDs or floppy disks), from OEM and license revenues, which
require substantially less content.
19
<PAGE> 22
SALES AND MARKETING EXPENSE
Sales and marketing expenses include the cost of advertising, promotions,
co-operative, rebate, and incentive programs with distributors, trade shows,
marketing, technical support, and the Company's sales force. Sales and marketing
expenses in fiscal 1997 were $34.1 million, or 53 percent of net revenues,
compared to $35.1 million, or 49 percent of net revenues, in fiscal 1996. The
decrease in sales and marketing expense in absolute dollars reflects the
efficiencies gained by eliminating duplicate costs subsequent to the acquisition
of Visual, the reduction in executive overhead and management layers, and cost
control measures. The rise in sales and marketing expenses as a percentage of
revenue was due primarily to the increased promotional costs related to selling
product through retail channels in conjunction with the rise of personal
creativity revenues. The effect of the retail promotions coupled with an overall
retail slowdown during the fiscal fourth quarter resulted in lower revenues with
relatively higher costs.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expenses include the costs of the Company's
information systems, human resources, finance, and administrative functions.
General and administrative expenses in fiscal 1997 were $7.9 million, or 12
percent of net revenues, compared to $8.2 million, or 11 percent of net
revenues, in fiscal 1996.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expenses include compensation, benefits, and incentives
paid to developers. In accordance with Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," the Company capitalizes certain software development costs incurred
after technological feasibility is achieved. These costs are amortized over the
estimated economic life of the products, generally 12 to 18 months. Amortization
of capitalized software development costs is included in cost of revenues.
Research and development expenses (net of amounts capitalized) in fiscal 1997
were $7.2 million, or 11 percent of net revenues, compared to $7.6 million, or
10 percent of net revenues, in fiscal 1996. Gross research and development
expenses, before capitalization, for fiscal 1997 were $11.0 million, or 17
percent of net revenues, compared to $10.9 million, or 15 percent of revenues
for fiscal 1996.
During fiscal 1997, the Company capitalized approximately $3.8 million in
software development costs and amortized $4.0 million in software development
costs. This compares to capitalization of $3.3 million and amortization of $3.3
million for fiscal 1996.
IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE
On June 30, 1997, the Company acquired AdvanEdge resulting in a $2.3 million
charge to expense as previously discussed.
RESTRUCTURING CHARGES
Effective December 31, 1996, the Company restructured, resulting in a charge of
$2.0 million as previously discussed.
20
<PAGE> 23
ACQUISITION CHARGES
In fiscal 1996, Micrografx acquired all of the issued and outstanding capital
stock and options of Visual Software, Inc. ("Visual"), which was accounted for
as a pooling of interests. As a result of this acquisition, the Company incurred
charges for professional services, the write-off of costs related to certain
software products that were no longer actively marketed, exit costs, and costs
to eliminate excess personnel and duplicate leases of approximately $3,379,000,
of which $1,359,000 was non-cash. Components of the acquisition related charges
consisted of the following (in thousands):
<TABLE>
<S> <C>
Acquisition transaction costs $ 1,115
Asset write-downs:
Inventory and accounts receivable 840
Acquired product rights 158
Fixed assets 241
Severance and other 1,025
--------
Total acquisition charges $ 3,379
</TABLE>
The severance charges resulted from the closing of Visual's general and
administrative support office and the related termination of 21 Visual
employees. None of this charge remained as an accrued liability as of June 30,
1997.
EFFECT OF EXCHANGE RATES
Exchange rates during fiscal 1997 had an unfavorable impact on net revenues
reported by the Company. If exchange rates had not changed from their 1996
rates, the Company would have reported approximately $2.6 million more in net
revenues in fiscal 1997. This decrease resulted from the change in exchange
rates of European currencies and the Japanese yen versus the U.S. dollar. Since
European manufacturing costs and European and Japanese operating expenses are
also incurred in those local currencies, the relative translation impact of
exchange rates on net income (loss) is less than on revenues.
The Company periodically enters into foreign exchange contracts to hedge against
certain exposure to changes in foreign currency exchange rates. This exposure
results from the Company's foreign operations in countries including Germany,
France, the United Kingdom, the Netherlands, and Japan that are denominated in
currencies other than the U.S. dollar. See "Foreign Forward Exchange Contracts"
under "Summary of Significant Accounting Policies" in Notes to Consolidated
Financial Statements.
NONOPERATING (INCOME) EXPENSE
Non operating (income) expense includes interest income, interest expense and
other (income) expense. Other (income) expense, net includes the gain or loss
resulting from revaluation of receivables and payables denominated in foreign
currency, and gains or losses when receivables and payables denominated in
foreign currency are settled. Interest income decreased from $0.9 million in
fiscal 1996 to $0.8 million in fiscal 1997, while unfavorable exchange rate
variations charged $0.5 million to other expense in fiscal 1997 and $0.4 million
in 1996.
INCOME TAXES
The Company recognized a tax benefit of $1.9 million in fiscal 1997, compared to
a tax provision of $0.5 million in fiscal 1996. For further information on
income taxes, see Notes to Consolidated Financial Statements.
21
<PAGE> 24
QUARTERLY RESULTS OF OPERATIONS
The following table presents selected financial results for each of the last
eight quarters through June 30, 1998 (in thousands). These financial results are
unaudited. In the opinion of management, however, they have been prepared on the
same basis as the audited financial information and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the information for the periods presented when read in
conjunction with the accompanying Consolidated Financial Statements and notes
thereto.
<TABLE>
<CAPTION>
QUARTERS ENDED
- -------------------------------------------------------------------------------------------------
9/30/97 12/31/97 3/31/98 6/30/98
--------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $ 15,531 $ 19,357 $ 17,262 $ 19,642
Gross profit 10,825 13,849 12,508 13,144
Income (loss) from operations (919) 631 291 370
Net income (loss) (547) 558 224 372
Basic and diluted income
(loss) per share $ (.05) $ .05 $ .02 $ .03
Shares used in computing income
(loss) per share:
Basic 10,472 10,539 10,636 10,783
Diluted 10,472 11,068 11,513 11,424
</TABLE>
<TABLE>
<CAPTION>
QUARTERS ENDED
- ----------------------------------------------------------------------------------------------------
9/30/96 12/31/96 3/31/97 6/30/97
------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $ 16,589 $ 16,113 $ 17,124 $ 15,036
Gross profit 11,987 10,774 11,990 10,327
Income (loss) from operations 265 (4,069)(1) 213 (4,814)(2)
Net income (loss) 334 (2,734)(1) 121 (3,908)(2)
Basic and diluted income
(loss) per share $ 0.03 $ (0.27)(1) $ 0.01 (0.37)(2)
Shares used in computing income
(loss) per share:
Basic 10,223 10,239 10,235 10,427
Diluted 10,443 10,239 10,241 10,427
</TABLE>
(1) The financial results for the quarter ended December 31, 1996, include the
restructuring-related charge of $2.0 million. See Notes to Consolidated
Financial Statements.
(2) The financial results for the quarter ended June 30, 1997, include the
AdvanEdge related in-process research and development charge of $2.3
million. See Notes to Consolidated Financial Statements.
22
<PAGE> 25
TRENDS AND RISK FACTORS
The following discusses trends and risk factors inherent in the Company's
business environment.
CHANGE IN COMPANY FOCUS
During fiscal 1998 and in prior years, the Company has generated a significant
portion of its business from the personal creativity software market. Due to
aggressive competition and the Company's belief that its products are well
suited to various high-growth corporate markets, the Company has chosen to
pursue corporate customers. The Company's future financial performance will
depend on the successful transition of internal resources away from its strength
in the retail market while moving toward solving problems currently experienced
by corporations. In order to accomplish its objective, the Company has hired
employees with skills required for the Company's new direction, and is training
existing employees on how to make this change, but there is no assurance that
management's efforts will be successful. In order to succeed, the Company will
have to convince corporations that its products are able to solve their
problems, the Company will have to identify and develop features which corporate
customers desire, and the Company will have to ensure that it has a sales force
and customer support system sufficient in size and expertise to service
corporate customers. In light of the difficulties associated with the transition
of its business focus from consumer retail products to business product sales to
corporate accounts, the Company may confront unanticipated risks and
uncertainties. Therefore, there can be no assurance that the Company's new
business strategy will be successful, and it is possible that the Company's
future results from operations and financial condition will be adversely
affected if it is unable to effectively implement its new business focus.
NEW PRODUCT INTRODUCTIONS
The Company's future financial performance will depend in significant part upon
the successful development and introduction of new and enhanced versions of its
products and customer acceptance of these products, of which there can be no
assurance. Additionally, the timing of new product introductions, which are
updates of previously released products, can have a significant impact on
profitability of the older version of the product. To the extent that the
distributors were unable to sell the older version at the rate they anticipated
when they purchased the product, additional marketing expenditures are generally
required to promote the older version in order to reduce stocking levels in
anticipation of the release of the new version of the product.
LICENSING AGREEMENTS
During fiscal 1998, the Company's business strategy included entering into
licensing agreements with third parties in an effort to increase brand awareness
for the Company's products by associating the Micrografx name with products and
services that customers already know. During fiscal 1998, the Company had a
licensing agreement with American Greetings Corporation relating to American
Greetings CreataCard Plus and the American Greetings CreataCard Gold products.
The agreement was to expire on August 31, 1999. The Company and American
Greetings agreed not to renew the agreement and effective August 31, 1998, the
Company assigned its rights under the licensing agreement to The Learning
Company.
The Company has entered into a licensing agreement with ImageNet, Inc.
("ImageNet") for Network Design products NetworkCharter and NetworkCharter Pro.
The Company has the right to distribute the products to end users and resellers
but the Company does not own the source code. The Company pays ImageNet a
quarterly fee for the right to distribute the software based upon sales of the
NetworkCharter products, with provisions for certain minimum payments regardless
of sales volume. The Company and ImageNet have also agreed to make a good faith
effort to develop NetworkCharter products that utilize the Company's FlowCharter
graphics engine. The agreement expires on April 30, 2001, and automatically
renews for successive terms of one year each, unless terminated by either party
prior to the expiration of the initial term.
TECHNOLOGICAL CHANGE
The personal computer industry is subject to rapid technological change and
continuing development of new and enhanced operating environments. The success
of the Company's products will depend to a large extent upon the
23
<PAGE> 26
Company's ability to continue to develop and introduce innovative and
competitive products on a cost-effective and timely basis, of which there can be
no assurance.
COMPETITION
The personal computer applications software market is highly competitive. The
Company's competitors include many companies that have larger technical staffs,
more established and larger marketing and sales organizations, and significantly
greater financial resources than does the Company. Additionally, merger activity
in the applications software market serves to strengthen the merging companies'
ability to compete.
INTERNATIONAL OPERATIONS
The Company anticipates that international net revenues will continue to account
for a significant portion of total net revenues, which will result in a
significant portion of the Company's net revenues being subject to the risks
inherent in international operations. These risks include unexpected changes in
regulatory requirements, exchange rates, tariffs and other barriers,
difficulties in staffing and managing foreign subsidiary operations, and
potentially adverse tax consequences.
The Company's revenue generated from its Asia Pacific sales offices has declined
more than 30 percent from fiscal 1997 to fiscal 1998 and the Company expects an
additional decline in sales for fiscal 1999. This decline resulted from the
economic uncertainty and recession in Japan, which resulted in a significant
decline in the retail sector of the Japanese economy. The Company has announced
that it will no longer concentrate its efforts on the retail distribution
channel, its strength historically, but will focus on corporate customers in
keeping with the Company's overall strategy. There is no assurance that this
strategy will be successful.
CHANGES IN DISTRIBUTION CHANNELS
The Company is focusing on corporate customers and has de-empasized its personal
creativity business. In doing such, it has to transition its relationships with
the distribution channels to match the change. While the Company does not
anticipate a significant change in the channels used, it must change its sales
and marketing programs to suit the corporate customers buying through those
channels. The Company's success depends in part on the ability to identify and
respond to changes in the distribution channel.
SEASONALITY
Historically, the Company's results of operations are subject to significant
quarterly variations. Causes of these variations include seasonality of the
retail software market, delays in the introduction of new or enhanced versions
of the Company's products, timing and cost of new product upgrades and
introductions, reduced distribution channel sales preceding the introduction of
updated products, and large distribution channel sales following the
introduction of new or updated products. Historically, as is typical in the
retail software industry, the Company has experienced some seasonal variations
in demand, with sales declining somewhat in the summer months and increasing
somewhat during the fourth and first calendar quarters. The Company expects the
seasonality to decline somewhat as it changes its focus from serving the retail
market to selling to corporate customers.
UPGRADES
Product upgrades, which enable users to upgrade from earlier versions of the
Company's products, or from competitors' products, typically have lower prices
than new products, resulting in lower gross profit margins.
The Company plans to continue upgrading successful products in the future.
INTERNET
The Company provides products for use in the Internet market. The Internet
market is rapidly evolving and is characterized by an increasing number of
market entrants. As is typical in the case of a new and evolving industry,
demand and market acceptance for recently introduced products and services are
subject to a high level of uncertainty. 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 impact the
growth of Internet use, together with the software standards and electronic
media employed in such markets.
24
<PAGE> 27
GROSS PROFIT
Product margins vary according to product mix and the geographical region in
which the products are sold. Changes in product mix, including the mix of boxed
product (full and upgrade product versions) relative to the amount of non-boxed
product (OEM and multi-user licenses), the transition away from personal
creativity products (which carry lower margins), the transition to "suite"
products accompanied with value-pricing, as well as changes in the components of
direct costs, have in the past and may in the future affect the Company's gross
profit.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company's principal sources of liquidity consisted of cash
and cash equivalents of $26.5 million and short-term investments of $1.6
million. Additionally, the Company obtained a $5 million line of credit
effective April 1, 1998, which expires March 30, 1999. Commitment fees related
to the line of credit are 0.25 percent of the unused line of credit per year. At
June 30, 1998, no borrowings on the line were outstanding.
CASH FLOWS DURING FISCAL 1998
For the year ended June 30, 1998, cash provided by operating and financing
activities exceeded cash used in investing activities, resulting in an increase
in cash and cash equivalents of $15.3 million. Cash flows from operating
activities generated $18.4 million in cash during fiscal 1998. The cash received
resulting from the Cendant transaction, offset by transactional expenses,
coupled with the adjustment for depreciation and amortization, were partially
offset by the increase in accounts receivable. Accounts receivable allowances
decreased primarily due to the reduced need for rebates and co-op funds
typically associated with personal creativity products.
Cash flows from investing activities used $6.2 million during fiscal 1998 and
consisted primarily of additions to capitalized software development costs and
acquired product rights and purchases of property and equipment. Expenditures
for property and equipment during fiscal 1998 were $1.2 million and consisted
primarily of computer and equipment upgrades. Investments of $6.6 million were
also made in capitalized software development costs and acquired product rights
related to the development of new and enhanced versions of the Company's
products. Cash flows from financing activities provided $3.3 million in cash
during fiscal 1998, due primarily to proceeds received from employee stock
programs. As discussed in the footnotes to the financial statements,
approximately $0.2 million of the $2.0 million restructuring charge remains
classified as an accrued liability as of June 30, 1998. The Company expects to
pay this amount during the next six months.
CAPITAL RESOURCES
As of June 30, 1998, the Company had no significant commitments for capital
expenditures.
The Company believes that cash flow from operations and existing cash will be
sufficient to meet the Company's capital requirements in the short term. The
Company believes that thereafter its liquidity requirements could be met with
cash flow from operations, and existing cash and short-term investment balances.
YEAR 2000 COSTS
The Company is aware of and is addressing a broad range of issues associated
with the programming code in existing computer systems as the year 2000
approaches. The year 2000 problem is complex, as many computer systems will be
affected in some way by the rollover of the two-digit year value to 00. Systems
that do not properly recognize such information could generate erroneous data or
cause a system to fail. The year 2000 issue creates risk for the Company from
unforeseen problems in its own computer systems and from third parties with whom
the Company deals on financial and other transactions worldwide. Failures of the
Company's and/or third parties' computer systems could have a material impact on
the Company's ability to conduct its business.
The Company's financial information system is SAP. This system is believed to be
year 2000 compliant. The Company is analyzing its remaining computer systems to
identify any potential year 2000 issues and will take appropriate corrective
action based on the results of such analysis. Management believes that any costs
that may arise to ensure functionality in the year 2000 would not be material.
25
<PAGE> 28
In addition, the year 2000 issue could affect the products that the Company
sells. The Company believes that the current versions of its products are year
2000 compliant. The Company's products are subject to ongoing analysis and
review.
OTHER MATTERS
The assets and liabilities of non-U.S. operations are translated into U.S.
dollars at exchange rates in effect as of the respective balance sheet dates,
and revenue and expense accounts of these operations are translated at average
exchange rates during the month the transactions occurred. Unrealized
translation gains and losses are included as an adjustment to shareholders'
equity. The Company has mitigated a portion of its currency exposure through
decentralized sales, marketing and administrative operations. When necessary,
the Company may also hedge to prevent material exposure.
LITIGATION
The Company is party to various legal proceedings arising from the normal course
of business activities, none of which, in management's opinion, is expected to
have a material adverse impact on the Company's results of operations or its
financial position.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income" (SFAS
130), which is effective for fiscal years beginning after December 15, 1997.
SFAS 130 establishes standards for reporting and displaying comprehensive income
and its components in the financial statements. This standard does not, however,
require a specific format for the statement, but requires the Company to display
an amount representing total comprehensive income for the period in that
financial statement. The effect of SFAS 130 on the Company has not been
determined.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131), which is effective for fiscal
years beginning after December 15, 1997. SFAS 131 establishes standards for the
manner in which public business enterprises report information about operating
segments in annual financial statements and requires those enterprises to report
selected information about operating segments in interim financial reports
issued to stockholders. The effect of SFAS 131 on the Company has not been
determined.
In February 1998, the FASB issued SFAS 132, "Employers' Disclosure about
Pensions and Other Postretirement Benefits -- an amendment of FASB Statements
No. 87, 88, and 106" (SFAS 132), which is effective for fiscal years beginning
after December 15, 1997. The Company does not provide pension or other
postretirement benefits, thus SFAS 132 has no impact on the Company.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133), which is effective for fiscal years
beginning after June 15, 1999. SFAS 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
effect of SFAS 133 on the Company has not yet been determined.
FORWARD-LOOKING STATEMENTS
The Company notes that, with the exception of historical information, the
matters discussed above are forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in these forward-looking statements. Factors that could cause
or contribute to such differences include, without limitation, changes in the
market, new products and announcements from other companies, changes in
technology, and competition from larger, more established competitors as
discussed in the "Trends and Risk Factors" of this item.
26
<PAGE> 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MICROGRAFX, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 26,483 $ 11,150
Short-term investments 1,584 3,615
Accounts receivable, net 12,712 9,610
Inventories 980 1,287
Deferred tax asset 1,135 404
Other current assets 1,379 1,041
-------- --------
Total current assets 44,273 27,107
Property and equipment, net 1,946 2,703
Capitalized software development costs, net 3,191 3,284
Acquired product rights, net 2,693 3,581
Other assets 3,038 2,437
-------- --------
Total assets $ 55,141 $ 39,112
======== ========
</TABLE>
See accompanying notes.
27
<PAGE> 30
MICROGRAFX, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,979 $ 6,127
Accrued compensation and benefits 2,578 1,629
Other accrued liabilities 4,070 2,862
Deferred revenue 11,933 1,205
Notes payable to related parties 1,125 1,100
Restructuring accrual 160 670
Accrued royalties 976 536
Income taxes payable 340 41
-------- --------
Total current liabilities 26,161 14,170
Notes payable to related parties - noncurrent 400 1,400
Other liabilities 10 14
Shareholders' equity:
Common stock, $.01 par value, 20,000 shares authorized;
11,474 and 10,940 shares issued 115 109
Additional capital 33,835 29,452
Accumulated deficit (894) (1,501)
Cumulative translation adjustment (1,537) (1,344)
Less - treasury stock (438 and 477 shares), at cost (2,884) (3,188)
Deferred compensation (65) --
-------- --------
Total shareholders' equity 28,570 23,528
-------- --------
Total liabilities and shareholders' equity $ 55,141 $ 39,112
======== ========
</TABLE>
See accompanying notes.
28
<PAGE> 31
MICROGRAFX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net revenues $ 71,792 $ 64,862 $ 72,919
Cost of revenues 21,466 19,784 17,497
-------- -------- --------
Gross profit 50,326 45,078 55,422
Operating expenses:
Sales and marketing 34,048 34,121 35,123
General and administrative 7,426 7,938 8,204
Research and development 8,479 7,210 7,638
In-process research and development charge -- 2,250 --
Restructuring charges -- 1,964 --
Acquisition charges -- -- 3,379
-------- -------- --------
Total operating expenses 49,953 53,483 54,344
-------- -------- --------
Income (loss) from operations 373 (8,405) 1,078
Interest income (621) (778) (878)
Interest expense 5 16 14
Other (income) expense 55 454 353
-------- -------- --------
Total non operating (income) expense (561) (308) (511)
-------- -------- --------
Income (loss) before income taxes 934 (8,097) 1,589
Income tax provision (benefit) 327 (1,910) 477
-------- -------- --------
Net income (loss) $ 607 $ (6,187) $ 1,112
======== ======== ========
Earnings (loss) per share:
Basic $ .06 $ (0.60) $ 0.11
======== ======== ========
Diluted $ .05 $ (0.60) $ 0.11
======== ======== ========
Shares used in computing earnings (loss) per share
Basic 10,613 10,342 9,798
======== ======== ========
Diluted 11,055 10,342 10,136
======== ======== ========
</TABLE>
See accompanying notes
29
<PAGE> 32
MICROGRAFX, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
COMMON STOCK CUMULATIVE
------------------- ADDITIONAL RETAINED RANSLATION TREASURY DEFERRED
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT STOCK COMPENSATION TOTAL
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1995 10,132 $ 101 $ 24,747 $ 3,574 $ (279) $ (2,167) -- $ 25,976
Common stock issued under
stock option plan 421 4 2,841 -- -- -- -- 2,845
Common stock issued under
stock purchase plan 144 2 671 -- -- -- -- 673
Common stock issued by Visual
Software, Inc. 103 1 418 -- -- -- -- 419
Translation of foreign
currency financial statements -- -- -- -- (951) -- -- (951)
Treasury stock acquired
(80 shares) -- -- -- -- -- (969) -- (969)
Net income -- -- -- 1,112 -- -- -- 1,112
------ -------- -------- -------- -------- -------- -------- --------
BALANCE, JUNE 30, 1996 10,800 108 28,677 4,686 (1,230) (3,136) -- 29,105
Common stock issued under
stock option plan 12 -- 85 -- -- -- -- 85
Common stock issued under
stock purchase plan 128 1 690 -- -- -- -- 691
Translation of foreign currency
financial statements -- -- -- -- (114) -- -- (114)
Treasury stock acquired
(8 shares) -- -- -- -- -- (52) -- (52)
Net loss -- -- -- (6,187) -- -- -- (6,187)
------ -------- -------- -------- -------- -------- -------- --------
BALANCE, JUNE 30, 1997 10,940 109 29,452 (1,501) (1,344) (3,188) -- 23,528
Common stock issued under
stock option plan 347 4 2,227 -- -- -- -- 2,231
Common stock issued under
stock purchase plan 167 2 779 -- -- -- -- 781
Translation of foreign currency
financial statements -- -- -- -- (193) -- -- (193)
Treasury stock issued related
to purchase of AdvanEdge -- -- 296 -- -- 304 -- 600
Stock option income tax benefit -- -- 828 -- -- -- -- 828
Issuance of restricted stock 20 -- 253 -- -- -- (65) 188
Net income -- -- -- 607 -- -- -- 607
------ -------- -------- -------- -------- -------- -------- --------
BALANCE, JUNE 30, 1998 11,474 $ 115 $ 33,835 $ (894) $ (1,537) $ (2,884) $ (65) $ 28,570
====== ======== ======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes
30
<PAGE> 33
MICROGRAFX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------------
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 607 $ (6,187) $ 1,112
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 10,144 9,145 8,492
Restricted stock amortization 188 -- --
In-process research and development charge -- 2,250 --
Acquisition related charge -- -- 1,359
Deferred income taxes and other (1,410) (2,327) 187
Changes in operating assets and liabilities,
net of effects of purchase of AdvanEdge:
(Increase) decrease in accounts receivable (3,102) (66) (810)
(Increase) decrease in inventories 307 (3) (161)
(Increase) decrease in other current assets (338) 670 (267)
(Decrease) increase in payables and accruals 11,667 3,311 (1,542)
(Decrease) increase in income taxes payable 299 (797) 110
-------- -------- --------
Total adjustments 17,755 12,183 7,368
-------- -------- --------
Net cash provided by operating activities 18,362 5,996 8,480
-------- -------- --------
Cash flows from investing activities:
Proceeds from maturities of short-term investments 6,160 8,953 6,778
Purchases of short-term investments (4,129) (7,724) (6,310)
Payment for purchase of acquisition, net of cash acquired (375) (918) --
Capitalization of software development costs and
purchases of acquired product rights (6,617) (7,686) (6,115)
Payments for purchases of property and equipment (1,215) (1,872) (1,679)
Other -- -- 499
-------- -------- --------
Net cash used in investing activities (6,176) (9,247) (6,827)
-------- -------- --------
Cash flows from financing activities:
Proceeds from employee stock programs 3,012 777 3,518
Treasury stock acquired -- (52) (969)
Payments of notes payable (500) -- (790)
Tax benefits realized from stock transactions 828 -- --
-------- -------- --------
Net cash provided by financing activities 3,340 725 1,759
-------- -------- --------
Effect of exchange rates on cash and cash equivalents (193) (114) (951)
Net increase (decrease) in cash and cash equivalents 15,333 (2,640) 2,461
Cash and cash equivalents, beginning of year 11,150 13,790 11,329
-------- -------- --------
Cash and cash equivalents, end of year $ 26,483 $ 11,150 $ 13,790
======== ======== ========
Supplemental Cash Flow Information
Cash paid for --
Interest $ -- $ -- $ 4
Income taxes $ 383 $ 1,035 $ 355
</TABLE>
See accompanying notes.
31
<PAGE> 34
MICROGRAFX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Micrografx, Inc. ("Micrografx" or the "Company") was founded in 1982 and
incorporated in 1984 in the state of Texas. Micrografx develops and markets
graphics software which enhances visual communication and empowers creative
expression.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
transactions and accounts have been eliminated.
On April 2, 1996, the Company acquired all of the issued and outstanding capital
stock and options of Visual Software, Inc., a California corporation ("Visual").
The acquisition has been accounted for as a pooling of interests. Accordingly,
the consolidated financial statements prior to the acquisition have been
restated to retroactively include the accounts and operations of Visual for all
periods presented (Note 2).
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 these estimates.
INVENTORIES
Inventories are stated at the lower of cost or market using a weighted-average
method. Finished goods inventories include costs of material, labor and
overhead. Major classes of inventory include the following (in thousands):
<TABLE>
<CAPTION>
June 30,
-----------------------
1998 1997
------ -------
<S> <C> <C>
Raw materials $ 720 $ 822
Finished goods 260 465
------ -------
$ 980 $ 1,287
====== =======
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is provided for using the straight-line method over
the following estimated useful lives:
<TABLE>
<S> <C>
Computers and equipment 2-5 Years
Software 2-5 Years
Furniture and fixtures 5-7 Years
Leasehold improvements Shorter of Lease Term or Asset Life
</TABLE>
CAPITALIZED SOFTWARE DEVELOPMENT COSTS AND ACQUIRED PRODUCT RIGHTS
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," the Company capitalizes certain software development costs incurred
after technological feasibility is achieved and also capitalizes costs of
acquiring certain product rights in connection with the development of its
computer software products. Capitalized costs are reported at the lower of
unamortized cost or net realizable value. Capitalized software development costs
and
32
<PAGE> 35
acquired product rights are amortized straight-line over the estimated economic
life of the products, generally 12 to 18 months, which approximates amortization
based on the ratio of current net sales over future estimated net sales. The
Company begins amortization when the products are available for general release
to customers. All other research and development expenditures are charged to
research and development expense in the period incurred.
FOREIGN CURRENCY
For the majority of the Company's foreign subsidiaries, the functional currency
is the local currency of the country. Accordingly, assets and liabilities of the
foreign subsidiaries are translated to U.S. dollars at year end exchange rates.
Income and expense items are translated at the average rates of exchange
prevailing during the year. The adjustments resulting from translating the
financial statements of foreign subsidiaries are reflected as cumulative
translation adjustments, a reduction of shareholders' equity.
The net foreign currency exchange losses were $52,000, $416,000, and $399,000,
in fiscal years 1998, 1997 and 1996, respectively.
FOREIGN FORWARD EXCHANGE CONTRACTS
The Company periodically enters into forward foreign exchange contracts to hedge
existing or projected exposure to changing foreign exchange rates. This exposure
results from the Company's foreign operations in countries including Germany,
France, the United Kingdom, the Netherlands, and Japan that are denominated in
currencies other than the U.S. dollar. These forward contracts are not held for
trading purposes.
These contracts generally have maturities of 180 days or less and contain an
element of risk that the counterparty may be unable to meet the terms of the
contracts. However, the Company minimizes such risk by limiting the counterparty
to major financial institutions. Management believes the risk of incurring such
losses is remote, and any losses therefrom would be immaterial.
Gains and losses associated with these forward contracts are recognized in other
(income) expense. During fiscal 1998, the Company recognized approximately
$77,000 in gains associated with forward contracts. At June 30, 1997 and 1996
the gains and losses recognized were not material.
At June 30, 1998, the Company had forward contracts outstanding to sell 3.4
million German Marks for approximately $1.9 million. The difference between the
carrying amount and current market settlement value of the forward contracts was
not significant. The Company also had options to sell 200 million Japanese Yen
for approximately $1.6 million. The difference between the carrying amount and
current market settlement value of the options was $0.1 million.
REVENUE RECOGNITION
Revenues on applications software product sales are recognized when the related
products are shipped to customers, net of discounts and allowances for estimated
future returns. The Company offers "stock balancing" (the ability to return
slow-moving or obsolete products) to distributors and resellers. Products may be
exchanged for credit against future purchases of other Company products on a
minimum of a dollar-for-dollar basis. Defective products may be returned for
credit or exchange. Returns in excess of the allowance could occur if a
significant amount of the Company's products prove to be defective.
The Company periodically offers rebates to distributors, the amounts of which
are primarily based on sales volume and are accrued as reductions in revenue and
in a contra-receivable account. The Company paid rebates of $3,196,000,
$2,041,000, and $1,249,000 in 1998, 1997, and 1996, respectively. The Company
also offers distributors and resellers co-op funds, generally 2-10 percent of
amounts invoiced, that are used to promote the Company's products. These funds
are generally paid as a credit against outstanding invoices and are included in
sales and marketing expense during the period in which the related revenue is
recognized. The Company paid co-op funds of $3,387,000, $2,852,000, and
$2,197,000 in 1998, 1997, and 1996, respectively.
33
<PAGE> 36
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense was $4,334,000,
$5,135,000, and $5,528,000 in 1998, 1997 and 1996, respectively.
STOCK-BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees and
directors with an exercise price equal to the fair value of the shares at the
date of grant. The Company accounts for stock option grants in accordance with
APB Opinion No. 25, "Accounting for Stock Issued to Employees," because the
alternative fair value accounting method provided for under FASB Statement No.
123, "Accounting for Stock-based Compensation," requires the use of valuation
models that were not developed for use in valuing employee stock options.
Accordingly, the Company does not recognize compensation expense for stock
option grants.
INCOME (LOSS) PER SHARE
Income (loss) per share for all periods presented is based on the weighted
average basic and dilutive equivalent shares outstanding using the treasury
stock method. Amounts are shown in thousands except for per share data.
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------------
1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
Numerator:
Net income (loss) $ 607 $ (6,187) $ 1,112
Denominator:
Denominator for basic earnings per
share - weighted average shares 10,613 10,342 9,798
Effect of dilutive employee stock options 442 -- 338
--------- --------- ---------
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions 11,055 10,342 10,136
========= ========= =========
Basic income (loss) per share $ 0.06 $ (0.60) $ (0.11)
========= ========= =========
Diluted income (loss) per share $ 0.05 $ (0.60) $ (0.11)
========= ========= =========
</TABLE>
RECLASSIFICATIONS
Certain previously reported amounts have been reclassified to conform with
current year presentation.
2. ACQUISITIONS
On December 31, 1997, the Company acquired WebKnight, Inc. ("WebKnight") which
was accounted for as a purchase. The total consideration to be paid is $0.5
million, with $250 thousand paid in December 1997, $125 thousand paid in June
1998, and $125 thousand to be paid in December 1998. The entire purchase price
was allocated to acquired product rights and will be amortized over the life of
products currently under development using the technologies acquired.
On June 30, 1997, the Company acquired the assets of AdvanEdge Technologies,
Inc. ("AdvanEdge") for approximately $3.7 million, which has been accounted for
as a purchase. Goodwill related to this acquisition is being amortized on a
straight-line basis over seven years.
In connection with the acquisition of AdvanEdge, the Company agreed to make
future payments to the former shareholders of AdvanEdge as a part of the
purchase price. The total consideration to be paid is $2.5 million with $1.1
million paid June 30, 1998, $1.0 million due June 30, 1999, and $0.4 million due
January 5, 2000. Of the total consideration, at least $1.0 million is payable in
cash with the remainder payable in cash or the Company's $.01 par Common Stock
at the Company's discretion provided that the average closing price of the
Company's Common Stock on the Nasdaq National Market on each due date described
above is at least $4.50 per share.
34
<PAGE> 37
On April 2, 1996, the Company acquired all of the issued and outstanding capital
stock and options of Visual. In connection with the acquisition, Micrografx also
agreed to exchange shares of its common stock for the 20 percent outstanding
minority interest in Visual Worlds Development Corporation ("VWD") owned by
persons other than Visual. VWD was an 80 percent owned subsidiary of Visual
prior to the acquisition. Visual and its subsidiaries were engaged in the
development and marketing of 3D graphics software and Micrografx intends to
continue the business of Visual. Micrografx issued approximately 0.36547 shares
of common stock for each outstanding share of common stock of Visual,
approximately 0.2930 shares of its common stock for each outstanding option, net
of the option exercise price, and an aggregate of 3,655 shares of its common
stock for the 20 percent interest in VWD owned by the minority stockholders of
VWD. As a result, a total of approximately 883,000 shares of the common stock of
Micrografx were issued in connection with these transactions.
3. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid securities with original maturities of
three months or less to be cash equivalents. All short-term investments have
maturities within one year of the balance sheet date. Cash and cash equivalents
and short-term investments consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash and cash equivalents:
Cash $ 4,745 $ 4,049
Money market funds 15,013 1,484
Commercial paper 6,725 5,617
-------- --------
Total cash and cash equivalents 26,483 11,150
Short-term investments:
Corporate bonds and notes 550 --
Government backed issues -- 3,115
Master notes 500 --
Commercial paper 392 500
Asset backed securities 142 --
-------- --------
Total short-term investments 1,584 3,615
Total cash and short-term investments $ 28,067 $ 14,765
======== ========
</TABLE>
The appropriate classification of securities is determined at the time of
purchase and reevaluated as of each balance sheet date. The Company has
classified its cash equivalents and short-term investments as
available-for-sale. The available-for-sale securities are carried at cost which
approximates fair value. Gross realized and unrealized gains and losses for
these securities were not material at June 30, 1998 and 1997. The fair value of
securities is based on quoted market prices, where available, or quotes from
external pricing sources such as brokers for those or similar investments and
issues. Gross sale proceeds from available-for-sale securities were
$124,650,000, $133,269,000, and $110,450,000 in fiscal 1998, 1997, and 1996,
respectively. The cost of available-for-sale securities sold is based on the
specific identification method.
35
<PAGE> 38
4. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
--------------------------
1998 1997
---------- -----------
<S> <C> <C>
Trade Receivables $ 15,761 $ 13,741
Allowances (3,049) (4,131)
-------- --------
Accounts receivable, net $ 12,712 $ 9,610
======== ========
</TABLE>
Allowances consist of reserves for returns, reserves for bad debt and accruals
for co-op and incentive programs.
At June 30, 1998 and 1997, approximately 66 percent and 74 percent,
respectively, of trade receivables represented amounts due from ten customers.
At June 30, 1998, the Company had two customers with receivable balances of 22
percent and 17 percent of trade receivables. At June 30, 1997, the Company had
two customers with receivable balances of 30 percent and 21 percent of trade
receivables. The credit risk in the Company's trade accounts receivable is
substantially mitigated by the Company's credit evaluation process, credit
insurance policies, reasonably short collection terms and the geographical
diversification of revenues.
The Company distributes its products domestically through independent,
non-exclusive distributors, authorized resellers, and its corporate sales
representatives located throughout the United States. The Company distributes
its products internationally through independent, non-exclusive distributors
located primarily in Western Europe and Japan. In fiscal 1998, two customers'
sales each accounted for 19 percent of net revenues. In fiscal 1997, the Company
had two customers whose sales accounted for 22 percent and 16 percent of net
revenues; in fiscal 1996, one customer's sales accounted for 17 percent of net
revenues.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
Computers and equipment $ 11,020 $ 10,231
Furniture and fixtures 544 541
Leasehold improvements 694 654
-------- --------
12,258 11,426
Less - accumulated depreciation (10,312) (8,723)
-------- --------
Property and equipment, net $ 1,946 $ 2,703
======== ========
</TABLE>
36
<PAGE> 39
6. INTANGIBLE ASSETS
Capitalized software development costs and acquired product rights consist of
the following (in thousands):
<TABLE>
<CAPTION>
June 30,
-----------------------
1998 1997
--------- ---------
<S> <C> <C>
Capitalized software development costs $ 9,077 $ 5,270
Less - accumulated amortization (5,886) (1,986)
------- -------
Capitalized software development costs, net $ 3,191 $ 3,284
======= =======
Acquired product rights $ 6,477 $ 5,940
Less - accumulated amortization (3,784) (2,359)
------- -------
Acquired product rights, net $ 2,693 $ 3,581
======= =======
</TABLE>
During the years ended June 30, 1998, 1997, and 1996, the Company capitalized
$6,617,000, $7,686,000, and $6,115,000, respectively, of software development
costs and acquired product rights. Amounts amortized and charged to cost of
revenues for capitalized software development costs and acquired product rights
during the years ended June 30, 1998, 1997, and 1996 were $8,070,000,
$6,828,000, and $5,573,000, respectively. Additionally, the Company wrote down
capitalized software development costs and acquired product rights to net
realizable value by approximately $157,000, $220,000, and $43,000 in fiscal
1998, 1997, and 1996, respectively.
7. LINES OF CREDIT
The Company obtained a $5 million line of credit effective April 1, 1998 which
expires March 30, 1999. Commitment fees related to the line of credit are 0.25
percent of the unused line of credit per year. At June 30, 1998, no borrowings
on the line were outstanding.
8. INCOME TAXES
Deferred tax assets and liabilities are recognized for the expected future tax
consequences of existing differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. Current and noncurrent deferred income tax assets and liabilities are
classified on the balance sheet based on the classification of the assets and
liabilities giving rise to these differences. Deferred tax assets and
liabilities that are not related to an asset or liability for financial
reporting are classified according to the expected reversal of the temporary
difference.
Components of the provision for income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal $ 1,126 $ -- $ 13
Foreign 693 402 721
------- ------- -------
Total current provision 1,819 402 734
Deferred provision (benefit) (1,492) (2,312) (257)
------- ------- -------
Total income tax provision (benefit) $ 327 $(1,910) $ 477
======= ======= =======
</TABLE>
37
<PAGE> 40
The provision for income taxes is reconciled with the federal statutory rate as
follows (in thousands):
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------------
1998 1997 1996
---------- ----------- ----------
<S> <C> <C> <C>
Provision (benefit) computed at
federal statutory rate $ 327 $ (2,753) $ 540
Nondeductible acquisition expenses -- -- 358
In-process research and development -- 765 --
Foreign tax rate differential -- -- 214
Change in valuation allowance (32) -- (862)
Other 32 78 227
-------- -------- --------
Tax provision (benefit) $ 327 $ (1,910) $ 477
======== ======== ========
</TABLE>
Components of the net deferred income tax assets (liabilities) are as follows
(in thousands):
<TABLE>
<CAPTION>
June 30,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Deferred Tax Assets
Tax credit carryforwards $ 2,387 $ 1,949
Net operating loss carryforward 2,592 3,504
Depreciation 412 365
Reserves and other accrued expenses not
currently deductible for tax purposes 2,190 1,499
Undistributed earnings in foreign subsidiaries 42 27
Other 340 --
------- -------
Total deferred tax assets 7,963 7,344
Deferred Tax Liabilities
Capitalized software development costs
currently deductible for tax purposes (2,001) (2,334)
Other -- (229)
------- -------
Total deferred tax liabilities (2,001) (2,563)
Total net deferred tax assets 5,962 4,781
Valuation allowance (2,560) (2,871)
------- -------
Net deferred tax assets, net of valuation allowance $ 3,402 $ 1,910
======= =======
</TABLE>
At June 30, 1998, the Company has research and development tax credit
carryforwards of $1,690,000 for Federal tax purposes, which expire between 2006
and 2009 and the Company has foreign tax credit carryforwards of $376,000 which
expire in 2003. In addition, the Company has alternative minimum tax credit
carryforwards of $321,000 that may be carried forward indefinitely as a credit
against the Company's current tax liability. The Company also has net operating
loss carryforwards of $2,592,000 for federal tax purposes that expire between
2009 and 2011. The annual utilization of these carryforwards will be limited.
As required by SFAS 109, the Company has recognized deferred tax assets for
these tax credit and net operating loss carryforwards. Pursuant to the
requirements of SFAS 109, a valuation allowance must be provided when it is more
likely than not that the deferred tax asset will not be realized. The Company
has provided a valuation allowance with respect to a portion of the deferred tax
assets as the Company does not deem the full recovery of such amounts at this
time to be more likely than not. The valuation allowance decreased by $311,000
in fiscal 1998 recognizing previously unbenefited losses, a portion of which
will be credited to additional paid in capital
38
<PAGE> 41
rather than a reduction of federal income tax expense. Management's assessment
is based upon current and anticipated operations, current tax laws, and other
qualitative and quantitative factors. In subsequent periods, the Company may
adjust the valuation allowance, to the extent that utilization of the deferred
tax asset is more likely than not, as defined by SFAS 109.
9. SHAREHOLDERS' EQUITY
PREFERRED STOCK
None of the Company's 10,000,000 authorized shares of Preferred Stock are issued
at June 30, 1998.
STOCK OPTIONS
The Company has reserved 6,400,000 shares of its Common Stock for issuance in
connection with its stock option plans for employees and non-employees, which
are administered by the Company's Stock Option Committee.
Up to 100,000 of the 6,400,000 shares available may be granted as restricted
stock awards. The stock is restricted because recipients receive the stock only
upon completing a specified objective or period of employment, generally one to
five years. The shares are considered issued when awarded, but the recipient
does not own and cannot sell the shares during the restriction period.
As of June 30, 1998, approximately 807,000 shares remained available for grant,
of which approximately 72,000 may be granted as restricted shares.
Each option issued under the plans terminates at the time designated by the
Board of Directors, not to exceed 10 years. The exercise price and vesting
schedule for each option is determined by the Company's Stock Option Committee,
based on the fair market value of the Company's stock at the grant date, and is
payable when the option is exercised. Options that terminate under the
provisions of the plan subsequently become available for reissuance.
A summary of the Company's stock option activity, and related information for
the years ended June 30, 1996, 1997, and 1998, follows:
<TABLE>
<CAPTION>
1996 1997 1998
--------------------- ---------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 1,128,744 $ 6.64 1,213,002 $ 9.16 1,618,641 $ 6.06
Granted 625,782 11.80 1,674,024 5.57 1,415,424 8.58
Exercised (421,008) 6.76 (12,053) 7.08 (353,451) 6.31
Canceled (120,516) 7.71 (1,256,332) 8.39 (283,320) 7.82
--------- --------- ---------
Outstanding at end of year 1,213,002 1,618,641 2,397,294
========= ========= =========
Exercisable at end of year 183,773 $ 7.48 289,963 $ 6.98 585,857 $ 6.91
========= ========= =========
Weighted-average fair
value of options granted
during the year $ 8.07 $ 3.84 $ 5.02
========= ========= =========
Weighted-average fair
value of purchase rights
granted during the year $ 5.84 $ 2.45 $ 2.33
========= ========= =========
</TABLE>
39
<PAGE> 42
The following is additional information relating to options outstanding as of
June 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------- ---------------------------------
Weighted Average Weighted Weighted
Exercise Number Remaining Average Number Average
Price Range Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- --------------------------------------------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.01 - $ 5.00 700,992 2.97 $ 4.78 181,552 $ 4.91
$ 5.01 - $ 9.00 694,406 3.40 $ 6.48 229,524 $ 6.47
$ 9.01 - $ 10.00 758,125 4.35 $ 9.13 143,000 $ 9.13
$ 10.01 - $ 16.00 243,771 4.42 $ 11.22 31,781 $ 11.58
</TABLE>
Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation," (SFAS 123) requires the disclosure of pro forma net income and
earnings per share information computed as if the Company had accounted for its
employee stock options granted subsequent to June 30, 1995, under the fair value
method set forth in SFAS 123. The fair 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>
Year Ended June 30,
1998 1997 1996
------------------ ------------------ -------------------
<S> <C> <C> <C>
Expected term:
Stock options 3.6 years 5.0 years 5.0 years
Employee stock purchase plan .95 years .79 years .60 years
Interest rate 5.80% 5.80% 5.50%
Volatility 69.86% 81.13% 81.13%
Dividends 0% 0% 0%
</TABLE>
On May 1, 1997, the Board of Directors approved a plan to reprice the Company's
outstanding stock options. As a result, 627,600 options with exercise prices
ranging from $4.94 to $16.00 per share were repriced at $4.94 per share, the
fair market value at the date of the repricing. These options will vest 25
percent pro rata over the first three years following the date of grant and 75
percent over the first to occur of four years from the date of the grant or 25
percent ratably upon the Company's stock price reaching specified thresholds.
The fair value of these options was estimated at the date of grant using the
factors previously described and has been reflected in the tables above as part
of the options granted and canceled during 1997.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
<TABLE>
<CAPTION>
Year ended June 30,
1998 1997 1996
------------ ----------- ------------
<S> <C> <C> <C>
Pro forma net income (loss) $ (1,199) $ (6,804) $ 863
======== ======== =========
Pro forma basic and diluted income (loss) per share $ (0.11) $ (0.66) $ 0.09
======== ======== =========
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan allows eligible employees to
authorize the Company to withhold from 1 percent to 10 percent of gross
earnings. Shares are purchased by participants at the lower of 85 percent of the
fair market value per share at the beginning or ending of each offering period.
As of June 30, 1998, 1,300,000 shares were authorized for the plan,
approximately 862,000 shares were issued, and approximately $91,000 had been
withheld for the purchase of shares for the November 1998 offering period.
40
<PAGE> 43
10. EMPLOYEE BENEFIT PLAN
The Micrografx, Inc. 401(k) Savings Plan allows eligible employees to elect to
reduce their current compensation by up to 15 percent, subject to certain
maximum dollar limitations prescribed by the Internal Revenue Code ($10,000 in
1998), and have the amount contributed to the plan as salary deferral
contributions. The Company may make employer contributions to the plan at the
discretion of the Board of Directors. During fiscal 1998, 1997 and 1996, the
Company contributed approximately $244,000, $192,000, and $128,000 to the plan,
respectively. At June 30, 1998, there were approximately 167 participants in the
plan.
11. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its office and warehouse space and certain equipment under
non-cancelable operating lease agreements. Rent expense of $1,302,000,
$1,455,000, and $1,348,000, was recorded for the years ended June 30, 1998, 1997
and 1996, respectively. Future minimum lease payments for operating leases are
as follows (in thousands):
<TABLE>
<CAPTION>
Years Ending June 30,
----------------------------------------------------
<S> <C>
1999 1,076
2000 649
2001 421
2002 226
2003 163
Thereafter 22
-------
$ 2,557
=======
</TABLE>
LITIGATION
The Company is party to various legal proceedings arising from the normal course
of business activities, none of which, in management's opinion, is expected to
have a material adverse impact on the Company's results of operations or its
financial position.
12. RESTRUCTURING AND ACQUISITION CHARGES
RESTRUCTURING CHARGES
Effective December 31, 1996, J. Paul Grayson resigned as Chairman of the Board
and Chief Executive Officer of the Company. An evaluation of the Company's
organization and operations resulted in the decision to make certain
organization changes. These changes resulted in a charge of $1.8 million for the
termination of seven members of management. The Company also recorded a $0.2
million charge related to the termination of commitments made by the previous
management for which no future benefit will be received. As of June 30, 1998,
the Company has paid approximately $1.7 million in termination benefits under
this restructuring. Approximately $0.2 million of this charge remains classified
as an accrued liability as of June 30, 1998.
ACQUISITION CHARGES
On April 2, 1996, Micrografx acquired all of the issued and outstanding capital
stock and options of Visual, which was accounted for as a pooling of interests.
As a result of this acquisition, the Company incurred charges for professional
services, the write-offs of costs related to certain software products which
were no longer actively marketed, exit costs, and costs to eliminate excess
personnel and duplicate leases of approximately $3,379,000, of which $1,359,000
was non-cash.
41
<PAGE> 44
The fiscal 1996 charges resulting from the acquisition consisted of the
following (in thousands):
<TABLE>
<S> <C>
Acquisition transaction costs $ 1,115
Asset write-downs:
Inventory and accounts receivable 840
Acquired product rights 158
Fixed assets 241
Severance and other 1,025
-------
Total acquisition charges $ 3,379
=======
</TABLE>
The severance charges resulted from the closing of Visual's general and
administrative support office and the related termination of 21 Visual
employees.
13. SEGMENT INFORMATION
The Company operates in a single industry segment: the development, marketing
and support of personal computer applications and systems software products.
Virtually all products sold in Europe are manufactured in the Netherlands.
Substantially all other products are manufactured in Richardson, Texas. Net
revenues for each segment include only sales to unaffiliated customers; there
were no intra-segment revenues for the periods presented. Income (loss) from
operations represents net revenues less cost of goods sold and operating
expenses for each geographical region. In fiscal 1998, 1997 and 1996, cost of
revenues include direct costs incurred by each segment and an allocation of
amortization of capitalized software development costs and acquired product
rights. The fiscal 1997 in-process research and development charge and the
fiscal 1996 acquisition related charge are reflected in the U.S. Of the fiscal
1997 $2.0 million restructuring charge, approximately $0.9 million is reflected
in the U.S., $0.1 million in Germany, and the remaining $1.0 million in Rest of
World.
Summary information regarding the Company's geographical regions is presented
below (in thousands):
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------------
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
Net revenues
United States $ 40,212 $ 32,071 $ 34,187
Germany 8,196 6,254 11,111
Japan 4,989 8,118 10,010
Rest of World 18,395 18,419 17,611
-------- -------- --------
Total $ 71,792 $ 64,862 $ 72,919
======== ======== ========
Income (loss) from operations
United States $ (1,711) $ (6,560) $ 967
Germany 149 132 133
Japan (221) 346 300
Rest of World 2,156 (2,323) (322)
-------- -------- --------
Total $ 373 $ (8,405) $ 1,078
======== ======== ========
Identifiable assets
United States $ 40,753 $ 29,604 $ 28,990
Germany 519 257 1,005
Japan 1,651 1,907 2,474
Rest of World 12,218 7,344 7,629
-------- -------- --------
Total $ 55,141 $ 39,112 $ 40,098
======== ======== ========
</TABLE>
42
<PAGE> 45
14. SUBSEQUENT EVENT
On August 31, 1998, the Company entered into a lease agreement commencing July
1, 1999, for a new headquarters building in Allen, Texas. The term of the
agreement is ten years with base rent due of approximately $810,000 each year
for the first three years, approximately $900,000 per year for the following
three years, and approximately $990,000 per year for the remainder of the lease.
43
<PAGE> 46
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Micrografx, Inc.
We have audited the accompanying consolidated balance sheets of Micrografx, Inc.
and subsidiaries (the Company) as of June 30, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the years then ended. Our audits also included the financial statement schedule
as of June 30, 1998 and 1997, listed in the Index at Item 14(a). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Micrografx, Inc.
and subsidiaries at June 30, 1998 and 1997, and the consolidated results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Dallas, Texas
August 11, 1998,
except for Note 14, as to which the date is
September 18, 1998
44
<PAGE> 47
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Micrografx, Inc.:
We have audited the accompanying consolidated consolidated statements of
operations, shareholders' equity and cash flows of Micrografx, Inc. (a Texas
corporation) and subsidiaries for the year ended June 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, based on our audit, the financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Micrografx, Inc. and subsidiaries for the year ended June 30, 1996, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Dallas, Texas
August 2, 1996
45
<PAGE> 48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL
DISCLOSURE
The Company had no disagreements on accounting or financial disclosure matters
with its independent public accountants to report under this Item 9.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information contained under the caption "Election of Directors" in the Company's
Proxy Statement is incorporated herein by reference. See Item 1 included herein
for information concerning executive officers.
ITEM 11. EXECUTIVE COMPENSATION
Information contained under the caption "Executive Compensation" in the
Company's Proxy Statement is incorporated herein by reference, except for the
information contained in the sections entitled "Report of the Compensation and
Stock Option Committee on Executive Compensation" and "Stock Performance Graph"
which shall not be deemed incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information contained under the caption "Principal Shareholders and Stock
Ownership of Management" in the Company's Proxy Statement is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The consolidated financial statements included in Item 8,
Financial Statements and Supplementary Data, are set forth in
the Index to Financial Statements and Financial Statement
Schedules listed on page 49 of this report
2. Financial Statement Schedules
The consolidated financial statement schedules are set forth
in the Index to Financial Statements and Financial Statement
Schedules listed on page 49 of this report.
3. Exhibits
The following documents are filed or incorporated by reference
as exhibits to this report. The exhibit numbers in the exhibit
list correspond to the numbers assigned to such exhibits in
the Exhibit Table of Item 601 of Regulations S-K.
** 2.1 Agreement and Plan of Merger with Visual Software, Inc. dated
as of February 27, 1996 (the exhibits and schedules listed
therein have been omitted but will be provided to the
Commission upon request). (Exhibit 2)
* 3.1 Articles of Incorporation of the Company, as amended
(Exhibit 3.1)
46
<PAGE> 49
**** 3.2 Amendment to Articles of Incorporation of the Company
(Exhibit 3.2)
* 3.3 Amended and Restated Bylaws of the Company (Exhibit 3.3)
**** 3.4 Amendment to Amended and Restated Bylaws of the Company
(Exhibit 3.4)
* 4.1 Specimen stock certificate evidencing the Common Stock
(Exhibit 4.1)
* 10.1 Incentive and Nonstatutory Stock Option Plan, as amended
(Exhibit 10.2)
*** 10.2 Amendment to the Incentive and Nonstatutory Stock Option Plan
(Exhibit 10.3)
* 10.4 Form of International Distributor Agreement used by the
Company (Exhibit 10.3)
* 10.5 Cross Licensing Agreement dated December 15, 1989, between the
Company and Microsoft Corporation (Exhibit 10.12)
*** 10.6 Employee Stock Purchase Plan (Exhibit 10.26)
***** 10.7 Agreement dated September 8, 1993, between the Company and
Hallmark Cards, Incorporated. (Exhibit 10.25)
***** 10.8 Micrografx, Inc. 1995 Stock Option Plan. (Exhibit 10.27)
***** 10.9 Micrografx, Inc. 1993 Restricted Stock Plan. (Exhibit 10.28)
****** 10.10 Micrografx, Inc. 1995 Director Stock Option Plan
(Exhibit 10.29)
******* 10.11 Employment agreement dated February 13, 1997, between the
Company and Doug Richard. (Exhibit 10.11)
******* 10.12 Compensation agreement dated May 21, 1997, between the Company
and Russell Hogg. (Exhibit 10.12)
******** 10.13 License Agreement between Micrografx, Inc. and Cendant
Software Corporation (Exhibit 10.1)
******** 10.14 Noncompetition Agreement between Micrografx, Inc. and Cendant
Software Corporation (Exhibit 10.2)
10.15 Revolving credit agreement dated April 1, 1998, between the
Company and BankBoston, N.A.
10.16 Lease agreement dated August 31, 1998, between Prentiss
Properties Acquisition Partners, L.P. and the Company.
*********10.17 Asset Purchase and License Agreement dated September 3, 1998,
between the Company and Learning Company Properties, Inc.
21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP
47
<PAGE> 50
23.2 Consent of Arthur Andersen LLP
27 Financial Data Schedule
* Incorporated by reference to the exhibit shown in parenthesis
filed in the Company's Registration Statement on Form S-1,
file No. 33-34842.
** Incorporated by reference to the exhibit shown in parenthesis
filed in the Company's Current Report on Form 8-K, dated April
2, 1996.
*** Incorporated by reference to the exhibit shown in parenthesis
filed in the Company's Registration Statement on Form S-1,
file No. 33-42195.
**** Incorporated by reference to the exhibit shown in parenthesis
filed in the Company's Annual Report on Form 10-K for the year
ended March 31, 1993.
***** Incorporated by reference to the exhibit shown in parenthesis
filed in the Company's Annual Report on Form 10-K for the year
ended March 31, 1994.
****** Incorporated by reference to the exhibit shown in parenthesis
filed in the Company's Annual Report on Form 10-K for the year
ended June 30, 1995.
******* Incorporated by reference to the exhibit shown in parenthesis
filed in the Company's Annual Report on Form 10-K for the year
ended June 30, 1997.
******** Incorporated by reference to the exhibit shown in parenthesis
files in the Company's Current Report on Form 8-K dated June
30, 1998
********* Portions of this exhibit have been omitted pursuant to a
request for confidential treatment.
(b) Reports on Form 8-K. During the first quarter of 1999, Micrografx, Inc.
filed Current Reports on Form 8-K relating to the following events:
1. June 30, 1998 (date of earliest event reported: June 30, 1998)
Item 2. Acquisition or disposition of assets--reported that
Micrografx, Inc. granted to Cendant Software Corporation
("Cendant") a nonexclusive, irrevocable, perpetual, worldwide
right and license to (a) a series of Personal creativity graphics
technologies, (b) information relating to the customers who have
purchased products based on the aforementioned technologies, (c)
marketing information related to those products, and (d) all
associated intellectual property rights. The Company retains
ownership of all items licensed to Cendant but the Company has
agreed not to compete with Cendant's products other than products
marketed to business users.
48
<PAGE> 51
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
ITEM 14 (a)
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at June 30, 1998, and 1997.............................................27
Consolidated Statements of Operations for the Years Ended June 30, 1998, 1997, and 1996............29
Consolidated Statements of Shareholders' Equity for the Years Ended
June 30, 1998, 1997, and 1996...................................................................30
Consolidated Statements of Cash Flows for the Years Ended June 30, 1998, 1997, and 1996............31
Notes to Consolidated Financial Statements.........................................................32
Reports of Independent Public Accountants..........................................................44
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants...........................................................51
Schedule II - Valuation and Qualifying Accounts....................................................52
All other schedules are omitted as the required information is inapplicable
</TABLE>
49
<PAGE> 52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on September 21, 1998.
MICROGRAFX, INC.
By: /s/ Douglas M. Richard
------------------------------------
Douglas M. Richard
Chief Executive Officer and Interim
Chief Financial Officer
(Principal Executive and Financial
Officer)
By: /s/ Darryl R. Halbert
------------------------------------
Darryl R. Halbert
Vice President, Controller and Chief
Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Russell Hogg Chairman of the Board of Directors September 21, 1998
- ---------------------------------
Russell Hogg
/s/ Douglas M. Richard Director September 21, 1998
- ---------------------------------
Douglas M. Richard
/s/ Eugene P. Beard Director September 21, 1998
- ---------------------------------
Eugene P. Beard
/s/ Robert Kamerschen Director September 21, 1998
- ---------------------------------
Robert Kamerschen
/s/ Seymour Merrin Director September 21, 1998
- ---------------------------------
Seymour Merrin
</TABLE>
50
<PAGE> 53
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited in accordance with generally accepted auditing standards, the
1996 consolidated financial statements of Micrografx, Inc. (a Texas corporation)
and subsidiaries included in this Form 10-K and have issued our report thereon
dated August 2, 1996. Our audit was made for the purpose of forming an opinion
on the basic consolidated financial statements taken as a whole. Schedule II of
the Form 10-K is the responsibility of the Company's management and is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic consolidated financial statements. This schedule
has been subjected to the auditing procedures applied in the audit of the basic
1996 consolidated financial statements and, in our opinion, based on our audit,
fairly states in all material respects, the financial data required to be set
forth therein in relation to the basic 1996 consolidated financial statements
taken as a whole.
/s/ Arthur Andersen LLP
Dallas, Texas
August 2, 1996
51
<PAGE> 54
SCHEDULE II
MICROGRAFX, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Balance At Charged Charged Balance
Beginning To Costs To Other at End
Description of Period and Expenses Accounts (b) Deductions of Period
- --------------------------------------------------------------------------------------------- ----------------
<S> <C> <C> <C> <C> <C>
Years Ended June 30,
1996
- --------------------------
Allowance for doubtful
accounts: $ 411 $ 126 $ -- $ 205 (a) $ 332
Allowance for sales
returns: $ 1,335 $ 600(c) $ 26 $ -- $ 1,961
1997
- --------------------------
Allowance for doubtful
accounts: $ 332 $ 256 $ -- $ 249 (a) $ 339
Allowance for sales
returns: $ 1,961 $ -- $ (9) $ 10 (a) $ 1,942
1998
- --------------------------
Allowance for doubtful
accounts: $ 339 $ 37 $ -- $ 33 (a) $ 343
Allowance for sales
returns: $ 1,942 $ -- $ (578) $ -- $ 1,364
</TABLE>
(a) Represents amounts written-off during the year, net of recoveries.
(b) The allowance for sales returns is recorded as a reduction of revenues.
(c) Represents allowance for Visual sales returns included in the acquisition
charges.
52
<PAGE> 55
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C> <C>
** 2.1 Agreement and Plan of Merger with Visual Software, Inc. dated as of February 27, 1996 (the
exhibits and schedules listed therein have been omitted but will be provided to the Commission
upon request). (Exhibit 2)
* 3.1 Articles of Incorporation of the Company, as amended (Exhibit 3.1)
**** 3.2 Amendment to Articles of Incorporation of the Company (Exhibit 3.2)
* 3.3 Amended and Restated Bylaws of the Company (Exhibit 3.3)
**** 3.4 Amendment to Amended and Restated Bylaws of the Company (Exhibit 3.4)
* 4.1 Specimen stock certificate evidencing the Common Stock (Exhibit 4.1)
* 10.1 Incentive and Nonstatutory Stock Option Plan, as amended (Exhibit 10.2)
*** 10.2 Amendment to the Incentive and Nonstatutory Stock Option Plan (Exhibit 10.3)
* 10.4 Form of International Distributor Agreement used by the Company (Exhibit 10.3)
* 10.5 Cross Licensing Agreement dated December 15, 1989, between the Company and Microsoft
Corporation (Exhibit 10.12)
*** 10.6 Employee Stock Purchase Plan (Exhibit 10.26)
***** 10.7 Agreement dated September 8, 1993, between the Company and Hallmark Cards, Incorporated.
(Exhibit 10.25)
***** 10.8 Micrografx, Inc. 1995 Stock Option Plan. (Exhibit 10.27)
***** 10.9 Micrografx, Inc. 1993 Restricted Stock Plan. (Exhibit 10.28)
****** 10.10 Micrografx, Inc. 1995 Director Stock Option Plan (Exhibit 10.29)
******* 10.11 Employment Agreement dated February 13, 1997, between the Company and Doug Richard. (Exhibit
10.11)
******* 10.12 Compensation agreement dated May 21, 1997, between the Company and Russell Hogg. (Exhibit 10.12)
******** 10.13 License Agreement between Micrografx, Inc. and Cendant Software Corporation (Exhibit 10.1)
******** 10.14 Noncompetition Agreement between Micrografx, Inc. and Cendant Software Corporation (Exhibit
10.2)
10.15 Revolving credit agreement dated April 1, 1998, between the Company and BankBoston, N.A.
</TABLE>
<PAGE> 56
<TABLE>
<S> <C> <C>
10.16 Lease agreement dated August 31, 1998, between Prentiss Properties Acquisition Partners, L.P. and the Company.
*********10.17 Asset Purchase and License Agreement dated September 3, 1998, between the Company and Learning Company
Properties, Inc.
21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP
23.2 Consent of Arthur Andersen LLP
27 Financial Data Schedule
</TABLE>
* Incorporated by reference to the exhibit shown in parenthesis
filed in the Company's Registration Statement on Form S-1,
file No. 33-34842.
** Incorporated by reference to the exhibit shown in parenthesis
filed in the Company's Current Report on Form 8-K, dated April
2, 1996.
*** Incorporated by reference to the exhibit shown in parenthesis
filed in the Company's Registration Statement on Form S-1,
file No. 33-42195.
**** Incorporated by reference to the exhibit shown in parenthesis
filed in the Company's Annual Report on Form 10-K for the year
ended March 31, 1993.
***** Incorporated by reference to the exhibit shown in parenthesis
filed in the Company's Annual Report on Form 10-K for the year
ended March 31, 1994.
****** Incorporated by reference to the exhibit shown in parenthesis
filed in the Company's Annual Report on Form 10-K for the year
ended June 30, 1995.
******* Incorporated by reference to the exhibit shown in parenthesis
filed in the Company's Annual Report on Form 10-K for the year
ended June 30, 1997.
******** Incorporated by reference to the exhibit shown in parenthesis
files in the Company's Current Report on Form 8-K dated June
30, 1998
********* Portions of this exhibit have been omitted pursuant to a
request for confidential treatment.
<PAGE> 1
EXHIBIT 10.15
MICROGRAFX, INC.
REVOLVING CREDIT AGREEMENT
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
1. DEFINITIONS: ..........................................................1
2. REVOLVING CREDIT FACILITY...............................................8
2.1. Commitment to Lend...........................................8
2.2. Requests for Loans...........................................8
2.3. Conversion Options...........................................9
2.3.1. Conversion to Different Loan Type.................9
2.3.2. Continuation of Loan Type.........................10
2.3.3. LIBOR Rate Loans..................................10
2.4. Interest.....................................................10
2.5. Repayments and Prepayments...................................10
3. LETTER OF CREDIT FACILITY...............................................11
3.1. Letter of Credit Commitment..................................11
3.2. Reimbursement Obligation of the Borrower.....................12
3.3. Letter of Credit Payments....................................12
3.4. Obligations Absolute.........................................12
3.5. Reliance by Issuer...........................................13
3.6. Letter of Credit Fees........................................13
4. CHANGES IN CIRCUMSTANCES, ETC...........................................13
4.1. Inability to Determine LIBOR Rate............................13
4.2. Illegality...................................................14
4.3. Change in Circumstances......................................14
4.4. Certificate..................................................14
4.5. Indemnity....................................................15
5. FEES AND PAYMENTS.......................................................15
6. REPRESENTATIONS AND WARRANTIES..........................................15
7. CONDITIONS PRECEDENT....................................................17
8. COVENANTS...............................................................18
8.1. Affirmative Covenants........................................18
8.2. Negative Covenants...........................................20
8.3. Financial Covenants..........................................21
9. EVENTS OF DEFAULT; ACCELERATION.........................................21
10. SETOFF.................................................................23
11. MISCELLANEOUS..........................................................24
</TABLE>
<PAGE> 2
REVOLVING CREDIT AGREEMENT
This REVOLVING CREDIT AGREEMENT (this "Agreement") is made as of April
1, 1998, by and between MICROGRAFX, INC. (the "Borrower"), a Texas corporation
having its principal place of business at 1303 East Arapaho Road, Richardson,
Texas 75081, and BANKBOSTON, N.A. (the "Bank"), a national banking association
with its head office at 100 Federal Street, Boston, Massachusetts 02110.
1. DEFINITIONS:
Certain capitalized terms are defined below:
Accounts: All rights of the Borrower or any of its Subsidiaries to any
payment of money for goods sold, leased or otherwise marketed in the ordinary
course of business, whether evidenced by or under or in respect of a contract or
instrument, and to all proceeds in respect thereof.
Agreement: See preamble, which term shall include this Agreement and
the Schedules hereto, all as amended and in effect from time to time.
Bank: See preamble.
Base Accounts: Those Accounts (net of any finance charges, late
charges, credits, commissions, contras or other offsets or counterclaims) (a)
which the Borrower reasonably determines to be collectible, (b) the account
debtors in respect of which are deemed creditworthy by the Bank, are solvent,
are not affiliated with the Borrower, and purchased the goods or services at
arms' length, (c) which are not outstanding for more than thirty (30) days past
the date on which such Accounts are due, (d) that are not due from an account
debtor located in Minnesota unless the Borrower (i) has received a certificate
of authority to do business and is in good standing in such state or (ii) has
filed a notice of business activities report with the appropriate office or
agency of such state for the current year, (e) (i) in which the Bank has a valid
and perfected first-priority security interest, and (ii) over which there is no
other Lien, (f) which are in payment of fully performed and undisputed
obligations, and (g) which are payable in U.S. currency from an office within
the United States. The requirements of clauses (e)(i) and (g) shall not be
required to be met for Accounts that are with account debtors of the Borrower or
any Subsidiary which are located in Japan, Australia, the United Kingdom,
Germany, France, Denmark, Italy and the Netherlands or any other country or
location acceptable to the Bank so long as the Bank in its sole and reasonable
discretion determines such account debtors are creditworthy and such Accounts
should be included as Base Accounts.
Base Rate: The higher of (a) the annual rate of interest announced from
time to time by the Bank at its head office as the Bank's "base rate" and (b)
one-half of one percent (1/2%) above the Federal Funds Effective Rate.
Base Rate Margin: With respect to any Base Rate Loan, three fourths of
one percent (3/4%) per annum.
Borrower: See preamble.
Borrowing Base: An amount equal to sixty-five percent (65%) of the Base
Accounts.
Borrowing Base Report: A report, in form and with supporting details
satisfactory to the Bank, setting forth the Borrower's computation of the
Borrowing Base.
Business Day: Any day on which banks in Boston, Massachusetts, are open
for business generally and, in the case of LIBOR Rate Loans, also a day which is
a LIBOR Business Day.
Capitalized Leases: Leases under which the Borrower or any of its
Subsidiaries is the Lessee or obligor, the discounted, future rental payment
obligations under which are required to be capitalized on the consolidated
balance sheet of the Borrower and its Subsidiaries in accordance with GAAP.
Charter Documents: In respect of any entity, the certificate or
articles of incorporation or organization and the by-laws of such entity, or
other constitutive documents of such entity.
Closing Date: The first date on which the conditions set forth in
Section 7 have been satisfied and any Loans are to be made or any Letter of
Credit is to be issued hereunder.
Collateral: All of the property, rights and assets of the Borrower and
Domestic its Subsidiaries that are or are intended to be subject to the security
interest created by the Security Documents.
Commitment: The obligation of the Bank to make Loans to, and to issue,
extend and renew Letters of Credit for the account of, the Borrower up to an
aggregate outstanding principal amount not to exceed $5,000,000, as such amount
may be reduced from time to time or terminated hereunder.
<PAGE> 3
Consent: In respect of any person or entity, any permit, license or
exemption from, approval, consent of, registration or filing with any local,
state or federal governmental or regulatory agency or authority, required under
applicable law.
Consolidated Current Liabilities: All liabilities of the Borrower
payable on demand or maturing within one (1) year from the date as of which
current liabilities are to be determined, and such other liabilities that in
accordance with GAAP are properly classified as current liabilities; provided,
however, Consolidated Current Liabilities shall exclude deferred revenues of the
Borrower and its Subsidiaries.
Consolidated Net Income: The consolidated net income (or deficit) of
the Borrower and its Subsidiaries, after deduction of all expenses, taxes and
other proper chargers, determined in accordance with GAAP, after eliminating
therefrom all extraordinary nonrecurring items of income.
Consolidated Quick Assets: All cash, investments made in items set
forth in Section 8.2(c)(i) and (ii) hereof, and Accounts of the Borrower and its
Subsidiaries on a consolidated basis.
Consolidated Tangible Net Worth: The excess of (a) all assets of the
Borrower and its Subsidiaries on a consolidated basis determined in accordance
with GAAP, over (b) all liabilities of the Borrower and its Subsidiaries on a
consolidated basis determined in accordance with GAAP, minus (c) the sum of (i)
the book value all intangibles determined in accordance with GAAP, including
good will and intellectual property, and (ii) any write-up in the book value of
assets since the most recent audited Financials in existence on the date hereof.
Consolidated Total Liabilities: All liabilities of the Borrower and its
Subsidiaries on a consolidated basis that in accordance with GAAP are properly
classified as liabilities; provided, however, Consolidated Total Liabilities
shall exclude deferred revenues of the Borrower and its Subsidiaries.
Conversion Request: A notice given by the Borrower to the Bank of the
Borrower's election to convert or continue a Loan in accordance with Section 2.3
hereof.
Copyright Mortgages: The several Copyright Mortgage and Security
Agreements, dated after the Closing Date, made by the Borrower and its Domestic
Subsidiaries pursuant to Section 8.1(h) in favor of the Bank and in form and
substance satisfactory to the Bank.
Default: An event or act which with the giving of notice and/or the
lapse of time, would become an Event of Default.
Domestic Lending Office: Initially the office of the Bank designated as
such by notice to the Borrower; thereafter, such other office of the Bank, if
any, located within the United States that will be making or maintaining Base
Rate Loans.
Domestic Subsidiaries: Any Subsidiary which is not a Foreign
Subsidiary.
Drawdown Date: In respect of any Loan, the date on which such Loan is
made to the Borrower.
Environmental Laws: All laws pertaining to environmental matters,
including without limitation, the Resource Conservation and Recovery Act, the
Comprehensive Environmental Response Compensation and Liability Act of 1980, the
Superfund Amendments and Reauthorization Act of 1986, the Federal Clean Water
Act, the Federal Clean Air Act, the Toxic Substances Control Act, in each case
as amended, and all rules, regulations, judgments, decrees, orders and licenses
arising under all such laws.
ERISA: The Employee Retirement Income Security Act of 1974, as amended,
and all rules, regulations, judgments, decrees, and orders arising thereunder.
Eurocurrency Reserve Rate: For any day with respect to a LIBOR Rate
Loan, the maximum rate (expressed as a decimal) at which any lender subject
thereto would be required to maintain reserves under Regulation D of the Board
of Governors of the Federal Reserve System (or any successor or similar
regulations relating to such reserve requirements) against "Eurocurrency
Liabilities" (as that term is used in Regulation D), if such liabilities were
outstanding. The Eurocurrency Reserve Rate shall be adjusted automatically on
and as of the effective date of any change in the Eurocurrency Reserve Rate.
Event of Default: Any of the events listed in Section 8 hereof.
Federal Funds Effective Rate: For any day, the rate per annum equal to
the weighted average of the rates on overnight federal funds transactions with
members of the Federal Reserve System arranged by federal funds brokers, as
published for such day (or, if such day is not a Business Day, for the next
preceding Business Day) by the Federal Reserve Bank of New York, or, if such
rate is not so published for any day that is a Business Day, the average of the
quotations for such day on such transactions received by the Bank from three
funds brokers of recognized standing selected by the Bank.
<PAGE> 4
Financials: In respect of any period, the consolidated balance sheet of
the Borrower and its Subsidiaries as at the end of such period, and the related
statement of income and consolidated statement of cash flow for such period,
each setting forth in comparative form the figures for the previous comparable
fiscal period, all in reasonable detail and prepared in accordance with GAAP.
Foreign Subsidiary: Any Subsidiary which conducts substantially all of
its business in countries other than the United States of America and that is
organized under the laws of a jurisdiction other than the United States of
America and the States (or the District of Columbia) thereof.
GAAP: Generally accepted accounting principles consistent with those
adopted by the Financial Accounting Standards Board and its predecessor, (a)
generally, as in effect from time to time, and (b) for purposes of determining
compliance by the Borrower with its financial covenants set forth herein, as in
effect for the fiscal year therein reported in the most recent Financials
submitted to the Bank prior to execution of this Agreement.
Guarantors: Each Domestic Subsidiary of the Borrower, whether now
existing or hereafter created or acquired.
Guaranty: The Guaranty, dated or to be dated on or prior to the Closing
Date, made by each of the Guarantors in favor of the Bank pursuant to which each
Guarantor guaranties to the Bank the payment and performance of the Obligations
and in form and substance satisfactory to the Bank.
Indebtedness: In respect of any entity, all obligations, contingent and
otherwise, that in accordance with GAAP should be classified as liabilities,
including without limitation (a) all debt obligations, (b) all liabilities
secured by Liens, (c) all guarantees and (d) all liabilities in respect of
bankers' acceptances or letters of credit.
Interest Payment Date: (a) As to any Base Rate Loan, the last day of
the calendar month which includes the Drawdown Date thereof; and (b) as to any
LIBOR Rate Loan in respect of which the Interest Period is 90 days or less, the
last day of such Interest Period.
Interest Period: With respect to each Loan, (a) initially, the period
commencing on the Drawdown Date of such Loan and ending on the last day of one
of the periods set forth below, as selected by the Borrower in a Loan Request
(i) for any Base Rate Loan, the last day of the calendar month; and (ii) for any
LIBOR Rate Loan, 30, 60 or 90 days; and (b) thereafter, each period commencing
on the last day of the immediately preceding Interest Period applicable to such
Loan and ending on the last day of one of the periods set forth above, as
selected by the Borrower in a Conversion Request; provided that all of the
foregoing provisions relating to Interest Periods are subject to the following:
(a) if any Interest Period with respect to a LIBOR Rate Loan
would otherwise end on a day that is not a LIBOR Business Day, that
Interest Period shall be extended to the next succeeding LIBOR Business
Day unless the result of such extension would be to carry such Interest
Period into another calendar month, in which event such Interest Period
shall end on the immediately preceding LIBOR Business Day;
(b) if the Borrower shall fail to give notice as provided in
Section 2.3, as the case may be, the Borrower shall be deemed to have
requested a conversion of the affected LIBOR Rate Loan to a Base Rate
Loan and the continuance of all Base Rate Loans as Base Rate Loans on
the last day of the then current Interest Period with respect thereto;
(c) any Interest Period that begins on the last LIBOR Business
Day of a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest
Period) shall end on the last LIBOR Business Day of a calendar month;
and
(d) any Interest Period relating to any LIBOR Rate Loan that
would otherwise extend beyond the Maturity Date shall end on the
Maturity Date.
Letter of Credit: See Section 3.1(a).
Letter of Credit Application: See Section 3.1(a).
Letter of Credit Fee: See Section 3.6.
LIBOR Business Day: Any day on which commercial banks are open for
international business (including dealings in U.S. dollar deposits) in London.
LIBOR Lending Office: Initially, the office of the Bank designated as
such by notice to the Borrower; thereafter, such other office of the Bank, if
any, that shall be making or maintaining LIBOR Rate Loans.
<PAGE> 5
LIBOR Rate: For any Interest Period with respect to a LIBOR Rate Loan,
the rate of interest equal to (a) the rate determined by the Bank at which U.S.
dollar deposits for such Interest Period are offered based on information
presented on Telerate Page 3750 as of 11:00 a.m. London time on the second LIBOR
Business Day prior to the first day of such Interest Period, divided by (b) a
number equal to 1.00 minus the Eurocurrency Reserve Rate, if applicable.
LIBOR Rate Loans: Loans bearing interest calculated by reference to the
LIBOR Rate.
LIBOR Rate Margin: With respect to any LIBOR Rate Loan, two and three
quarters percent (2 3/4%) per annum.
Liens: Any encumbrance, mortgage, pledge, hypothecation, charge,
restriction or other security interest of any kind securing any obligation of
any entity or person.
Loan: Any loan made or to be made to the Borrower pursuant to Section 2
hereof.
Loan Documents: This Agreement, the Note, the Letter of Credit
Applications and the Security Documents, in each case as from time to time
amended or supplemented.
Loan Request: See Section 2.1.
Materially Adverse Effect: Any materially adverse effect on the
financial condition or business operations of the Borrower or the Borrower and
its Subsidiaries, taken as a whole, or material impairment of the ability of the
Borrower or any of its Subsidiaries to perform its obligations hereunder or
under any of the other Loan Documents.
Maturity Date: March 30, 1999 or such earlier date on which all Loans
may become due and payable pursuant to the terms hereof.
Maximum Drawing Amount: The maximum aggregate amount from time to time
that beneficiaries may draw under outstanding Letters of Credit, as such
aggregate amount may be reduced from time to time pursuant to the terms of the
Letters of Credit.
Note. See Section 2.1.
Obligations: All indebtedness, obligations and liabilities of the
Borrower and its Subsidiaries to the Bank, existing on the date of this
Agreement or arising thereafter, direct or indirect, joint or several, absolute
or contingent, matured or unmatured, liquidated or unliquidated, secured or
unsecured, arising by contract, operation of law or otherwise, arising or
incurred under this Agreement or any other Loan Document or in respect of any of
the Loans or Letters of Credit or the Note or other instruments at any time
evidencing any thereof.
Patent Assignments: The several Patent Assignments, dated after the
Closing Date, made by the Borrower and its Domestic Subsidiaries pursuant to
Section 8.1(h) in favor of the Bank and in form and substance satisfactory to
the Bank.
Reimbursement Obligation: The Borrower's obligation to reimburse the
Bank on account of any drawing under any Letter of Credit as provided in Section
3.2.
Requirement of Law: In respect of any person or entity, any law,
treaty, rule, regulation or determination of an arbitrator, court, or other
governmental authority, in each case applicable to or binding upon such person
or entity or affecting any of its property.
Security Agreements: The several Security Agreements, dated or to be
dated on or prior to the Closing Date, between the Borrower and its Domestic
Subsidiaries and the Bank and in form and substance satisfactory to the Bank.
Security Documents: The Security Agreements, the Guaranty, the
Trademark Assignments, the Patent Assignments, the Copyright Mortgages, the
Stock Pledge Agreements and all other instruments and documents, including
without limitation Uniform Commercial Code financing statements, required to be
executed or delivered pursuant to any Security Document.
Stock Pledge Agreements: The several Stock Pledge Agreements, dated or
to be dated on or prior to the Closing Date, between the Borrower and the
applicable Subsidiaries and the Bank and in form and substance satisfactory to
the Bank.
Subsidiary: In respect of the Borrower, any business entity of which
the Borrower at any time owns or controls directly or indirectly more than fifty
percent (50%) of the outstanding shares of stock having voting power, regardless
of whether such right to vote depends upon the occurrence of a contingency.
<PAGE> 6
Total Outstandings: At any time of reference thereto, the sum of (a)
Loans outstanding at such time, (b) the Maximum Drawing Amount at such time and
(c) any Unpaid Reimbursement Obligations at such time.
Trademark Assignments: The several Trademark Assignments, dated after
the Closing Date, made by the Borrower and its Domestic Subsidiaries pursuant to
Section 8.1(h) in favor of the Bank and in form and substance satisfactory to
the Bank.
Uniform Customs: With respect to any Letter of Credit, the Uniform
Customs and Practice for Documentary Credits (1993 Revision), International
Chamber of Commerce Publication No. 500 or any successor version thereto adopted
by the Bank in the ordinary course of its business as a letter of credit issuer
and in effect at the time of issuance of such Letter of Credit.
Unpaid Reimbursement Obligation: Any Reimbursement Obligation for which
the Borrower does not reimburse the Bank on the date specified in, and in
accordance with, Section 3.2(a).
2. REVOLVING CREDIT FACILITY.
2.1. COMMITMENT TO LEND. Upon the terms and subject to the conditions of this
Agreement, the Bank agrees to lend to the Borrower such sums that the Borrower
may request, from the date hereof until but not including the Maturity Date,
provided that the sum of the outstanding principal amount of all Loans (after
giving effect to all amounts requested) shall not exceed the lesser of (a) the
Commitment minus the sum of the Maximum Drawing Amount and all Unpaid
Reimbursement Obligations and (b) the Borrowing Base. Loans shall be in the
minimum aggregate amount of $500,000 or an integral multiple of $100,000 in
excess thereof.
2.2. REQUESTS FOR LOANS.
(a) The Borrower shall give to the Bank written notice in form
and substance satisfactory to the Bank (or telephonic notice confirmed
in writing in form and substance satisfactory to the Bank) of each Loan
requested hereunder (a "Loan Request") (i) no later than 10:00 a.m.,
Boston time, on the proposed Drawdown Date of any Base Rate Loan and
(ii) no less than three (3) LIBOR Business Days prior to the proposed
Drawdown Date of any LIBOR Rate Loan. Each such notice shall specify
(A) the principal amount of the Loan requested, (B) the proposed
Drawdown Date of such Loan, (C) the Interest Period for such Loan and
(D) whether such Loan shall be a Base Rate Loan or a LIBOR Rate Loan.
Each such notice shall be irrevocable and binding on the Borrower and
shall obligate the Borrower to accept the Loan requested from the Bank
on the proposed Drawdown Date. Each Request shall be in a minimum
aggregate amount of $500,000 or an integral multiple of $100,000 in
excess thereof.
(b) Notwithstanding the notice requirements set forth in
Section 2.2(a), Loans may be made from time to time in the following
manner: the Bank may make Loans to the Borrower by entry of credits to
the Borrower's controlled disbursement account (the "Disbursement
Account") with the Bank to cover checks or other charges which the
Borrower has drawn or made against such Disbursement Account. The
Borrower hereby requests and authorizes the Bank to make from time to
time such Loans by means of appropriate entries of such credits
sufficient to cover checks and other charges then presented. The
Borrower and the Bank may also agree to effect such other controlled
disbursement arrangements as may be mutually satisfactory. The Borrower
acknowledges and agrees that the making of such Loans in accordance
with this Section 2.2(b) shall, in each case, be subject in all
respects to provisions of this Agreement as if they were Loans covered
by a Loan Request including, without limitation, the limitations set
forth in Section 2.1 and the requirement that the applicable provisions
of Section 7 be satisfied. All actions taken by the Bank pursuant to
the provisions of this Section 2.2(b) shall be conclusive and binding
on the Borrower.
(c) Notwithstanding the notice requirement set forth above in
Section 2.2(a), the Bank agrees to make Loans to the Borrower
sufficient to pay to the Bank any Unpaid Reimbursement Obligations on
the date on which such Reimbursement Obligations become Unpaid
Reimbursement Obligations. The Borrower hereby requests and authorizes
the Bank to make from time to time such Loans by means of paying Unpaid
Reimbursement Obligations. The Borrower acknowledges and agrees that
the making of such Loans shall, in each case, be subject in all
respects to the provisions of this Agreement, including, without
limitation, the limitations set forth in Section 2.1 and the
requirements of the applicable conditions in Section 7. All actions
taken by the Bank pursuant to the provisions of this Section 2.2(c)
shall be conclusive and binding on the Borrower.
(d) The obligation of the Borrower to repay to the Bank the
principal of the Loans and interest accrued thereon shall be evidenced
by a promissory note (the "Note") in the maximum aggregate principal
amount of $5,000,000 executed and delivered by the Borrower and payable
to the order of the Bank, in form and substance satisfactory to the
Bank.
<PAGE> 7
2.3. CONVERSION OPTIONS.
2.3.1. CONVERSION TO DIFFERENT LOAN TYPE. The Borrower may elect from time
to time to convert any outstanding Loan from a Base Rate Loan to a
LIBOR Rate Loan or from a LIBOR Rate Loan to a Base Rate Loan, provided
that (a) with respect to any such conversion of a LIBOR Rate Loan to a
Base Rate Loan, the Borrower shall give the Bank at least three (3)
Business Days prior written notice of such election; (b) with respect
to any such conversion of a LIBOR Rate Loan into a Base Rate Loan, such
conversion shall only be made on the last day of the Interest Period
with respect thereto; (c) with respect to any such conversion of a Base
Rate Loan to a LIBOR Rate Loan, the Borrower shall give the Bank at
least three (3) LIBOR Business Days prior written notice of such
election and (d) no Loan may be converted into a LIBOR Rate Loan when
any Default or Event of Default has occurred and is continuing. On the
date on which such conversion is being made the Bank shall take such
action as is necessary to transfer such Loans to its Domestic Lending
Office or its LIBOR Lending Office, as the case may be. All or any part
of outstanding Loans may be converted as provided herein, provided that
partial conversions shall be in an aggregate principal amount of
$500,000 or a whole multiple of $100,000 in excess thereof. Each
Conversion Request relating to the conversion of a Loan to a LIBOR Rate
Loan shall be irrevocable by the Borrower.
2.3.2. CONTINUATION OF LOAN TYPE. Any Base Rate Loan or LIBOR Rate Loan may
be continued as such upon the expiration of an Interest Period with
respect thereto by compliance by the Borrower with the notice
provisions contained in Section 2.3.1; provided that no LIBOR Rate Loan
may be continued as such when any Default or Event of Default has
occurred and is continuing, but shall be automatically converted to a
Base Rate Loan on the last day of the first Interest Period relating
thereto ending during the continuance of any Default or Event of
Default of which the officers of the Bank active upon the Borrower's
account have actual knowledge. In the event that the Borrower fails to
provide any such notice with respect to the continuation of any LIBOR
Rate Loan as such, then such LIBOR Rate Loan shall be automatically
converted to a Base Rate Loan on the last day of the first Interest
Period relating thereto.
2.3.3. LIBOR RATE LOANS. Any conversion to or from LIBOR Rate Loans shall
be in such amounts and be made pursuant to such elections so that,
after giving effect thereto, (a) the aggregate principal amount of all
LIBOR Rate Loans having the same Interest Period shall not be less than
$500,000 or a whole multiple of $100,000 in excess thereof, and (b)
there shall not be more than six (6) outstanding Loans which are LIBOR
Rate Loans at any time.
2.4. INTEREST. So long as no Event of Default is continuing, (a) each Base Rate
Loan shall bear interest for the period commencing with the Drawdown Date
thereof and ending on the last day of the Interest Period with respect thereto
at a rate per annum equal to the sum of (i) the Base Rate, and (ii) the Base
Rate Margin, and (b) each LIBOR Rate Loan shall bear interest for the period
commencing with the Drawdown Date thereof and ending on the last day of the
Interest Period with respect thereto at a rate per annum equal to the sum of (i)
the LIBOR Rate, and (ii) the LIBOR Rate Margin. While an Event of Default is
continuing, amounts payable under any of the Loan Documents shall bear interest
(compounded monthly and payable on demand in respect of overdue amounts) at a
rate per annum which is equal to the sum of (a) the Base Rate, and (b) three
percent (3%) until such amount is paid in full or (as the case may be) such
Event of Default has been cured or waived in writing by the Bank (and such
amounts shall bear interest at the rate specified herein both prior to any
bankruptcy judgment as well as after any such judgment).
2.5. REPAYMENTS AND PREPAYMENTS. The Borrower hereby agrees to pay the Bank on
the Maturity Date the entire unpaid principal of and interest on all Loans. The
Borrower may elect to prepay the outstanding principal of all or any part of any
Loan, without premium or penalty, provided that the full or partial prepayment
of the outstanding amount of any LIBOR Rate Loans pursuant to this Section 2.5
may be made only on the last day of the Interest Period relating thereto. The
Borrower shall give the Bank no later than 10:00 a.m. Boston time, at least
three (3) LIBOR Business Days prior telephonic notice (confirmed in writing), of
any proposed prepayment pursuant to this Section 2.5 of any LIBOR Rate Loan; and
on the date of such prepayment pursuant to this Section 2.5 of any Base Rate
Loan, in each case specifying the proposed date of such prepayment and the
amount to be prepaid. The Borrower shall be entitled to reborrow before the
Maturity Date such amounts, upon the terms and subject to the conditions of this
Agreement. Each repayment or prepayment of principal of any Loan shall be
accompanied by payment of the unpaid interest accrued to such date on the
principal being repaid or prepaid. If at any time the Total Outstandings shall
exceed the lesser of (a) the Commitment and (b) the Borrowing Base, the Borrower
shall immediately pay the amount of such excess to the Bank for application to
the Loans or, if no Loans are outstanding, to be held by the Bank as cash
collateral to secure the payment of all Reimbursement Obligations up to the
Maximum Drawing Amount. The Borrower may elect to reduce or terminate the
Commitment by a minimum principal amount of $100,000 or an integral multiple
thereof, upon written notice to the Bank given by 10:00 a.m. Boston time at
least two (2) Business Days prior to the date of such reduction or termination.
The Borrower shall not be entitled to reinstate the Commitment following such
reduction or termination.
3. LETTER OF CREDIT FACILITY.
3.1. LETTER OF CREDIT COMMITMENT.
(a) Subject to the terms and conditions hereof and the
execution and delivery by the Borrower of a letter of credit
application on the Bank's customary form (a "Letter of Credit
Application"), the Bank, in reliance upon the representations and
warranties of the Borrower
<PAGE> 8
contained herein, agrees to issue, extend and renew from time to time
from the date hereof until but not including the date which is fourteen
(14) days prior to the then scheduled Maturity Date, for the account of
the Borrower, standby and documentary letters of credit (each a "Letter
of Credit"), in such form as may be requested by the Borrower and
agreed to by the Bank; provided, however, that, after giving effect to
such request, (i) the sum of the aggregate Maximum Drawing Amount and
all Unpaid Reimbursement Obligations shall not exceed $1,000,000 at any
one time, and (ii) the sum of the principal amount of Total
Outstandings shall not exceed the lesser of (A) the Commitment and (B)
the Borrowing Base. No Letter of Credit shall be issued, extended or
renewed with an expiration date occurring after the then scheduled
Maturity Date;
(b) Each Letter of Credit Application shall be completed to
the satisfaction of the Bank. In the event that any provision of any
Letter of Credit Application shall be inconsistent with any provision
of this Agreement, then the provisions of this Agreement shall, to the
extent of any such inconsistency, govern;
(c) Each Letter of Credit issued, extended or renewed
hereunder shall, among other things, provide for the payment of sight
drafts for honor thereunder when presented in accordance with the terms
thereof and when accompanied by the documents described therein. Each
Letter of Credit so issued, extended or renewed shall be subject to the
Uniform Customs.
3.2. REIMBURSEMENT OBLIGATION OF THE BORROWER. In order to induce the Bank to
issue, extend and renew each Letter of Credit, the Borrower hereby agrees to
reimburse the Bank for or to pay to the Bank with respect to each Letter of
Credit issued, extended or renewed by the Bank hereunder,
(a) except as otherwise expressly provided in Section 3.2(b),
on each date that any draft presented under such Letter of Credit is
honored by the Bank, or the Bank otherwise makes a payment with respect
thereto, (i) the amount paid by the Bank under or with respect to such
Letter of Credit, and (ii) the amount of any taxes, fees, charges or
other costs and expenses whatsoever incurred by the Bank in connection
with any payment made by the Bank under, or with respect to, such
Letter of Credit;
(b) upon the termination of the Commitment, or the
acceleration of the Reimbursement Obligations with respect to all
Letters of Credit in accordance with Section 8 an amount equal to the
Maximum Drawing Amount, which amount shall be held by the Bank as cash
collateral for all Reimbursement Obligations.
Unless funded by a Loan pursuant to Section 2.1(c)(i), each such
payment shall be made to the Bank at the Bank's head office at 100 Federal
Street, Boston, Massachusetts 02110 in immediately available funds. Interest on
any and all amounts remaining unpaid by the Borrower under this Section 3.2 and
not required to be funded by a Loan pursuant to Section 2.1(c)(i) at any time
from the date such amounts become due and payable (whether as stated in this
Section 3.2, by acceleration or otherwise) until payment in full (and such
amounts shall bear interest at the rate specified herein both prior to any
bankruptcy judgment as well as after any such judgment) shall be payable to the
Bank on demand at the rate specified in Section 2.4.
3.3. LETTER OF CREDIT PAYMENTS. If any draft shall be presented or other demand
for payment shall be made under any Letter of Credit, the Bank shall notify the
Borrower of the date and amount of the draft presented or demand for payment and
of the date and time when it expects to pay such draft or honor such demand for
payment. The responsibility of the Bank to the Borrower shall be only to
determine that the documents (including each draft) delivered under each Letter
of Credit in connection with such presentment shall be in conformity in all
material respects with such Letter of Credit.
3.4. OBLIGATIONS ABSOLUTE. The Borrower's obligations under this Section 3 shall
be absolute and unconditional under any and all circumstances and irrespective
of the occurrence of any Default or Event of Default or any condition precedent
whatsoever or any setoff, counterclaim or defense to payment which the Borrower
may have or have had against the Bank or any beneficiary of a Letter of Credit.
The Borrower further agrees with the Bank that the Bank shall not be responsible
for, and the Reimbursement Obligations shall not be affected by, among other
things, the validity or genuineness of documents or of any endorsements thereon,
even if such documents should in fact prove to be in any or all respects
invalid, fraudulent or forged, or any dispute between or among the Borrower, the
beneficiary of any Letter of Credit or any financing institution or other party
to which any Letter of Credit may be transferred or any claims or defenses
whatsoever of the Borrower against the beneficiary of any Letter of Credit or
any such transferee. The Bank shall not be liable for any error, omission,
interruption or delay in transmission, dispatch or delivery of any message or
advice, however transmitted, in connection with any Letter of Credit unless
caused by the Bank's gross negligence or willful misconduct. The Borrower agrees
that any action taken or omitted by the Bank under or in connection with each
letter of Credit and the related drafts and documents, if done in good faith,
shall be binding upon the Borrower and shall not result in any liability on the
part of the Bank to the Borrower.
3.5. RELIANCE BY ISSUER. To the extent not inconsistent with Section 3.4, the
Bank shall be entitled to rely, and shall be fully protected in relying upon,
any Letter of Credit, draft, writing, resolution, notice, consent, certificate,
affidavit, letter, cablegram, telegram, telecopy, telex or teletype message,
statement, order or other document believed by it to be genuine and correct and
to have been signed, sent or made by the proper
<PAGE> 9
person or entity and upon advice and statements of legal counsel, independent
accountants and other experts selected by the Bank.
3.6. LETTER OF CREDIT FEES. The Borrower shall, on the date of issuance or of
any extension or renewal of any Letter of Credit and at such other time or times
as such charges are customarily made by the Bank, pay a fee (in each case a
"Letter of Credit Fee") to the Bank (a) in respect of each Standby Letter of
Credit an amount equal to two percent (2%) per annum of the face amount of such
Letter of Credit, plus the Bank's customary issuance, amendment and other
administrative processing fees and (b) in respect of each documentary Letter of
Credit an amount equal to one-half of one percent (1/2%) per annum of the face
amount of such documentary Letter of Credit, plus the Bank's customary issuance,
amendment, time negotiation fee and other administrative processing fees.
4. CHANGES IN CIRCUMSTANCES, ETC.
4.1. INABILITY TO DETERMINE LIBOR RATE. In the event, prior to the commencement
of any Interest Period relating to any LIBOR Rate Loan, the Bank shall determine
that adequate and reasonable methods do not exist for ascertaining the LIBOR
Rate that would otherwise determine the rate of interest to be applicable to any
LIBOR Rate Loan during any Interest Period, the Bank shall forthwith give notice
of such determination (which shall be conclusive and binding on the Borrower) to
the Borrower. In such event (a) any Loan Request or Conversion Request with
respect to any LIBOR Rate Loan shall be automatically withdrawn and shall be
deemed a request for a Base Rate Loan, (b) each LIBOR Rate Loan will
automatically, on the last day of the then current Interest Period thereof,
become a Base Rate Loan, and (c) the obligation of the Bank to make LIBOR Rate
Loans shall be suspended until the Bank determines that the circumstances giving
rise to such suspension no longer exist, whereupon the Bank shall so notify the
Borrower.
4.2. ILLEGALITY. Notwithstanding any other provisions herein, if any present or
future law, regulation, treaty or directive or in the interpretation or
application thereof shall make it unlawful for the Bank to make or maintain
LIBOR Rate Loans, the Bank shall forthwith give notice of such circumstances to
the Borrower and thereupon (a) the commitment of the Bank to make LIBOR Rate
Loans or convert Base Rate Loans to LIBOR Rate Loans shall forthwith be
suspended and (b) the Loans then outstanding as LIBOR Rate Loans, if any, shall
be converted automatically to Base Rate Loans on the last day of each Interest
Period applicable to such LIBOR Rate Loans or within such earlier period as may
be required by law. The Borrower hereby agrees promptly to pay the Bank, upon
demand by the Bank, any additional amounts necessary to compensate the Bank for
any costs incurred by the Bank in making any conversion in accordance with this
Section 4.2, including any interest or fees payable by the Bank to lenders of
funds obtained by it in order to make or maintain its LIBOR Rate Loans
hereunder.
4.3. CHANGE IN CIRCUMSTANCES. If, on or after the date hereof the Bank
determines that (a) the adoption of, or any change in, any applicable law, rule,
regulation or guideline or the interpretation or administration thereof (whether
or not having the force of law), or (b) compliance by the Bank or its parent
holding company with any guideline, request or directive (whether or not having
the force of law), (i) has the effect of reducing the return on the Bank's or
such holding company's capital as a consequence of the Commitment, the Loans or
any Letters of Credit to a level below that which the Bank or such holding
company could have achieved but for such adoption, change or compliance by any
amount deemed by the Bank to be material, or (ii) shall subject the Bank to any
tax, duty or other charge with respect to any LIBOR Rate Loan or any Note, or
shall change the basis of taxation of payments to the Bank of the principal of
or interest on, LIBOR Rate Loans or in respect of any other amounts due under
this Agreement in respect of LIBOR Rate Loans (other than with respect to taxes
based upon the Bank's net income), or (iii) shall impose, modify or deem
applicable any reserve, special deposit or similar requirement (including,
without limitation, any imposed by the Board of Governors of the Federal Reserve
System, but excluding with respect to any LIBOR Rate Loan any such requirement
included in an applicable Eurocurrency Reserve Rate) against assets of, deposits
with or for the account of, or credit extended by, the Bank, or shall impose on
the Bank or the London interbank market any other condition affecting LIBOR Rate
Loans or the Notes, and the result of any of the foregoing is to increase the
cost to the Bank of making or maintaining any LIBOR Rate Loan, or to reduce the
amount of any sum received or receivable by the Bank under this Agreement or
under any Note with respect to any Loan or any Letter of Credit, by an amount
reasonably deemed by the Bank to be material, then, upon demand by the Bank, the
Borrower agrees to pay to the Bank such additional amount or amounts as will
compensate the Bank for such increased cost or reduction.
4.4. CERTIFICATE. A certificate setting forth any additional amounts payable
pursuant to Section 4.3 and a brief explanation of such amounts which are due,
submitted by the Bank to the Borrower, shall be conclusive, absent manifest
error, that such amounts are due and owing.
4.5. INDEMNITY. The Borrower agrees to indemnify and hold the Bank harmless from
and against any loss, cost or expense (including loss of anticipated profits)
the Bank may sustain as a consequence of the Borrower's failure to pay the
principal amount of any LIBOR Rate Loan as and when due or the payment of any
LIBOR Rate Loan on a date that is not the last day of the Interest Period
applicable thereto, including interest or fees payable by the Bank to lenders of
funds obtained by it in order to maintain any such Loans.
<PAGE> 10
5. FEES AND PAYMENTS.
Contemporaneously with execution and delivery of this Agreement, the
Borrower shall pay to the Bank a closing fee in the amount of $37,500. The
Borrower shall pay to the Bank, on the first day of each calendar quarter
hereafter, and upon the Maturity Date or the date upon which the Commitment is
no longer in effect, a commitment fee calculated at a rate per annum which is
equal to (a) until the earlier to occur of (i) the first Drawdown Date
hereunder; and (ii) the Maximum Drawing Amount on all issued and outstanding
Letters of Credit exceeds $1,000,000 in the aggregate, one quarter of one
percent (1/4%) of the average daily difference by which the Commitment amount
exceeds the aggregate sum of the outstanding Loans, the Maximum Drawing Amount
and all Unpaid Reimbursement Obligations during the preceding calendar quarter
or portion thereof; and (b) thereafter, three-eighths of one percent (3/8%) of
the average daily difference by which the Commitment amount exceeds the
aggregate sum of the outstanding Loans, the Maximum Drawing Amount and all
Unpaid Reimbursement Obligations during the preceding calendar quarter or
portion thereof. All payments to be made by the Borrower hereunder or under any
of the other Loan Documents shall be made in U.S. dollars in immediately
available funds at the Bank's head office at 100 Federal Street, Boston,
Massachusetts 02110, without set-off or counterclaim and without any withholding
or deduction whatsoever. The Bank shall be entitled to charge any account of the
Borrower with the Bank for any sum due and payable by the Borrower to the Bank
hereunder or under any of the other Loan Documents. If any payment hereunder is
required to be made on a day which is not a Business Day, it shall be paid on
the immediately succeeding Business Day, with interest and any applicable fees
adjusted accordingly. All computations of interest or of the commitment fee or
any Letter of Credit Fees payable hereunder shall be made by the Bank on the
basis of actual days elapsed and on a 360-day year.
6. REPRESENTATIONS AND WARRANTIES.
The Borrower represents and warrants to the Bank on the date hereof, on
the date of any Loan Request, on the date of each request for a Letter of
Credit, on each Drawdown Date and on the date on which each Letter of Credit is
issued, extended or renewed that:
(a) the Borrower and each of its Subsidiaries is duly
organized, validly existing, and in good standing under the laws of its
jurisdiction of incorporation and is duly qualified and in good
standing in every other jurisdiction where it is doing business, and
the execution, delivery and performance by the Borrower and each of its
Subsidiaries of the Loan Documents to which it is a party (i) are
within its corporate authority, (ii) have been duly authorized, (iii)
do not conflict with or contravene its Charter Documents;
(b) upon execution and delivery thereof, each Loan Document
shall constitute the legal, valid and binding obligation of the
Borrower and its Subsidiaries party thereto, enforceable in accordance
with its terms;
(c) the Borrower and each of its Subsidiaries has good and
marketable title to all its material properties, subject only to Liens
permitted hereunder, and possesses all assets, including intellectual
properties, franchises and Consents, adequate for the conduct of its
business as now conducted, without known conflict with any rights of
others. The Borrower maintains insurance with financially responsible
insurers, copies of the policies for which have been previously
delivered to the Bank, covering such risks and in such amounts and with
such deductibles as are customary in the Borrower's business and are
adequate;
(d) the Borrower has provided to the Bank its audited
Financials as at June 30, 1997 and for the fiscal period then ended,
and such Financials are complete and correct and fairly present the
position of the Borrower and its Subsidiaries as at such date and for
such period in accordance with GAAP consistently applied. The Borrower
has also provided to the Bank its forecast of the operations of the
Borrower and its Subsidiaries for the period from July 1, 1997 through
June 30, 1998, and such forecast has been prepared in good faith based
upon reasonable assumptions;
(e) since June 30, 1997, there has been no materially adverse
change of any kind in the Borrower or any of its Subsidiaries which
would have a Materially Adverse Effect;
(f) there are no legal or other proceedings or investigations
pending or threatened against the Borrower or any of its Subsidiaries
before any court, tribunal or regulatory authority which would, if
adversely determined, alone or together, have a Materially Adverse
Effect;
(g) the execution, delivery, performance of its obligations,
and exercise of its rights under the Loan Documents by the Borrower and
each of its Subsidiaries, including, in the case of the Borrower,
borrowing under this Agreement and the obtaining of Letters of Credit
(i) do not require any Consents; and (ii) are not and will not be in
conflict with or prohibited or prevented by (A) any Requirement of Law,
or (B) any Charter Document, corporate minute or resolution,
instrument, agreement or provision thereof, in each case binding on it
or affecting its property;
(h) neither the Borrower nor any Subsidiary is in violation of
(i) any Charter Document, corporate minute or resolution, (ii) any
instrument or agreement, in each case binding on it or
<PAGE> 11
affecting its property, or (iii) any Requirement of Law, in a manner
which could have a Materially Adverse Effect, including, without
limitation, all applicable federal and state tax laws, ERISA and
Environmental Laws;
(i) upon execution and delivery of the Security Documents and
the filing of documents thereby required, the Bank shall have
first-priority perfected Liens on the Collateral, subject only to Liens
permitted hereunder and entitled to priority under applicable law, with
no financing statements, chattel mortgages, real estate mortgages or
similar filings on record anywhere which conflict with such
first-priority Liens of the Bank;
(j) each Subsidiary of the Borrower and each Subsidiary of any
other Subsidiary is set forth on Schedule 6(j) attached hereto; and
(k) neither the Borrower nor any Subsidiary is a party to any
partnership or transaction in which the Borrower or such Subsidiary
owns 50% or less of the capital stock of any entity.
7. CONDITIONS PRECEDENT.
In addition to the making of the foregoing representations and
warranties and the delivery of the Loan Documents and such other documents and
the taking of such actions as the Bank may require at or prior to the time of
executing this Agreement, the obligation of the Bank to make any Loan or to
issue, renew or extend any Letter of Credit to the Borrower hereunder is subject
to the satisfaction of the following further conditions precedent:
(a) each of the representations and warranties of the Borrower
and each of its Subsidiaries to the Bank herein, in any of the other
Loan Documents or any documents, certificate or other paper or notice
in connection herewith shall be true and correct in all material
respects as of the time made or claimed to have been made;
(b) no Default or Event of Default shall be continuing;
(c) all proceedings in connection with the transactions
contemplated hereby shall be in form and substance satisfactory to the
Bank, and the Bank shall have received all information and documents as
it may have reasonably requested;
(d) no change shall have occurred in any law or regulation or
in the interpretation thereof that in the reasonable opinion of the
Bank would make it unlawful for the Bank to make such Loan or issue,
renew or extend any Letter of Credit; and
(e) the Borrower shall have delivered to the Bank (i)
certified copies of the Charter Documents for itself and each of its
Subsidiaries; (ii) evidence that all corporate action necessary for the
valid execution, delivery and performance by the Borrower and its
Subsidiaries of the Loan Documents to which each is a party has been
duly and effectively taken; (iii) an incumbency certificate signed by a
duly authorized officer of each of the Borrower and each Subsidiary
party to the Loan Documents, and giving the name and bearing the
specimen signature of each individual who shall be authorized to sign,
in the name and on behalf of the Borrower and each Subsidiary, each of
the Loan Documents and to take action on the Borrower's and such
Subsidiary's behalf under the Loan Documents, and, in the case of the
Borrower, to make loan requests, requests for Letters of Credit,
conversion requests and give notices provided for in this Agreement;
and (iv) a favorable legal opinion addressed to the Bank in form and
substance satisfactory to the Bank from counsel to the Borrower and its
Subsidiaries.
8. COVENANTS.
8.1. AFFIRMATIVE COVENANTS. The Borrower agrees that so long as there are any
Loans or Letters of Credit outstanding and until the termination of the
Commitment and the payment and satisfaction in full of all the Obligations, the
Borrower will, and where applicable will cause each of its Subsidiaries to,
comply with its obligations as set forth throughout this Agreement and to:
(a) furnish the Bank: (i) as soon as available but in any
event within ninety (90) days after the close of each fiscal year, its
audited Financials for such fiscal year, certified by the Borrower's
accountants, which must be acceptable to the Bank; (ii) as soon as
available but in any event within forty-five (45) days after the end of
each fiscal quarter its unaudited Financials for such quarter,
certified by its chief financial officer; (iii) together with the
quarterly and annual audited Financials, a certificate of the Borrower
setting forth computations demonstrating compliance with the Borrower's
financial covenants set forth herein, and certifying that no Default or
Event of Default has occurred, or if it has, the actions taken by the
Borrower with respect thereto; and (iv) to the extent the Borrower has
any Loans or Letters of Credit outstanding, within fifteen (15) days
after the end of each calendar month, (and in any event on any Drawdown
Date of any Loan or request
<PAGE> 12
for the issuance, extension or renewal of any Letter of Credit) or at
such other time or times as the Bank may request, a Borrowing Base
report, in form and detail satisfactory to the Bank, demonstrating the
Borrowing Base as at the end of such month or other applicable date
requested;
(b) keep true and accurate books of account in accordance with
GAAP, maintain its current fiscal year and permit the Bank or its
designated representatives to inspect the Borrower's or any
Subsidiary's premises during normal business hours, to examine and be
advised as to such or other business records upon the reasonable
request of the Bank, and to permit the Bank's commercial finance
examiners to conduct periodic commercial finance examinations;
(c) (i) maintain its corporate existence, business and assets,
(ii) keep its business and assets adequately insured, (iii) maintain
its chief executive office in the United States, (iv) continue to
engage in the same lines of business, and (v) comply with all
Requirements of Law, including ERISA and Environmental Laws;
(d) notify the Bank promptly in writing of (i) the occurrence
of any Default or Event of Default, (ii) any noncompliance with ERISA
or any Environmental Law or proceeding in respect thereof which could
have a Materially Adverse Effect, (iii) any change of address, (iv) any
threatened or pending litigation or similar proceeding materially
affecting the Borrower or any such Subsidiary or any material change in
any such litigation or proceeding previously reported and (v) claims
against any assets or properties of the Borrower or such Subsidiary
encumbered in favor of the Bank;
(e) use the proceeds of the Loans solely to finance general
corporate and for working capital purposes, and use Letters of Credit
solely for other working capital purposes approved by the Bank for
Letters of Credit, and not for the carrying of "margin security" or
"margin stock" within the meaning of Regulations U and X of the Board
of Governors of the Federal Reserve System, 12 C.F.R. Parts 221 and
224;
(f) cooperate with the Bank, take such action, execute such
documents, and provide such information as the Bank may from time to
time request in order further to effect the transactions contemplated
by and the purposes of the Loan Documents, including without
limitation, the delivery at the Borrower's expense of additional
security or appraisals;
(g) simultaneously with the formation or acquisition of any
Subsidiary, (i) notify the Bank of such formation or acquisition, as
the case may be; (ii) cause such Subsidiary to execute and deliver to
the Bank a guaranty of the Obligations hereunder, which guaranty shall
be in form and substance satisfactory to the Bank; (iii) cause such
Subsidiary to execute and deliver to the Bank all relevant Security
Documents which the Bank may request to secure such Subsidiary's
obligations under its guaranty as well as the Obligations hereunder;
and (iv) execute and deliver to the Bank an updated schedule to the
Stock Pledge Agreement and deliver to the Bank the stock certificates
representing the shares of capital stock of such Subsidiary owned by
the Borrower (together with stock powers duly executed in blank); and
(h) upon the occurrence of a default or Event of Default
hereunder, execute and deliver to the Bank (and cause each of its
Domestic Subsidiaries to execute and deliver to the Bank) a Copyright
Mortgage, Trademark Assignment and Patent Assignment in form and
substance satisfactory to the Bank.
8.2. NEGATIVE COVENANTS. The Borrower agrees that so long as there are any Loans
or Letters of Credit outstanding and until the termination of the Commitment and
the payment and satisfaction in full of all the Obligations, the Borrower will
not and where applicable will not permit its Subsidiaries to:
(a) create, incur or assume any Indebtedness other than (i)
Indebtedness to the Bank, (ii) Indebtedness in respect of the
acquisition of property which does not exceed $1,000,000 in the
aggregate, (iii) current liabilities of the Borrower or any Subsidiary
not incurred through the borrowing of money or the obtaining of credit
except credit on an open account customarily extended, (iv)
Indebtedness in respect of taxes or other governmental charges
contested in good faith and by appropriate proceedings and for which
adequate reserves have been taken; (v) Indebtedness of the Borrower to
any Guarantor, or Indebtedness of any Guarantor to the Borrower so long
as such Persons remain Subsidiaries of the Borrower and a Guarantor
hereunder; and (vi) Indebtedness not included above and listed on
Schedule 8.2(a) hereto;
(b) create or incur any Liens on any of the property or assets
of the Borrower except (i) Liens securing the Obligations; (ii) Liens
securing taxes or other governmental charges not yet due; (iii)
deposits or pledges made in connection with social security
obligations; (iv) Liens of carriers, warehousemen, mechanics and
materialmen, less than 120 days old as to obligations not yet due; (v)
easements, rights-of-way, zoning restrictions and similar minor Liens
which individually and in the aggregate do not have a Materially
Adverse Effect; (vi) purchase money security interests in or
<PAGE> 13
purchase money mortgages on real or personal property securing purchase
money Indebtedness permitted by Section 8.2(a)(ii), covering only the
property so acquired; and (vii) other Liens existing on the date hereof
and listed on Schedule 8.2(b) hereto;
(c) make any investments other than investments (i) in
marketable obligations of the United States maturing within one (1)
year; (ii) in certificates of deposit, bankers' acceptances and time
and demand deposits of United States banks having total assets in
excess of $1,000,000,000; (iii) in money market funds investing
primarily in the items described in this Section 8.2(c)(i) and (ii);
(iv) consisting of the Guaranty or investments by the Borrower in any
Guarantor or investments by any Guarantor in the Borrower; or (v) in
such other investments as the Bank may from time to time approve in
writing; provided, however, that in each such case referred to in this
Section 8.2(c), arrangements have been made to the satisfaction of the
Bank for the perfection and protection and the preservation of the
Bank's Lien therein;
(d) make any distributions on or in respect of its capital of
any nature whatsoever, other than dividends payable solely in shares of
common stock or distributions by Subsidiaries to the Borrower; or
(e) become party to a merger or sale-leaseback transaction, or
to effect any disposition of assets other than in the ordinary course,
or to purchase, lease or otherwise acquire assets other than in the
ordinary course.
8.3. FINANCIAL COVENANTS. The Borrower agrees that so long as there are any
Loans or Letters of Credit outstanding and until the termination of the
Commitment and the payment and satisfaction in full of all the Obligations, the
Borrower will not and where applicable will not permit its Subsidiaries to:
(a) make capital expenditures which in the aggregate exceed
$2,500,000 per annum;
(b) permit Consolidated Net Income to be less than (i)
($100,000) at the end of each fiscal quarter; (ii) $400,000 for the two
consecutive fiscal quarters (treated as a single accounting period)
ending March 31, 1998; (iii) $300,000 for the two consecutive fiscal
quarters (treated as a single accounting period) ending June 30, 1998;
and (iv) $400,000 for any two consecutive quarters (treated as a single
accounting period) commencing with the fiscal quarter ending September
30, 1998;
(c) permit the ratio of Consolidated Quick Assets to
Consolidated Current Liabilities to be less than 1.50:1.00 at any time;
(d) permit the ratio of Consolidated Total Liabilities to
Consolidated Tangible Net Worth to exceed 1.25:1.00 at the end of any
fiscal quarter; or
(e) permit the aggregate amount of its cash on deposit in a
cash account or readily marketable securities in a securities account
(as each are reflected on the Borrower's balance sheet) at any time to
be less than $9,500,000; provided, however, at such times as the
Borrower has demonstrated to the satisfaction of the Bank that
Consolidated Net Income for any fiscal quarter (commencing with the
fiscal quarter ending March 31, 1998) is greater than $1.00, such
amount shall be permitted to be reduced to $9,000,000, and, provided,
further, at such time as the Borrower has demonstrated to the
satisfaction of the Bank that Consolidated Net Income for the most
recent period of two consecutive fiscal quarters is greater than $1.00
(commencing with the fiscal quarter ending June 30, 1998), such amount
shall be permitted to be reduced to $0.
9. EVENTS OF DEFAULT; ACCELERATION.
If any of the following events ("Events of Default") shall occur:
(a) the Borrower shall fail to pay when due and payable any
principal of the Loans when the same becomes due;
(b) the Borrower shall fail to pay interest on the Loans, any
Reimbursement Obligations not funded by a Loan pursuant to Section
2.1(c), or any other sum due under any of the Loan Documents within two
(2) Business Days after the date on which the same shall have first
become due and payable;
(c) the Borrower shall fail to perform any term, covenant or
agreement contained in Sections 8.1(a), 8.1(d) through (f), 8.2 and
8.3;
(d) the Borrower or any Subsidiary shall fail to perform any
other term, covenant or agreement contained in the Loan Documents
within fifteen (15) days after the Bank has given written notice of
such failure to the Borrower;
<PAGE> 14
(e) any representation or warranty of the Borrower or any of
its Subsidiaries in the Loan Documents or in any certificate or notice
given in connection therewith shall have been false or misleading in
any material respect at the time made or deemed to have been made;
(f) the Borrower or any of its Subsidiaries shall be in
default (after any applicable period of grace or cure period) under any
agreement or agreements evidencing Indebtedness owing to the Bank or
any affiliates of the Bank or in excess of $500,000 in aggregate
principal amount, or shall fail to pay such Indebtedness when due, or
within any applicable period of grace;
(g) any of the Loan Documents shall cease to be in full force
and effect,
(h) the Borrower or any of its Subsidiaries (i) shall make an
assignment for the benefit of creditors, (ii) shall be adjudicated
bankrupt or insolvent, (iii) shall seek the appointment of, or be the
subject of an order appointing, a trustee, liquidator or receiver as to
all or part of its assets, (iv) shall commence, approve or consent to,
any case or proceeding under any bankruptcy, reorganization or similar
law and, in the case of an involuntary case or proceeding, such case or
proceeding is not dismissed within forty-five (45) days following the
commencement thereof, or (v) shall be the subject of an order for
relief in an involuntary case under federal bankruptcy law;
(i) the Borrower or any of its Subsidiaries shall be unable to
pay its debts as they mature;
(j) there shall remain undischarged for more than thirty (30)
days any final judgment or execution action against the Borrower or any
of its Subsidiaries that, together with other outstanding claims and
execution actions against the Borrower and its Subsidiaries exceeds
$500,000 in the aggregate;
(k) unless otherwise agreed to in writing by the Bank, the
Borrower shall cease to own legally or beneficially 100% of the capital
stock of any of the Subsidiaries; or
(l) any person or group of persons (within the meaning of
Section 13 or 14 of the Securities Exchange Act of 1934, as amended)
shall have acquired beneficial ownership (within the meaning of Rule
13d-3 promulgated by the Securities and Exchange Commission under said
Act) of forty percent (40%) or more of the outstanding shares of common
stock of the Borrower; or, during any period of twelve consecutive
calendar months, individuals who were directors of the Borrower on the
first day of such period shall cease to constitute a majority of the
directors of the Borrower;
THEN, or at any time thereafter:
(1) In the case of any Event of Default under clause (h) or
(i), the Commitment shall automatically terminate and the Bank shall be
relieved of all further obligations to make Loans or to issue, renew or
extend any Letters of Credit, and the entire unpaid principal amount of
the Loans, all interest accrued and unpaid thereon, all Unpaid
Reimbursement Obligations, and all other amounts payable thereunder and
under the other Loan Documents shall automatically become forthwith due
and payable, without presentment, demand, protest or notice of any
kind, all of which are hereby expressly waived by the Borrower, and the
Bank may require that cash be delivered to the Bank in the amount of
the Maximum Drawing Amount to be held by the Bank as cash collateral
for all Reimbursement Obligations; and
(2) In the case of any Event of Default other than (h) and
(i), the Bank may, by written notice to the Borrower, terminate the
Commitment and/or declare the unpaid principal amount of the Loans, all
interest accrued and unpaid thereon, all Unpaid Reimbursement
Obligations, and all other amounts payable hereunder and under the
other Loan Documents to be forthwith due and payable, without
presentment, demand, protest or further notice of any kind, all of
which are hereby expressly waived by the Borrower, and the Bank may
require that cash be delivered to the Bank in the amount of the Maximum
Drawing Amount to be held by the Bank as cash collateral for all
Reimbursement Obligations.
No remedy herein conferred upon the Bank is intended to be exclusive of
any other remedy and each and every remedy shall be cumulative and in addition
to every other remedy hereunder, now or hereafter existing at law or in equity
or otherwise.
10. SETOFF.
Regardless of the adequacy of any collateral for the Obligations, any
deposits or other sums credited by or due from the Bank to the Borrower may be
applied to or set off against any principal, interest and any other amounts due
from the Borrower to the Bank at any time without notice to the Borrower, or
compliance with any other procedure imposed by statute or otherwise, all of
which are hereby expressly waived by the Borrower.
<PAGE> 15
11. MISCELLANEOUS.
The Borrower agrees to indemnify and hold harmless the Bank and its
officers, employees, affiliates, agents, and controlling persons from and
against all claims, damages, liabilities and losses of every kind arising out of
the Loan Documents, including without limitation, against those in respect of
the application of Environmental Laws to the Borrower absent the gross
negligence or willful misconduct of the Bank. The Borrower shall pay to the Bank
promptly on demand all costs and expenses (including any taxes and reasonable
legal and other professional fees and fees of its commercial finance examiner)
incurred by the Bank in connection with the preparation, negotiation, execution,
amendment, administration or enforcement of any of the Loan Documents. Any
communication to be made hereunder shall (a) be made in writing, but unless
otherwise stated, may be made by telex, facsimile transmission or letter, and
(b) be made or delivered to the address of the party receiving notice which is
identified with its signature below (unless such party has by five (5) days
written notice specified another address), and shall be deemed made or
delivered, when dispatched, left at that address, or five (5) days after being
mailed, postage prepaid, to such address. This Agreement shall be binding upon
and inure to the benefit of each party hereto and its successors and assigns,
but the Borrower may not assign its rights or obligations hereunder. This
Agreement may not be amended or waived except by a written instrument signed by
the Borrower and the Bank, and any such amendment or waiver shall be effective
only for the specific purpose given. No failure or delay by either party hereto
to exercise any right hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise of any right, power or privilege preclude any other
right, power or privilege. The provisions of this Agreement are severable and if
any one provision hereof shall be held invalid or unenforceable in whole or in
part in any jurisdiction, such invalidity or unenforceability shall affect only
such provision in such jurisdiction. This Agreement, together with all Schedules
hereto, expresses the entire understanding of the parties with respect to the
transactions contemplated hereby. This Agreement and any amendment hereby may be
executed in several counterparts, each of which shall be an original, and all of
which shall constitute one agreement. In proving this Agreement, it shall not be
necessary to produce more than one such counterpart executed by the party to be
charged. THIS AGREEMENT AND THE NOTE ARE CONTRACTS UNDER THE LAWS OF THE
COMMONWEALTH OF MASSACHUSETTS AND SHALL BE CONSTRUED IN ACCORDANCE THEREWITH AND
GOVERNED THEREBY. THE BORROWER AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF ANY
OF THE LOAN DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE COMMONWEALTH OF
MASSACHUSETTS OR ANY FEDERAL COURT SITTING THEREIN.
12. INTEREST LIMITATION.
It is the intention of the parties hereto that the Bank shall conform
strictly to usury laws applicable to it. Accordingly, if the transactions
contemplated hereby would be usurious as to the Bank under laws applicable to it
(including the laws of the United States of America or any other jurisdictions
whose laws may be mandatorily applicable to the Bank notwithstanding the other
provision of the Notes), then, in that event, notwithstanding anything to the
contrary in the Note, the Loan Documents, the Agreement or any other agreements
entered into in connection with or as security the Notes, it is agreed as
follows: (a) the aggregate of all consideration which constitutes interest under
laws applicable to the Bank that is contracted for, taken, reserved, charged or
received by the Bank under the Notes, the Loan Documents, the Agreement or any
other agreements entered into in connection with or as security for the Note or
otherwise in connection with the Note shall under no circumstances exceed the
maximum amount allowed by such applicable law, and any excess shall be cancelled
automatically and if theretofore paid shall be credited by the Bank on the
principal amount of the Indebtedness (or, to the extent that the principal
amount of the Indebtedness shall have been or would thereby be paid in full,
refunded by the Bank to the Borrower); and (b) in the event that the maturity of
the Note is accelerated by reason of an election of the holder thereof resulting
from any Event of Default under the Note, or in the event of any required or
permitted prepayment, then such consideration that constitutes interest under
law applicable to the Bank may never include more than the maximum amount
allowed by such applicable law, and excess interest, if any, provided for in the
Note or otherwise shall be cancelled automatically by the Bank as of the date of
such acceleration or prepayment and, if therefore paid, shall be credited by the
Bank on the principal amount of the Indebtedness (or, to the extent that the
principal amount of the Indebtedness shall have been or would thereby be paid in
full, refunded by the Bank to the Borrower). All sums paid or agreed to be paid
to the Bank for the use, forbearance or detention of sums due hereunder shall,
to the extent permitted by laws applicable to the Bank, be amortized, prorated,
allocated and spread through the term of the Loans evidenced by the Note until
payment in full so that the rate or amount of interest on account of any Loans
does not exceed the maximum amount allowed by such applicable law. If at any
time and from time to time (a) the amount of interest payable to the Bank on any
date shall be computed at the highest lawful rate applicable to the Bank
pursuant to this paragraph and (b) in respect of any subsequent interest
computation period the amount of interest otherwise payable to the Bank would be
less than the amount of interest payable to the Bank computed at the highest
lawful rate applicable to the Bank, then the amount of interest payable to the
Bank in respect of such subsequent interest computation period shall continue to
be computed at the highest lawful rate applicable to the Bank until the total
amount of interest payable to the Bank shall equal the total amount of interest
which would have been payable to the Bank if the total amount of interest had
been computed without giving effect to this paragraph.
<PAGE> 16
To the extent that Article 5069-1.04 of the Texas Revised Civil
Statutes is relevant to the Bank for the purpose of determining the highest
lawful rate, the Bank hereby elects to determine the applicable rate ceiling
under such Article by the indicated (weekly) rate ceiling from time to time in
effect.
<PAGE> 17
IN WITNESS WHEREOF, the undersigned have duly executed this Revolving
Credit Agreement as a sealed instrument as of the date first above written.
MICROGRAFX, INC.
By: /s/ Larry G. Morris
------------------------------------
Name:
Title:
Address:
1303 East Arapaho Road
Richardson, Texas 75081
Tel: (972) 234-1769
---------------------------------
Fax:
---------------------------------
BANKBOSTON, N.A.
By: /s/ Jay L. Massimo
------------------------------------
Name: Jay L. Massimo
Title: Vice President
Address:
100 Federal Street, 01-08-06
Boston, Massachusetts 02110
Tel: (617)434-7824
Fax: (617)434-0819
<PAGE> 18
Schedule 6(j) - Subsidiaries
Micrografx France
Micrografx Japan
Micrografx BV
Mircrografx Italy
Micrografx Deutschland GmbH
Micrografx Ltd.
<PAGE> 19
Schedule 8.2(a) - Indebtedness
None.
<PAGE> 20
Schedule 8.2(b) - Liens
None.
<PAGE> 1
EXHIBIT 10.16
========================================
LEASE AGREEMENT
BETWEEN
Prentiss Properties Acquisition Partners, L.P.
(Landlord)
AND
Micrografx, Inc.
a Texas corporation
(Tenant)
Millennium Drive and Century Parkway
Allen, Texas
Dated: August 31, 1998
========================================
<PAGE> 2
TABLE OF CONTENTS - LEASE AGREEMENT
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ARTICLE 1 BASIC LEASE INFORMATION AND CERTAIN DEFINITIONS...............1
ARTICLE 2 PREMISES AND QUIET ENJOYMENT..................................2
ARTICLE 3 TERM; COMMENCEMENT DATE; DELIVERY AND
ACCEPTANCE OF PREMISES........................................2
ARTICLE 4 RENT..........................................................4
ARTICLE 5 OPERATING COSTS...............................................4
ARTICLE 6 PARKING.......................................................6
ARTICLE 7 SERVICES OF LANDLORD..........................................7
ARTICLE 8 ASSIGNMENT AND SUBLETTING.....................................8
ARTICLE 9 REPAIRS.......................................................9
ARTICLE 10 ALTERATIONS...................................................10
ARTICLE 11 LIENS.........................................................11
ARTICLE 12 USE AND COMPLIANCE WITH LAWS..................................11
ARTICLE 13 DEFAULT AND REMEDIES..........................................12
ARTICLE 14 INSURANCE.....................................................13
ARTICLE 15 DAMAGE BY FIRE OR OTHER CAUSE.................................14
ARTICLE 16 CONDEMNATION..................................................14
ARTICLE 17 INDEMNIFICATION...............................................15
ARTICLE 18 SUBORDINATION AND ESTOPPEL CERTIFICATES.......................15
ARTICLE 19 SURRENDER OF THE PREMISES.....................................16
ARTICLE 20 LANDLORD'S RIGHT TO INSPECT...................................17
ARTICLE 21 SECURITY DEPOSIT..............................................17
ARTICLE 22 BROKERAGE.....................................................17
ARTICLE 23 OBSERVANCE OF RULES AND REGULATIONS...........................17
ARTICLE 24 NOTICES.......................................................17
ARTICLE 25 MISCELLANEOUS.................................................18
ARTICLE 26 OTHER DEFINITIONS.............................................20
</TABLE>
I
<PAGE> 3
EXHIBITS AND RIDERS
The following Exhibits and Riders are attached hereto and by this
reference made a part of this Lease:
EXHIBIT A - FLOOR PLAN OF THE PREMISES
EXHIBIT B - THE LAND
EXHIBIT C - LEASEHOLD IMPROVEMENTS
EXHIBIT D - FORM OF COMMENCEMENT NOTICE
RIDER NO. 1 - RULES AND REGULATIONS
RIDER NO. 2 - EXTENSION OPTIONS
RIDER NO. 3 - ARBITRATION
RIDER NO. 4 - RIGHT OF FIRST OFFER
RIDER NO. 5 - EXPANSION AREA
II
<PAGE> 4
INDEX OF DEFINED TERMS
Definitions of certain terms used in this Lease are found in the
following sections:
<TABLE>
<CAPTION>
TERM LOCATION OF DEFINITION
<S> <C>
Additional Rent Section 1.01M
Bankruptcy Code Section 8.06
Base Building Condition Exhibit C
Base Rent Section 1.01L
Basic Lease Information and Certain Definitions Article 1
Branch Exhibit C
Broker Section 1.01Q
Building Section 1.01B
Building Standard Exhibit C
Business Days Article 27
Central Exhibit C
Commencement Date Section 1.01F
Common Areas Article 27
days Article 27
Events of Default Section 13.01
Expiration Date Section 1.01G
herein, hereof, hereby, hereunder and words
of similar import Article 27
include and including Article 27
Interest Rate Section 4.02
Land Section 1.01C
Landlord Preamble
Landlord's Address for Notice Section 1.01R
Landlord's Address for Payment Section 1.01S
Landlord's Operating Costs Estimate Section 5.01
Landlord's Work Exhibit C
Leasehold Improvements Exhibit C
Net Rentable Area Article 27
Net Rentable Area of the Building Section 1.01J
Net Rentable Area of the Premises Section 1.01I
Non-Building Standard Exhibit C
Parking Facilities Section 1.01D
Parking Permits Section 1.01N
Permit Fees Section 1.01N
Project Section 1.01E
Premises Section 1.01A
Reference to Landlord as having "no liability
to Tenant" or being "without liability to
Tenant" or words of like import Article 27
Rent Section 1.01K
repair Article 27
Security Deposit Section 1.01P
Successor Landlord Section 18.02
Taxes Section 5.02
Tenant Preamble & Article 27
Tenant Delay Exhibit C
Tenant's Address for Notice Section 1.01T
Tenant's Allowance Exhibit C
Tenant's Permitted Uses Section 1.01O
Tenant's Property Section 14.01A(a)
Tenant's Work Exhibit C
Term Section 1.01H
termination of this Lease and words of like import Article 27
terms of this Lease Article 27
this Lease Preamble
Usable Area of Premises Exhibit C
year Article 27
</TABLE>
i
<PAGE> 5
LEASE AGREEMENT
THIS LEASE AGREEMENT ("this Lease") is made and entered into by and between
Prentiss Properties Acquisition Partners, L.P., an Delaware limited
partnership ("Landlord") and Micrografx, Inc., a Texas corporation ("Tenant"),
upon all the terms set forth in this Lease and in all Exhibits and Riders
hereto, to each and all of which terms Landlord and Tenant hereby mutually
agree, and in consideration of One Dollar ($1.00) and other valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, and
of the rents, agreements and benefits flowing between the parties hereto, as
follows:
ARTICLE 1
BASIC LEASE INFORMATION AND CERTAIN DEFINITIONS
Section 1.01. Each reference in this Lease to information and definitions
contained in the Basic Lease Information and Certain Definitions and each use of
the terms capitalized and defined in this Section 1.01 shall be deemed to refer
to, and shall have the respective meaning set forth in, this Section 1.01.
A. Premises: The entire Building, as said space is
identified by diagonal lines on the floor
plans attached hereto as Exhibit A.
B. Building: The building owned by Landlord on that
portion of the Land generally located at
Millennium Parkway and Century Parkway,
Allen, Texas. Landlord and Tenant
acknowledge and agree that the Premises
consists of the entirety of the Building
and accordingly, for purposes hereof, the
terms "Premises" and "Building" are used
interchangeably.
C. Land: That certain parcel of land described
under the caption "Land" in Exhibit B
hereof.
D. Parking Facilities: The parking area and structures located
on the Land.
E. Project: The Land and all improvements thereon,
including the Building, the Parking
Facilities, and all Common Areas.
F. Commencement Date: That certain date on which the Term shall
commence, as determined pursuant to the
provisions of Article 3 hereof, which
Landlord shall endeavor to cause to be
July 1, 1999.
G. Expiration Date: The day preceding the tenth (10th)
anniversary of the Commencement Date.
H. Term: Ten (10) years, beginning on the
Commencement Date and ending at 11:59
p.m. on the Expiration Date, unless this
Lease is sooner terminated as provided
herein.
I. Net Rentable Area of the Premises: Approximately 90,000 square feet, subject
to measurement after Building completion
and Tenant's right to remeasure the
Premises and the Building as set forth
herein.
J. Net Rentable Area of the Building: Approximately 90,000 square feet, subject
to measurement after Building completion
and Tenant's right to remeasure the
Premises and the Building as set forth
herein.
K. Rent: The Base Rent and the Additional Rent.
L. Base Rent: The Base Rent shall be (i) an amount
equal to nine percent (9%) of the Total
Project Costs (as defined in Exhibit C
attached hereto), which Base Rent is
initially estimated to be $810,000.00 per
annum ($9.00 per square foot per annum of
Net Rentable Area of the Premises), from
the Commencement Date through the day
preceding the third (3rd) anniversary of
the Commencement Date; (ii) ten percent
(10%) of the Total Project Costs, which
Base Rent is initially estimated to be
$900,000.00 per annum ($10.00 per square
foot per annum of Net Rentable Area of
the Premises), from the third (3rd)
anniversary of the Commencement Date
through the day preceding the seventh
(7th) anniversary of the Commencement
Date; and (iii) eleven percent (11%) of
the
1
<PAGE> 6
Total Project Cost, which Base Rent is
initially estimated to be $990,000.00
per annum ($11.00 per square foot per
annum of Net Rentable Area of the
Premises), from the seventh (7th)
anniversary of the Commencement Date
through the Expiration Date. The Base
Rent shall be payable in equal monthly
installments. In the event actual Total
Project Costs are more or less than
$9,000,000.00, (based upon $100.00 per
square foot of the Building), Landlord
and Tenant shall execute an amendment to
this Lease for purposes of adjusting the
Base Rent and other sums payable by
Tenant hereunder in accordance with
Exhibit C hereto.
M. Additional Rent: The Additional Rent shall be Tenant's
Operating Costs Payment and all other
sums due and payable by Tenant under the
Lease.
N. Parking Spaces: Tenant shall be entitled, at no charge
during the initial Term to the exclusive
use of the Parking Facilities. The
Parking Facilities shall contain at least
375 concrete surfaced parking spaces..
O. Tenant's Permitted Uses: Tenant may use the Premises for executive
and administrative offices for the
conduct of Tenant's business and any
other lawful purpose.
P. Security Deposit: None
Q. Broker: Jackson & Cooksey
R. Landlord's Address for Notice: Prentiss Properties Acquisition Partners,
L.P. 3890 West Northwest Highway, Suite
400 Dallas, Texas 75220 Attention:
Michael V. Prentiss
S. Landlord's Address for Payment: Prentiss Properties Acquisition Partners,
L.P. 3890 W. Northwest Highway, Suite 400
Dallas, Texas 75220 Attention: Lori
Ashley
T. Tenant's Address for Notice:
Prior to Commencement Date: 1303 East Arapaho Road
Richardson, Texas 75081
After the Commencement Date: The Premises
ARTICLE 2
PREMISES AND QUIET ENJOYMENT
Section 2.01. Landlord hereby leases the Project to Tenant, and Tenant
hereby rents and leases the Project from Landlord, for the Term. During the
Term, Tenant shall have the exclusive right to use, in accordance with the Rules
and Regulations, the Common Areas and all other areas of the Project during the
Term of this Lease.
Section 2.02. Landlord represents and covenants with Tenant that Tenant
shall have, hold and enjoy the Premises during the Term without hindrance or
disturbance from or by Landlord or anyone else under the control of Landlord.
Landlord further represents and warrants to Tenant that Landlord is, or prior to
the Commencement Date will be, the record owner and holder of fee simple title
to the Land, Building and Premises and Landlord is duly authorized to enter into
this Lease on the terms set forth herein without the consent, joinder or
approval of any party.
ARTICLE 3
TERM; COMMENCEMENT DATE;
DELIVERY AND ACCEPTANCE OF PREMISES
Section 3.01. The Commencement Date shall be the earlier of (a) the date the
Premises are deemed available for occupancy pursuant to Section 3.02 hereof,
which date Landlord anticipates to be August 1,
2
<PAGE> 7
1999 (the "Anticipated Commencement Date"), or (b) the date Tenant, or anyone
claiming by, through or under Tenant, occupies any portion of the Premises for
the purpose of the conduct of Tenant's (or such other person's) business therein
for purposes other than move-in or installation of Tenant's furniture, fixtures
and equipment. Notwithstanding the foregoing, in no event shall Tenant be
obligated to pay Rent prior the Completion Date (hereinafter defined).
Section 3.02. A. The Premises shall be deemed available for occupancy as
soon as the following conditions have been met (the date upon which all of the
following items have been completed is referred to herein as the "Completion
Date", and the occurrence of all of the following items shall be "completion" or
"completed" for purposes of this Lease): (a) Landlord completes the Building and
delivers same to Tenant in Base Building Condition (as defined in Exhibit C
hereto) as determined by Architect (as defined in Exhibit C); (b) Landlord
completes Tenant's Work as determined by Architect; (c) a final certificate or
temporary certificate of occupancy allowing Tenant to lawfully occupy the
Premises has been issued for the Premises by all appropriate governmental
authorities; and (d) Landlord has completed the remaining portions of the
Project as determined by Architect and the Project may be occupied and used by
Tenant for the purposes contemplated by this Lease, subject only to the
correction by Landlord of outstanding punchlist items.
B. Notwithstanding anything to the contrary contained herein, if there is a
delay in the availability for occupancy of the Premises due to Tenant Delay (as
defined in Exhibit C to the Lease) then the Premises shall be deemed available
for occupancy on the date on which the Premises would have been available for
occupancy but for such Tenant Delay, even though a certificate of occupancy or
other certificate permitting the lawful occupancy of the Premises has not been
issued or the Leasehold Improvements have not been completed.
C. If Landlord fails to deliver the Premises and the remaining portions of
the Project "completed" by the Anticipated Commencement Date for any reason
whatsoever, excluding Force Majeure (as defined in Article 25) and Tenant Delay
(as defined in Exhibit C hereto), Landlord shall, from and after the Anticipated
Commencement Date until the Completion Date, provide Tenant two (2) days of
abatement of Rent (including Additional Rent) for each day of such delay between
the Anticipated Commencement Date and the date upon which the Completion Date
actually occurs (the "Occupancy Delay Payment"). Notwithstanding anything
contained herein to the contrary, if the Completion Date does not occur on or
before October 1, 1999 (the "Outside Commencement Date"), for any reason
whatsoever other than Force Majeure and Tenant Delay, Tenant shall have the
option, but not the obligation, to terminate this Lease, and thereafter neither
party shall have any further liability to the other pursuant to this Lease. If
Tenant should elect to so terminate, it shall notify Landlord in writing of such
termination within ten (10) days after the expiration of the Outside
Commencement Date with the Lease to automatically terminate on the 30th day
after the Outside Commencement Date if Landlord has not "completed" the Premises
and the remaining portions of the Project by such date. Failure of Tenant to
notify Landlord in a timely manner shall be deemed an election by Tenant not to
terminate the Lease.
Section 3.03. The Net Rentable Area of the Premises and the Building are
approximately as stated in Sections 1.01 I and J, respectively. Upon completion
of the Building, Landlord shall have Architect remeasure the area of the
Building in accordance with BOMA/American National Standard Institute single
tenant standard, governed by Boma Southwest-Dallas, Texas. Landlord shall
provide Architect's remeasurement to Tenant for Tenant's review. Tenant may
elect to remeasure the Building. If Tenant's measurement reflects any
discrepancy from Landlord's remeasurement, Landlord and Tenant shall mutually
and reasonably reconcile such differences. Upon such reconciliation, Landlord
and Tenant shall execute an amendment to this Lease for the purpose of
correcting Sections 1.01 I and J, and any other provisions of this Lease which
are based upon or connected with the Net Rentable Area of the Building,
including without limitation, obligations with respect to the payment of Rent,
to the extent applicable. By written instrument substantially in the form of
Exhibit D attached hereto, Landlord and Tenant, upon request of the other party,
shall confirm the Commencement Date, the Net Rentable Area of the Building and
all other matters stated therein. The Commencement Notice shall be conclusive
and binding on Tenant as to all matters set forth therein, unless within twenty
(20) days following delivery of such Commencement Notice, Tenant contests any of
the matters contained therein by notifying Landlord in writing of Tenant's
objections.
Section 3.04. Except as set forth in this Section 3.04, Tenant may not enter
or occupy the Premises prior to the Commencement Date without Landlord's express
written consent, which consent shall not be unreasonably withheld, delayed or
conditioned, and any entry by Tenant shall be subject to all of the terms of
this Lease, except the obligation to pay Rent; provided however, that no such
early entry shall change the Commencement Date or the Expiration Date. Landlord
shall advise Tenant forty-five (45) days prior to the Anticipated Commencement
Date, Tenant may enter the Premises during such forty-five (45) day period
before the Premises have been substantially completed for the purpose of systems
checking and installing furniture, special flooring or carpeting, trade
fixtures, telephones, computers, photocopy equipment, business equipment,
cabling and wiring, access control systems, and other improvements to the
Premises desired by Tenant ("Early Entry Work"), provided such Early Entry Work
is fully coordinated with Landlord's Contractor (as defined in Exhibit C).
Provided Tenant fully coordinates such Early Entry Work, with Landlord's
Contractor, such Early Entry Work shall not constitute a Tenant Delay. Such
Early Entry Work shall not advance the Commencement Date, provided Tenant does
not commence business operations from any part of the Premises. In connection
with such Early Entry Work, Landlord shall not be responsible for, and Tenant is
required to obtain insurance covering any loss caused by Tenant or those
entering the Premises on behalf of Tenant to perform such Early Entry Work,
including theft, damage or destruction to any work or material installed or
stored by Tenant or any contractor or individual involved in the construction of
the Leasehold Improvements, or for any injury to Tenant or Tenant's employees,
3
<PAGE> 8
agents, contractors, licensees, directors, officers, partners, trustees,
visitors or invitees (collectively "Tenant's Employees") or to any other person.
Section 3.05. Tenant shall not, by moving into or accepting the Premises,
Building or Project, be deemed to have waived any of Landlord's obligations
under this Lease, including without limitation, Landlord's obligations with
respect to construction or completion of the Project. Without limiting any of
Landlord's obligations under this Lease, Landlord warrants that the Project will
be constructed in a first class, good and workmanlike manner and will be free
from defects for a period of twelve (12) months following the Completion Date.
Landlord will repair and/or replace any defects, whether latent or patent, which
are discovered by Tenant and reported, in writing, to Landlord by Tenant during
the twelve (12) month period following the Completion Date, as well as any
damage to other portions of the Project or Tenant's Property (as defined in
Section 14.01 hereof) arising in connection therewith. Prior to the expiration
of the twelve (12) month warranty period described herein, Landlord shall assign
to Tenant all construction warranties issued in connection with the construction
of the Project, and shall cooperate with and assist Tenant in the enforcement of
such warranties.
ARTICLE 4
RENT
Section 4.01. Tenant shall pay to Landlord, without notice, demand, offset
or deduction, in lawful money of the United States of America, at Landlord's
Address for Payment, or at such other place as Landlord shall designate in
writing from time to time: (a) the Base Rent in equal monthly installments, in
advance, on the first day of each calendar month during the Term, and (b) the
Additional Rent, at the respective times required hereunder. The first monthly
installment of Base Rent payable under Article 5 hereof shall be paid on the
Commencement Date and applied to the first installments of Base Rent coming due
under this Lease. Payment of Rent shall begin on the Commencement Date;
provided, however, that, if either the Commencement Date or the Expiration Date
falls on a date other than the first day of a calendar month, the Rent due for
such fractional month shall be prorated on a per diem basis between Landlord and
Tenant so as to charge Tenant only for the portion of such fractional month
falling within the Term.
Section 4.02. All installments of Rent which are more than seven (7) days
past due and owing shall bear interest until paid at a rate per annum (the
"Interest Rate") equal to three percent (3%) above the prime rate of interest
from time to time publicly announced by Bank One, Texas, N.A., or any successor
thereof; not to exceed the maximum rate permitted under federal law or under the
laws of the State of Texas, the rate of interest on such past due installments
of Rent shall be the maximum rate of interest then permitted by applicable law.
ARTICLE 5
OPERATING COSTS
Section 5.01. Tenant shall pay to Landlord, as Additional Rent, for each
year or fractional year during the Term an amount ("Tenant's Operating Costs
Payment") of money equal to Tenant's Share of Operating Costs, as hereinafter
defined, for such year, such amount to be calculated and paid as follows:
(a) On the first day of January of each year during the Term (or, with
respect to the year in which the Commencement Date occurs, prior to the
Commencement Date), or as soon thereafter as is practicable, Landlord shall
furnish Tenant with a statement ("Landlord's Operating Costs Estimate") setting
forth Landlord's reasonable estimate of Operating Costs for the forthcoming year
(or the fractional year in which the Commencement Date occurs, as the case may
be). On the first day of each calendar month during such year, Tenant shall pay
to Landlord one-twelfth of Tenant's Operating Costs Payment as estimated on
Landlord's Operating Costs Estimate. If for any reason Landlord has not provided
Tenant with Landlord's Operating Costs Estimate on the first day of January of
any year during the Term, then, (i) until the first day of the calendar month
following the month in which Tenant is given Landlord's Operating Costs
Estimate, Tenant shall continue to pay to Landlord on the first day of each
calendar month the monthly sum, if any, payable by Tenant under this Section
5.01 for the month of December of the preceding year, and (ii) promptly after
Landlord's Operating Costs Estimate is furnished to Tenant or together
therewith, Landlord shall give notice to Tenant stating whether the installments
of Tenant's Operating Costs Payments previously made for such year were greater
or less than the installments of Tenant's Operating Costs Payments to be made
for such year in accordance with Landlord's Operating Costs Estimate, and (A) if
there shall be a deficiency, Tenant shall pay the amount thereof to Landlord
within thirty (30) days after the giving of Landlord's Operating Costs Estimate,
or (B) if there shall have been an overpayment, Landlord shall apply such
overpayment as a credit against the next accruing installment(s) of Additional
Rent due from Tenant under this Section 5.01 until fully credited to Tenant, and
(C) on the first day of the first calendar month following the month in which
Tenant is given Landlord's Estimate of Operating Costs and on the first day of
each calendar month thereafter during the Term throughout the remainder of such
year, Tenant shall pay to Landlord an amount equal to one-twelfth (1/12th) of
Tenant's Operating Costs Payment. The foregoing notwithstanding, Landlord shall
have the right from time to time during any year to notify Tenant in writing of
any change in Landlord's Operating Costs Estimate, in which event such Tenant's
Operating Costs Payment, as previously estimated, shall be adjusted to reflect
the amount shown in such notice and shall be effective, and due
4
<PAGE> 9
from Tenant, on the first day of each month during the year for which given
following Landlord's giving of such notice.
(b) On the first day of March of each year during the Term (beginning
on the first day of March of the year following the year in which the
Commencement Date occurs), or as soon thereafter as is practicable, Landlord
shall furnish Tenant with a statement of the actual Operating Costs for the
preceding year. Within thirty (30) days after Landlord's delivery of such
statement, Tenant shall make a lump sum payment to Landlord in the amount, if
any, by which Tenants' Operating Costs Payment for such preceding year as shown
on such Landlord's statement, exceeds the aggregate of the monthly installments
of Tenant's Operating Costs Payments paid during such preceding year. If
Tenant's Operating Costs Payment, as shown on such Landlord's statement, is less
than the aggregate of the monthly installments of Tenant's Operating Costs
Payment actually paid by Tenant during such preceding year, then Landlord shall
apply such amount to the next accruing installment(s) of Additional Rent due
from Tenant under this Section 5.01 until fully credited to Tenant.
(c) If the Commencement Date occurs on a date other than the first day
of January, or if the Term ends on a date other than the last day of December,
the actual Operating Costs for the year in which the Commencement Date or the
Expiration Date occurs, as the case may be, shall be prorated so that Tenant
shall pay that portion of Tenant's Share of Operating Costs for such year
represented by a fraction, the numerator of which shall be the number of days
during such fractional year falling within the Term, and the denominator of
which is 365 (or 366, in the case of a leap year). The provisions of this
Section 5.01 shall survive the Expiration Date or any sooner termination
provided for in this Lease.
(d) Notwithstanding the foregoing provisions of this Section 5.01,
Tenant shall pay Taxes (as defined in Section 5.02(d) hereof) in one (1) annual
installment no later than thirty (30) days prior to the date such Taxes are
deemed to be past due and owing.
Section 5.02. For purposes of this Lease, the term "Operating Costs" shall
mean any and all expenses, costs and disbursements of every kind which Landlord
pays, incurs or becomes obligated to pay in connection with the operation,
management, repair and maintenance of all portions of the Project. All Operating
Costs shall be determined according to generally accepted accounting principles
which shall be consistently applied. Operating Costs include, but are not
limited to, the following:
(a) Wages, salaries, and fees (excluding educational, travel and
professional fees) of all on-site personnel, if any, engaged in the operation,
repair, maintenance, or security of the Project, including taxes, insurance, and
benefits relating thereto and the costs of all supplies and materials (including
work clothes and uniforms) used by Landlord's on-site personnel, if any, in the
operation, repair, and maintenance or security of the Project.
(b) Cost of performance by Landlord or third parties of all service
agreements, if any, for any maintenance, janitorial services, access control,
alarm service, window cleaning, elevator maintenance and landscaping for the
Project which are Landlord's responsibility during any year of the Term. The
foregoing provision shall include rental of personal property used by third
parties or Landlord's personnel, if any, in the maintenance and repair of the
Project.
(c) Cost of all insurance, including casualty and liability insurance
applicable to the Project and to Landlord's equipment, fixtures and personal
property used in connection therewith, business interruption or rent insurance
against such perils as are commonly insured against by prudent landlords, such
other insurance as may be required by any lessor or mortgagee of Landlord and
such other insurance which Landlord considers reasonably necessary in the
operation of the Project, together with all appraisal and consultants' fees in
connection with such insurance.
(d) All Taxes. Landlord shall be responsible for payment of all Taxes (as
hereinafter defined) which are levied, assessed or become due or payable prior
to the Commencement Date. Taxes for the year in which this Lease commences and
ends shall be prorated between Landlord and Tenant as of the actual Commencement
Date during the year in which this Lease commences, and as of the actual
Expiration Date during the year in which this Lease ends. Except as provided in
the preceding sentence, Tenant shall be responsible for all Taxes which may be
levied or assessed against the Premises and the Project and all Taxes levied
against personal property and trade fixtures placed by Tenant in the Premises,
for each calendar year or portion thereof, for the period commencing on the
actual Commencement Date and ending upon the actual Expiration Date of this
Lease. For purposes hereof, the term "Taxes" shall mean (i) all taxes,
assessments, and other governmental charges, applicable to or assessed against
the Project or any portion thereof, or applicable to or assessed against
Landlord's personal property used in connection therewith, whether federal,
state, county, or municipal and whether assessed by taxing districts or
authorities presently taxing the Project or the operation thereof or by other
taxing authorities subsequently created, or otherwise, and any other taxes and
assessments attributable to or assessed against all or any part of the Project
or its operation, and (ii) any reasonable expenses, including fees and
disbursements of attorneys, tax consultants, arbitrators, appraisers, experts
and other witnesses, incurred by Landlord in contesting any taxes or the
assessed valuation of all or any part of the Project. If at any time during the
Term there shall be levied, assessed, or imposed on Landlord or all or any part
of the Project by any governmental entity any general or special ad valorem or
other charge or tax directly upon rents received under leases, or if any fee,
tax, assessment, or other charge is imposed which is measured by or based, in
whole or in part, upon such rents, or if any charge or tax is made based
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directly or indirectly upon the transactions represented by leases or the
occupancy or use of the Project or any portion thereof, such taxes, fees,
assessments or other charges shall be deemed to be Taxes; provided, however,
that any (i) franchise, corporation, income or net profits tax, unless
substituted for real estate taxes or imposed as additional charges in connection
with the ownership of the Project, which may be assessed against Landlord or the
Project or both, (ii) transfer taxes assessed against Landlord or the Project or
both, (iii) penalties or interest on any late payments of Landlord, and (iv)
personal property taxes of Tenant or other tenants in the Project shall be
excluded from Taxes. Notwithstanding any provision contained in this Lease to
the contrary, during the Term of this Lease, Tenant shall be entitled to receive
for Tenant's account all benefits, credits, abatements and payments which may at
any time arise in connection with or pursuant to the terms of the Economic
Development Agreement (herein so called) and/or Tax Abatement Agreement (herein
so called) between the City of Allen, Texas and the Allen Economic Development
Committee.
(e) Cost of repairs and general maintenance of the Project (excluding
repairs and general maintenance paid by proceeds of insurance or by Tenant or
other third parties or repairs or general maintenance which are solely
Landlord's responsibility pursuant to Section 9.04 hereof).
(f) A management fee equal to two percent (2%) of the gross receipts from
the Project, including Base Rent and Tenant's Operating Costs Payment (exclusive
of Taxes).
(g) The Project's share of costs in connection with the owner's association
for Millennium Business Park.
Section 5.03. If during the Term any change occurs in either the number of
square feet of the Net Rentable Area of the Premises or of the Net Rentable Area
of the Building, Tenant's share of Operating Costs shall be adjusted, effective
as of the date of any such change. On and after the date of any such change,
Tenant's Operating Costs Payment pursuant to Section 5.01A shall be adjusted
effective as of the date of such change.
Section 5.04. Tenant shall, at Tenant's sole cost and expense, have the
right, at anytime, upon reasonable written notice, during the business hours of
Landlord and in a manner so as to not unreasonably interfere with Landlord's
business, to have a certified public accountant, audit Landlord's books related
to the computation of Operating Costs. Such audit may cover a period of time up
to two (2) years prior to the date of such audit. If Landlord and Tenant
mutually agree upon any misapplication or miscalculation of Operating Costs, or
if Tenant finds a credit owed by Landlord, then Landlord shall adjust its
Operating Costs computation and pay Tenant for such adjustment within thirty
(30) days of Landlord agreeing to the adjustment. Landlord and Tenant shall
diligently pursue resolution of any disputed amounts. If the audit reveals that
Landlord's computation of Operating Costs was more than five percent (5%) in the
aggregate in error and Landlord reasonably agrees with such audit, Landlord will
pay the reasonable costs of the audit.
Section 5.05. Landlord shall provide copies of any reassessments or
reappraisals affecting Taxes to Tenant within sixty (60) days after Landlord's
receipt of such reassessment or reappraisal from the governing levying
authority, and shall advise Tenant, at the time of such delivery of such
reassessment or reappraisal, whether Landlord intends to protest Taxes. Landlord
agrees to use reasonable efforts to obtain a reduction of Taxes. In the event
Landlord elects not to protest Taxes, Tenant may protest Taxes. The method and
manner of conducting proceedings for such reduction, including the selection of
counsel, shall be solely within the judgment and determination of the party
protesting Taxes. If the protesting party determines to cancel or discontinue
such proceedings, the other party shall have the right to continue such
proceeding at such party's own expense. Landlord shall provide to Tenant any
supporting information as to the Project, which Tenant may use in proceedings
prosecuted by Tenant. Should Taxes increase over the amount initially sought by
the government levying authority as a result of Tenant's continued protest,
Tenant shall pay the entire amount of the Project's increase in Taxes over the
amount sought by the government levying authority. If such Taxes decrease from
the amount initially sought by the government levying authority as a result of
Tenant's continued protest, Taxes shall be adjusted for such year and any
previous year affected by such protest. Tenant also shall have the right to seek
and obtain tax abatements. Landlord will cooperate with Tenant to obtain any
such tax abatements.
Section 5.06. Tenant shall have the right to require adjustments in the
quality and quantity of services in Operating Costs, provided Tenant and
Landlord are able to maintain the Building in accordance with the first class
standards for comparable buildings in the north Plano, Texas suburban area.
Tenant may require that all service contracts exceeding $5,000 annually, or on
an individual basis, be competitively bid by at least three (3) bidders and that
Landlord accept only the lowest qualified bid, unless otherwise approved by
Tenant, such approval not to be unreasonably withheld, conditioned or delayed.
Section 5.07. On or before December 1 of every year Landlord shall prepare
and deliver to Tenant a budget for Operating Costs for the following year.
Landlord agrees to meet with Tenant prior to December 31 to discuss any of
Tenant's budget issues or questions.
ARTICLE 6
PARKING
Section 6.01. Landlord hereby grants to Tenant the exclusive right to use
the Parking Facilities.
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ARTICLE 7
SERVICES OF LANDLORD
Section 7.01. A. During the Term, Landlord shall furnish Tenant with the
following services, with all such services to be comparable to the services
provided by other first class office buildings in the north Plano, Texas
suburban area: (a) hot and cold water in Building Standard bathrooms and chilled
water in Building Standard drinking fountains; (b) electrical power sufficient
for lighting the Premises and for the operation therein of typewriters,
voicewriters, calculating machines, word processing equipment, photographic
reproduction equipment, copying machines, personal computers, and similar items
of business equipment; (c) heating, ventilating or air-conditioning, as
appropriate, during Business Hours; (d) electric lighting for the Project; (e)
passenger elevator service for access to and from the Premises twenty-four (24)
hours per day, seven (7) day per week; provided, however, that Landlord shall
have the right to limit the number of (but not cease to operate all) elevators
to be operated for repairs and after Business Hours and on Saturdays, Sundays
and Holidays; (f) facilities for Tenant's loading, unloading, delivery and
pick-up activities, including access thereto during Business Hours; and (g) any
services set forth in Section 5.02(b), which Tenant elects to have Landlord
provide for the Project. All services referred to in this Section 7.01A shall be
provided by Landlord and paid for by Tenant, on a monthly basis, as part of
Tenant's Operating Costs Payment.
B. If Tenant requires services, including cleaning services, for hours or
days in addition to the hours and days specified in Section 7.01A, Landlord
shall provide such additional service, and Tenant shall reimburse Landlord for
the cost of such additional service. Landlord shall have no obligation to
provide any additional service to Tenant at any time Tenant is in default under
this Lease unless Tenant pays to Landlord, in advance, the cost of such
additional service. Landlord shall ensure that Tenant shall have the ability to
directly control the providing of after hours HVAC services to the Premises.
C. Tenant shall not install any machinery or equipment which generates
abnormal heat or otherwise creates unusual demands on the air-conditioning or
heating system serving the Premises. Tenant shall not install any electrical
equipment requiring special wiring unless approved in advance by Landlord. At no
time shall use of electricity in the Premises exceed the capacity of existing
feeders and risers to or wiring in the Premises.
D. The degree of utility consumption and potential consumption by Tenant
shall be determined by separate meters in the Premises to be installed,
maintained, and read by Landlord, all at Tenant's sole cost and expense. Tenant
shall not install any electrical equipment requiring special wiring unless
approved in advance by Landlord. At no time shall use of electricity in the
Premises exceed the capacity of existing feeders and risers to or wiring in the
Premises. Any risers or wiring to meet Tenant's excess electrical requirements
shall, upon Tenant's written request, be installed by Landlord, at Tenant's sole
cost, if, in Landlord's reasonable judgment, the same are necessary and shall
not (i) cause permanent damage or injury to the Project, the Building or the
Premises, or (ii) cause or create a dangerous or hazardous condition.
E. Except for maintenance of the Central Systems (as defined in Section 9.01
hereof), which shall be governed by Section 7.01F hereinbelow, at Tenant's sole
option, Tenant shall have the right to provide, and contract directly with the
provider of, the services set forth in Sections 7.01A, in which case Landlord
will cooperate with Tenant in the provision of such services and make sufficient
area available in the Project to allow for the provisions of such services,
provided that the quality of such services is comparable to the standards set
forth in Sections 7.01A. In the event Tenant provides any such services,
Tenant's Operating Costs Payment shall be adjusted by deleting Landlord's cost
of providing such service from Operating Costs.
F. Notwithstanding the foregoing provisions of this Section 7.01 or
elsewhere in this Lease, Tenant may maintain the Central Systems, provided that
(i) Tenant notifies Landlord in writing of Tenant's desire to maintain the
Central Systems, (ii) the Central Systems are maintained in strict accordance
with manufacturer's specifications and requirements, and (iii) Landlord, in
Landlord's reasonable discretion, approves all contractors who will be
maintaining the Central Systems. In the event Tenant provides any such services,
Tenant's Operating Costs Payment shall be adjusted by deleting Landlord's cost
of providing such service from Operating Costs.
G. In the event that Landlord determines that the quality of any of the
services provided by Tenant pursuant to this Section 7.01 (a) are not in keeping
with the standards set forth in Section 7.01, or (b) are not in the best
interest of the long term ownership of the Building, Landlord, upon thirty (30)
days written notice to Tenant, may undertake the providing of such service which
is being improperly provided by Tenant.
Section 7.02. Landlord's obligation to furnish electrical and other utility
services shall be subject to the rules and regulations of the supplier of such
electricity of other utility services and the rules and regulations of any
municipal or other governmental authority regulating the business of providing
electricity and other utility services.
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Section 7.03. No failure to furnish, or any stoppage of, the services
referred to in this Article 7 resulting from any cause shall make Landlord
liable in any respect for damages to any person, property or business, or be
construed as an eviction of Tenant, or entitle Tenant to any abatement of Rent
or other relief from any of Tenant's obligations under this Lease, except as set
forth below. Should any malfunction of any systems or facilities occur within
the Project or should maintenance or alterations of such systems or facilities
become necessary, Landlord shall repair the same promptly and with reasonable
diligence, and Tenant shall have no claim for rebate, abatement of Rent, or
damages because of malfunctions or any such interruptions in service.
Notwithstanding the foregoing, subject to Article 15 (Damage by Fire or Other
Cause) and Article 16 (Condemnation), if any portion of the Premises becomes
untenantable for occupancy because of a failure to deliver any service required
under this Article 7 for any period exceeding three (3) consecutive Business
Days, and provided such failure is not caused by Tenant, Landlord shall allow
Tenant an equitable abatement of Rent (based on the severity of the interruption
and the amount of space untenantable for occupancy) effective from the fourth
(4th) Business Day following the date on which Tenant first provided Landlord
with written notice of the interruption of such service (or effective on the
first (1st) calendar day if such service interruption occurs within thirty (30)
days of a three (3) consecutive Business Day service interruption), until such
portion of the Premises is again fit for occupancy and such service is restored.
Tenant shall not be entitled to an equitable abatement of Rent, if the Premises
are untenantable as the result of (a) any act or omission of Tenant or any of
Tenant's servants, employees, or agents, (b) a request by Tenant of Landlord to
make a decoration, alteration, improvement or addition; or (c) the repair in
question or the services in question are those which Tenant is obligated to make
or furnish under any of the provisions of this Lease. In addition to the
foregoing abatement, if elevator service is wholly unavailable to the Premises
for any period in excess of three (3) consecutive Business Days such that Tenant
can access the Premises solely through the stairs in the Building, Tenant shall
be entitled to an equitable abatement of rent until such elevator service, and
accessibility to the Premises, is restored.
ARTICLE 8
ASSIGNMENT AND SUBLETTING
Section 8.01. Except as hereinafter provided, neither Tenant nor its legal
representatives or successors in interest shall, by operation of law or
otherwise, assign, mortgage, pledge, encumber or otherwise transfer this Lease
or any part hereof, or the interest of Tenant under this Lease, or in any
sublease or the rent thereunder without Landlord's prior written consent, which
consent shall not be unreasonably withheld, conditioned or delayed. The Premises
or any part thereof shall not be sublet, occupied or used for any purpose by
anyone other than Tenant, without Tenant's obtaining in each instance the prior
written consent of Landlord in the manner hereinafter provided, such consent not
to be unreasonably withheld, conditioned, or delayed. Tenant shall not modify,
extend, or amend a sublease previously consented to by Landlord without
obtaining Landlord's prior written consent thereto, such consent not to be
unreasonably withheld, conditioned, or delayed.
Section 8.02. The transfer of the outstanding capital stock of any corporate
Tenant through the "over-the-counter" market or any recognized national
securities exchange shall not be deemed to be an assignment pursuant to this
Article 8.
Section 8.03. Notwithstanding anything to the contrary in Section 8.01,
Tenant shall have the right, upon five (5) days' prior written notice to
Landlord, but without Landlord's approval, to (a) (i) sublet all or part of the
Premises, or assign this Lease, to any related corporation or other entity which
controls Tenant, is controlled by Tenant or is under common control with Tenant
or any other parent, subsidiary or affiliate of Tenant and/or (ii) sublet up to
twenty-five percent (25%) of the Premises to any party; or (b) assign this Lease
to a successor corporation into which or with which Tenant is merged or
consolidated or which acquired substantially all of Tenant's assets and
property; provided that (i) such successor corporation assumes substantially all
of the obligations and liabilities of Tenant and shall have assets,
capitalization and net worth at least equal to the assets, capitalization and
net worth of Tenant as of the date of this Lease as determined by generally
accepted accounting principles, and (ii) Tenant shall provide in its notice to
Landlord the information required in Section 8.04. For the purpose hereof
"control" shall be defined in accordance with applicable provisions of the
Internal Revenue Code and the rules and regulations promulgated thereunder.
Section 8.04. If Tenant should desire to assign this Lease or sublet the
Premises (or any part thereof) and with respect to which Landlord's consent is
required, Tenant shall give Landlord written notice no later than thirty (30)
days in advance of the proposed effective date of any other proposed assignment
or sublease, specifying (a) the name, current address, and business of the
proposed assignee or sublessee, (b) the amount and location of the space within
the Premises proposed to be so subleased, (c) the proposed effective date and
duration of the assignment or subletting, (d) the proposed rent or consideration
to be paid to Tenant by such assignee or sublessee, and (e) financial statements
and other information as Landlord may reasonably request to evaluate the
proposed assignment or sublease. For assignments and sublettings other than
those permitted by Section 8.03, Landlord shall have fifteen (15) days following
receipt of such notice and other information requested by Landlord within which
to notify Tenant in writing that Landlord elects: (i) to permit Tenant to assign
or sublet such space; provided, however, that, if the rent rate agreed upon
between Tenant and its proposed subtenant is greater than the rent rate that
Tenant must pay Landlord hereunder for that portion of the Premises, or if any
consideration shall be promised to or received by Tenant in connection with such
proposed assignment or sublease (in addition to rent), then fifty percent (50%)
of such excess rent and other consideration shall be considered Additional Rent
owed by
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Tenant to Landlord (less brokerage commissions, attorneys' fees and other
disbursements reasonably incurred by Tenant for such assignment and subletting);
or (ii) to refuse, in Landlord's reasonable discretion, to consent to Tenant's
assignment or subleasing of such space and to continue this Lease in full force
and effect. Landlord cannot unreasonably withhold its consent to an assignment
or subletting for which Landlord's consent is required hereunder. In the event
Landlord refuses such assignment or subletting, Landlord shall deliver to Tenant
written notice setting forth in reasonable detail the reason for such refusal
within fifteen (15) days following Landlord's receipt of Tenant's request for
same. If Landlord should fail to notify Tenant in writing of such election
within the aforesaid fifteen (15) day period, Landlord shall be deemed to have
elected option (ii) above. Notwithstanding the foregoing sentence, if Tenant
shall provide an additional five (5) Business Days written notice to Landlord
after the expiration of such fifteen (15) day period, requesting such approval
and if Landlord should fail to timely respond to the second (2nd) written
notice, Landlord shall be deemed to have elected option (i) above. Upon
Landlord's approval of such subletting or assignment, the subtenant or assignee
shall have the right to enter upon the Premises, or portion thereof, to be
occupied by such subtenant or assignee. Tenant agrees to reimburse Landlord for
legal fees and any other reasonable costs incurred by Landlord in connection
with any permitted assignment or subletting not to exceed $500.00. Tenant shall
deliver to Landlord copies of all documents executed in connection with any
permitted assignment or subletting, which documents shall be in form and
substance reasonably satisfactory to Landlord and which shall require any
assignee to assume performance of all terms of this Lease to be performed by
Tenant or any subtenant to comply with all the terms of this Lease to be
performed by Tenant. No acceptance by Landlord of any Rent or any other sum of
money from any assignee, sublessee or other category of transferee shall be
deemed to constitute Landlord's consent to any assignment, sublease, or
transfer.
Section 8.05. Any attempted assignment or sublease by Tenant in violation of
the terms and provisions of this Article 8 shall be void and shall constitute a
material breach of this Lease. In no event, shall any assignment, subletting or
transfer, whether or not with Landlord's consent, relieve Tenant of its primary
liability under this Lease for the entire Term, and Tenant shall in no way be
released from the full and complete performance of all the terms hereof. If
Landlord takes possession of the Premises pursuant to the provisions of this
Lease before the expiration of the Term of this Lease, Landlord shall have the
right, at its option, to terminate all subleases, or to take over any sublease
of the Premises or any portion thereof and such subtenant shall attorn to
Landlord, as its landlord, under all the terms and obligations of such sublease
occurring from and after such date, but excluding previous acts, omissions,
negligence or defaults of Tenant and any repair or obligation in excess of
available net insurance proceeds or condemnation award.
Section 8.06. The term "Landlord," as used in this Lease, so far as
covenants or obligations on the part of Landlord are concerned, shall be limited
to mean and include only the owner or owners, at the time in question, of the
fee title to, or a lessee's interest in a ground lease of, the Land or the
Building. In the event of any transfer, assignment or other conveyance or
transfers of any such title or interest, Landlord herein named, and in case of
any subsequent transfers, the then grantor shall be automatically freed and
relieved from and after the date of such transfer, assignment or conveyance of
all liability as respects the performance of any covenants or obligations on the
part of Landlord contained in this Lease thereafter to be performed provided
that the transferee of such title or interest shall have assumed and agreed to
observe and perform any and all obligations of Landlord hereunder, during its
ownership of the Project. Landlord may transfer its interest in the Project
without the consent of Tenant and such transfer or subsequent transfer shall not
be deemed a violation on Landlord's part of any of the terms of this Lease.
ARTICLE 9
REPAIRS
Section 9.01. Except for ordinary wear and tear and except as otherwise
provided in Section 9.02, Landlord shall perform all maintenance and make all
repairs and replacements to the Project (including the Leasehold Improvements).
Tenant shall pay to Landlord the actual cost (including a fee equal to five
percent (5%) of actual costs to cover a fee for Landlord's agent or manager) for
all maintenance, repairs and replacements within the Premises (including the
Leasehold Improvements), which are completed, or caused to be completed, by
Landlord, including maintenance, repairs and replacements to any Building system
or component within the Building core in the Building ("Central Systems")
located within the Premises, except for all repairs and replacements
necessitated by damage to the Building, the Premises, or the Project caused by
the negligence or willful misconduct of Landlord, or its agents, contractors,
and licensees or by normal wear and tear, fire, casualty or condemnation, and
except for any matter which Landlord is required to correct or repair, at
Landlord's sole cost, pursuant to any provision of this Lease. Amounts payable
by Tenant pursuant to this Section 9.01 shall be payable within thirty (30) days
after receipt of an invoice therefor from Landlord. Landlord has no obligation
and has made no promise to maintain, alter, remodel, improve, repair, decorate,
or paint the Premises or any part thereof, except as specifically set forth in
this Lease. In no event shall Landlord have any obligation to maintain, repair
or replace any furniture, furnishings, fixtures or personal property of Tenant,
except to the extent the need for such replacements, repairs or maintenance is
caused by the negligence or willful misconduct of Landlord, or its employees,
agents, contractors or licensees, or the breach by Landlord of any of its
obligations under this Lease, in which event Landlord shall pay for the cost of
the replacements, repairs or maintenance.
Section 9.02. Tenant shall keep the Premises (including the Leasehold
Improvements) in good order and in a safe, neat and clean condition, reasonable
wear and tear, casualty and damage, replacement,
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repairs and maintenance which are the responsibility of Landlord excepted. No
representations respecting the condition of the Premises or the Building or the
other portions of the Project have been made by Landlord to Tenant except as
specifically set forth in this Lease. Except as provided in Section 10.01 or
specifically consented to by Landlord, Tenant shall not perform any maintenance
or repair work or make any replacement in or to the Premises (including the
Leasehold Improvements), and any branch of a Central System serving the Premises
("Branch System"), but rather shall promptly notify Landlord of the need for
such maintenance, repair or replacement so that Landlord may proceed to perform
the same. In the event Landlord specifically consents to the performance of any
maintenance or the making of any repairs or replacements by Tenant, which
consent shall not be unreasonably withheld, conditioned, or delayed by Landlord
and Tenant fails to promptly commence and diligently pursue the performance of
such maintenance or the making of such repairs or replacements, then Landlord,
at its option, following fifteen (15) days prior written notice to Tenant
(provided, that in the event of an emergency or situation where damage to person
or property is at risk, no notice shall be required), may perform such
maintenance or make such repairs and Tenant shall reimburse Landlord, within
thirty (30) days after Tenant receives an invoice therefor, the cost thereof
plus five percent (5%) of the actual costs of the repairs, which are completed,
or caused to be completed, by Landlord, to cover a fee for Landlord's agent or
manager.
Section 9.03. All repairs made by Tenant pursuant to Section 9.02 shall be
performed in a good and workmanlike manner by contractors or other repair
personnel selected by Tenant and approved by Landlord, such approval not to be
unreasonably withheld, conditioned, or delayed.
Section 9.04. Subject to the other provisions of this Lease imposing
obligations regarding repair upon Tenant, Landlord shall, at Landlord's sole
cost, be responsible for the maintenance, repair and replacement to the roof
(including the roof membrane), the foundation, and the structural portion of the
exterior walls of the Building, and the roof covering (including interior
ceiling if damaged by leakage), load-bearing walls, floor slabs, and masonry
walls, and Landlord shall maintain same in good condition and repair, in
compliance with all applicable laws and in a first-class manner, unless such
repairs are made as the result of the negligence or willful misconduct of
Tenant, or its employees, agents, contractors, or licensees, in which event,
Tenant shall pay the cost of such repairs reasonably incurred by Landlord within
thirty (30) days following Tenant's receipt of an invoice therefor. In the event
of an emergency or situation where damage to person or property is at risk,
Tenant may perform Landlord's maintenance or repair obligations, in which event,
if Landlord agrees that such maintenance or repair obligation was Landlord's
sole responsibility at Landlord's sole cost, Landlord shall pay to Tenant the
reasonable cost incurred by Tenant in performing such obligation within thirty
(30) days of demand therefor, failing which Tenant shall be entitled to offset
such sums against the Rent becoming due hereunder. All maintenance, repairs,
restorations and replacements by Landlord shall be performed in a first-class,
good and workmanlike manner and in compliance with all applicable laws. Landlord
shall additionally be responsible for repair all machinery, systems and
equipment necessary to provide the services of Landlord described in Article 7,
including the Common Areas, and the Central Systems, consisting of the HVAC,
life safety systems, and other Building systems or components (provided that
Tenant shall pay the costs of any repair to such systems or any part thereof
damaged by the misuse thereof by Tenant and Tenant's employees, customers,
clients, agents, licensees and invitees) and for repair of all portions of the
Project which do not comprise a part of the Premises, with the costs therefore
to be an Operating Cost pursuant to Article 5 hereof.
ARTICLE 10
ALTERATIONS
Section 10.01. Tenant shall not at any time during the Term make any
structural alterations to the Premises without first obtaining Landlord's
written consent thereto, which consent Landlord shall not unreasonably withhold,
condition, or delay. Tenant shall be entitled to construct and install any
non-structural alterations to the Premises without obtaining the consent from,
and without submitting its plans and specifications to, Landlord. Landlord's
consent to any structural alterations may be conditioned upon Tenant's agreement
to remove the alterations at the end of the Term. Should Tenant desire to make
any alterations to the Premises for which Landlord's consent is required
hereunder, Tenant shall submit all plans and specifications for such proposed
alterations which require Landlord's approval to Landlord for Landlord's review
and approval before Tenant allows any such work to commence. Landlord's approval
of such plans and specifications shall not be unreasonably withheld,
conditioned, or delayed and, unless Landlord sooner delivers a reasonably
detailed explanation of its disapproval in writing to Tenant, shall be deemed
given within twenty (20) days following Tenant's delivery of the plans and
specifications therefore to Landlord. Tenant shall select and use only
contractors approved by Landlord, such approval not to be unreasonably withheld,
conditioned, or delayed. Upon Tenant's receipt of written approval, or deemed
approval, from Landlord and upon Tenant's payment of any third party review
costs reasonably incurred by Landlord, Tenant shall have the right to proceed
with the construction of all approved alterations, in substantial compliance
with the approved plans and specifications. All alterations shall be made at
Tenant's sole cost and expense, either by Tenant's contractors or, at Tenant's
option, by Landlord's contractor on terms reasonably satisfactory to Tenant,
including a fee of five percent (5%) of the actual costs of such work which is
completed, or caused to be completed, by Landlord, to cover a fee for Landlord's
agent or manager in supervising and coordinating such work.
Section 10.02. All construction, alterations and repair work done by or for
Tenant shall (a) be performed in such a manner as to maintain harmonious labor
relations; (b) not materially and adversely affect the
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safety of the Project, the Building or the Premises or the systems thereof and
not affect the Central systems of the Building; (c) comply with all building,
safety, fire, plumbing, electrical, and other codes and governmental and
insurance requirements; and (d) be completed promptly and in a good and
workmanlike manner and in compliance with, and subject to, all of the provisions
of the Lease. After completion of any alterations to the Premises, which cost in
excess of $50,000.00 per single project, Tenant will deliver to Landlord a copy
of "as built" plans and specifications depicting and describing such
alterations.
Section 10.03. All leasehold improvements, alterations and other physical
additions made to or installed by or for Tenant in the Premises shall be and
remain Landlord's property (except for Tenant's furniture, personal property and
movable trade fixtures and other items which are not permanently attached to the
Premises). In no event shall Tenant be required to remove the initial Leasehold
Improvements. Tenant agrees to remove, at its sole cost and expense, all of
Tenant's furniture, personal property and movable trade fixtures from the
Premises, on or before the Expiration Date or any earlier date of termination of
this Lease. Tenant shall repair, or promptly reimburse Landlord for the cost of
repairing, all damage done to the Premises or the Building by such removal. If
Tenant fails to remove any of Tenant's furniture, personal property or movable
trade fixtures by the Expiration Date or any sooner date of termination of the
Lease or, if Tenant fails to remove any leasehold improvements, alterations and
other physical additions made by Tenant to the Premises which Landlord advised
Tenant at the time of installation were to be removed at the end of the Term,
Landlord shall have the right, on the fifteenth (15th) day after Landlord's
delivery of written notice to Tenant, to deem such property abandoned by Tenant
and to remove, store, sell, discard or otherwise deal with or dispose of such
abandoned property in a commercially reasonable manner. Tenant shall be liable
for all costs of such disposition of Tenant's abandoned property, and Landlord
shall have no liability to Tenant in any respect regarding such property of
Tenant. The provisions of this Section 10.03 shall survive the expiration or any
earlier termination of this Lease.
ARTICLE 11
LIENS
Section 11.01. Tenant shall keep the Project, the Building and the Premises
and Landlord's interest therein from any liens arising from any work performed,
materials furnished, or obligations incurred by, or on behalf of Tenant. Notice
is hereby given that neither Landlord nor any mortgagee or lessor of Landlord
shall be liable for any labor or materials furnished to Tenant, except as
furnished to Tenant by Landlord pursuant to Exhibit C. If any lien is filed for
such work or materials, such lien shall encumber only Tenant's interest in
leasehold improvements on the Premises. Within thirty (30) days after Tenant
learns of the filing of any such lien, Tenant shall either contest, discharge
and cancel such lien of record or post a bond sufficient under the laws of the
State of Texas to cover the amount of the lien claim plus any penalties,
interest, attorneys' fees, court costs, and other legal expenses in connection
with such lien. If Tenant fails to so contest, discharge or bond such lien
within thirty (30) calendar days after written demand from Landlord, Landlord
shall have the right, at Landlord's option, to pay the full amount of such lien
without inquiry into the validity thereof, and Landlord shall be promptly
reimbursed by Tenant, as Additional Rent, for all amounts so paid by Landlord,
including expenses, interest, and attorneys' fees.
ARTICLE 12
USE AND COMPLIANCE WITH LAWS
Section 12.01. The Premises shall be used only for the uses specifically set
forth in Section 1.01Q and for no other purposes whatsoever, without the prior
approval of Landlord, which approval shall not be unreasonably withheld,
conditioned or delayed. Landlord acknowledges and agrees that Tenant shall have
exclusive use of the Project during the Term of the Lease. Subject to Landlord's
obligations hereunder, Tenant shall use and maintain the Premises in a clean,
careful, safe, lawful and proper manner and shall not allow within the Premises,
any offensive noise, odor, conduct or private or public nuisance or permit
Tenant's employees, agents, licensees or invitees to create a public or private
nuisance or act in a disorderly manner within the Building or in the Project.
Landlord represents that any certificate of occupancy issued with respect to the
Premises shall allow use for executive and administrative offices.
Section 12.02. Landlord shall deliver the Project to Tenant in compliance
with all laws and thereafter, except to the extent specifically caused by
Tenant's particular use of the Premises, shall, at Landlord's sole cost, be
responsible for causing the Project, and all other improvements associated with
the Premises, to comply with all applicable governmental laws and requirements,
including without limitation the Americans With Disabilities Act and
environmental and zoning laws and regulations. Tenant shall not be required to
make any alterations or additions to any portion of the Project which may be
required pursuant to such applicable governmental laws and requirements, unless
such alterations or additions are required as a result of Tenant's particular
use of the Premises, it being agreed and understood that in the event any
governmental law or requirement requires that alterations or additions be made
to the Premises or the Project, same shall be completed by Landlord, at
Landlord's sole cost. Subject to Landlord's responsibility under the preceding
provisions of this Section 12.02, Tenant shall, at Tenant's sole expense, (a)
comply with all laws, orders, ordinances, and regulations of federal, state,
county, and municipal authorities having jurisdiction over Tenant's use
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of the Premises, (b) comply with any directive, order or citation made pursuant
to law by any public officer requiring abatement of any nuisance or which
imposes upon Landlord or Tenant any duty or obligation arising from Tenant's
occupancy or use of the Premises or from conditions which have been created by
or at the request or insistence of Tenant, or required by reason of a breach of
any of Tenant's obligations hereunder or by or through other fault of Tenant,
(c) comply with all reasonable and customary insurance requirements applicable
to the Premises and (d) indemnify and hold Landlord harmless from any loss,
cost, claim or expense which Landlord incurs or suffers by reason of Tenant's
failure to comply with its obligations under clauses (a), (b) or (c) above.
Except as set forth herein, nothing contained herein shall be interpreted to
require Tenant to make any alterations or additions to the Premises or the
Project, if Tenant receives notice of any such directive, order citation or of
any violation of any law, order, ordinance, regulation or any insurance
requirement, Tenant shall promptly notify Landlord in writing of such alleged
violation and furnish Landlord with a copy of such notice. Notwithstanding
anything contained herein to the contrary, Tenant's responsibility for
environmental matters shall be limited to conditions caused by Tenant, and
Tenant shall have no responsibility for pre-existing conditions or conditions
caused by any other party, all of which shall be Landlord's sole responsibility
in accordance with all applicable Hazardous Substances laws. Landlord shall
indemnify and hold harmless Tenant from and against any liability, costs or
expenses that may arise on account of the release, discharged, storage,
disposal, treatment processing or other handling of any Hazardous Substances (as
such term is defined or used in applicable federal, state or local law) on
and/or violations of applicable Hazardous Substances laws with respect to the
Premises occurring prior to or after Tenant's possession of the Premises, unless
caused by Tenant, its agents, employees, representatives, or contractors, or any
other persons acting under Tenant ("Tenant's Indemnitees"). Tenant shall
indemnify Landlord from such Hazardous Substances violations by Tenant's
Indemnitees. This indemnification shall survive the expiration or earlier
termination of this Lease.
ARTICLE 13
DEFAULT AND REMEDIES
Section 13.01. The occurrence of any one or more of the following events
shall constitute an Event of Default (herein so called) of Tenant under this
Lease: (a) if Tenant fails to pay any Rent hereunder as and when such Rent
becomes due and such failure shall continue for more than seven (7) days after
Landlord gives Tenant written notice of past due Rent; (b) if Tenant dissolves
its business; (c) if any petition is filed by or against Tenant or any guarantor
of this Lease under any present or future section or chapter of the Bankruptcy
Code, or under any similar law or statute of the United States or any state
thereof (which, in the case of an involuntary proceeding, is not permanently
discharged, dismissed, stayed, or vacated, as the case may be, within sixty (60)
days of commencement), or if any order for relief shall be entered against
Tenant or any guarantor of this Lease in any such proceedings; (d) if Tenant or
any guarantor of this Lease becomes insolvent or makes a transfer in fraud of
creditors or makes an assignment for the benefit of creditors; (e) if a
receiver, custodian, or trustee is appointed for the Premises or for all or
substantially all of the assets of Tenant or of any guarantor of this Lease,
which appointment is not vacated within sixty (60) days following the date of
such appointment; or (f) if Tenant fails to perform or observe any other terms
of this Lease and such failure shall continue for more than thirty (30) days
after Landlord gives Tenant notice of such failure, or, if such failure cannot
be corrected within such thirty (30) day period, if Tenant does not commence to
correct such default within said thirty (30) day period and thereafter
diligently prosecute the correction of same to completion within a reasonable
time.
Section 13.02. Upon the occurrence and during the continuance of any Event
of Default, Landlord shall have the right, at Landlord's option, to elect to do
any one or more of the following without further notice or demand to Tenant:
(a) terminate this Lease, in which event Tenant shall immediately
surrender the Premises to Landlord, and, if Tenant fails to so surrender,
Landlord shall have the right to enter upon and take possession of the
Premises and to expel or remove Tenant and its effects without being liable
for prosecution or any claim for damages therefor; and Tenant shall, and
hereby agrees to, indemnify Landlord for all loss and damage which Landlord
suffers by reason of such termination, including damages in an amount equal
to the total of (1) the costs of recovering the Premises and all other
expenses incurred by Landlord in connection with Tenant's default; (2) the
unpaid Rent earned as of the date of termination, plus interest at the
Interest Rate; (3) the total Rent which Landlord would have received under
this Lease for the remainder of the Term, but discounted to the then present
value at a rate of eight percent (8%) per annum, minus the fair market
rental value for the balance of the Term, determined as of the time of such
default, discounted to the then present value at a rate of eight percent
(8%) per annum; and (4) all other sums of money and damages owing by Tenant
to Landlord; or
(b) enter upon and take possession of the Premises without terminating
this Lease and without being liable to prosecution or any claim for damages
therefor, and, if Landlord elects, relet the Premises on such terms as
Landlord deems advisable, in which event Tenant shall pay to Landlord on
demand the cost of repossession, renovating, repairing and altering the
Premises for a new tenant or tenants and any deficiency between the Rent
payable hereunder and the rent paid under such reletting; provided, however,
that Tenant shall not be entitled to any excess payments received by
Landlord from such reletting. Landlord's failure to relet the Premises shall
not release or affect Tenant's liability for Rent or for damages; or
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(c) enter the Premises without terminating this Lease and without being
liable for prosecution or any claim for damages therefor and maintain the
Premises and repair or replace any damage thereto or do anything for which
Tenant is responsible hereunder. Tenant shall reimburse Landlord immediately
upon demand for any expenses which Landlord incurs in thus effecting
Tenant's compliance under this Lease, and Landlord shall not be liable to
Tenant for any damages with respect thereto.
Section 13.03. No agreement to accept a surrender of the Premises and no act
or omission by Landlord or Landlord's agents during the Term shall constitute an
acceptance or surrender of the Premises unless made in writing and signed by
Landlord. No re-entry or taking possession of the Premises by Landlord shall
constitute an election by Landlord to terminate this Lease unless a written
notice of such intention is given to Tenant. No provision of this Lease shall be
construed as an obligation upon Landlord to mitigate Landlord's damages under
the Lease, except to the extent required by law. In no event shall Tenant be
liable to Landlord for any punitive, consequential, multiple or speculative
damages and Landlord hereby waives any right to recover same.
Section 13.04. No provision of this Lease shall be deemed to have been
waived by Tenant or Landlord unless such waiver is in writing and signed by
Landlord. Landlord's acceptance of Rent following an Event of Default hereunder
shall not be construed as a waiver of such Event of Default, except with respect
to the particular Rent so accepted. No custom or practice which may grow up
between the parties in connection with the terms of this Lease shall be
construed to waive or lessen either Tenant's or Landlord's right to insist upon
strict performance of the terms of this Lease, without a written notice thereof
to the party bound to the other party.
Section 13.05. The rights granted to Landlord in this Article 13 shall be
cumulative of every other right or remedy provided in this Lease or which
Landlord may otherwise have at law or in equity or by statute, and the exercise
of one or more rights or remedies shall not prejudice or impair the concurrent
or subsequent exercise of other rights or remedies or constitute a forfeiture or
waiver of Rent or damages accruing to Landlord by reason of any Event of Default
under this Lease.
Section 13.06. Notwithstanding any provision contained in this Lease to the
contrary, Landlord waives and agrees not to have any statutory, constitutional
or contractual liens against Tenant's Property. Landlord agrees to execute and
deliver to Tenant such waivers and releases as Tenant may request to confirm the
foregoing within thirty (30) days following written receipt of a request
thereof.
ARTICLE 14
INSURANCE
Section 14.01. A. Tenant, at its sole expense, shall obtain and keep in
force during the Term the following insurance: (a) "All Risk" insurance insuring
all property located in the Premises, including furniture, equipment, fittings,
installations, fixtures, supplies and any other personal property ("Tenant's
Property"), in an amount equal to the full replacement value or such other
amount acceptable to Tenant; (b) Comprehensive general public liability
insurance including personal injury, bodily injury, broad form property damage,
operations hazard, owner's protective coverage, contractual liability, with a
cross liability clause and a severability of interests clause to cover Tenant's
indemnities set forth herein, and products and completed operations liability,
in limits not less than $1,000,000.00 inclusive per occurrence; (c) Worker's
Compensation and Employer's Liability insurance, with a waiver of subrogation
endorsement, in form and amount as required by applicable law, but only to the
extent such Worker's Compensation and Employer's Liability insurance is required
by applicable law; and (d) In the event Tenant performs any repairs or
alterations in the Premises, Builder's Risk insurance on an "All Risk" basis
(including collapse) on a completed value (non-reporting) form for full
replacement value covering all work incorporated in the Building and all
materials and equipment in or about the Premises; and (e) Improvements and
betterments.
B. Tenant shall have the right to include the insurance required by Section
14.01A under Tenant's policies of "blanket insurance". All certificates of
insurance evidencing such coverage shall name Tenant as named insured thereunder
and the liability insurance policy shall name Landlord and all mortgagees and
lessors of Landlord of which Tenant has been notified, additional insureds, all
as their respective interest may appear. Tenant shall deliver to Landlord
certificates by the Commencement Date and, with respect to renewals of such
policies, not later than fifteen (15) days prior to the end of the expiring term
of coverage. All policies of insurance shall be primary and non-contributing.
All such policies and certificates shall contain an agreement by the insurers to
notify Landlord and any mortgagee or lessor of Landlord in writing, by
Registered U.S. mail, return receipt requested, not less than thirty (30) days
before any material change, reduction in coverage, cancellation (except only ten
(10) days prior notice to Landlord shall be required as a result of non-payment
of insurance premiums).
Section 14.02. Landlord shall insure the Project, Common Areas, Parking
Facilities and all other portions of the Project during the term of this Lease
against damage with casualty in an amount equal to the full replacement value of
the Project and commercial general public liability insurance, all in such
amounts and with such deductible as Landlord reasonably deems appropriate.
Notwithstanding any contribution by Tenant to the cost of insurance premiums, as
provided hereinabove, Landlord shall not be required to carry insurance of any
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kind on Tenant's Property, and Tenant hereby agrees that Tenant shall have no
right to receive any proceeds from any insurance policies carried by Landlord.
Section 14.03. Tenant shall not knowingly conduct or permit to be conducted
in the Premises any activity, or place any equipment in or about the Premises or
the Building, which will invalidate the insurance coverage in effect or increase
the rate of fire insurance or other insurance on the Premises or the Building,
and Tenant shall comply with all reasonable and customary requirements and
regulations of Landlord's casualty and liability insurer. In no event shall
Tenant introduce or permit to be kept on the Premises or brought into the
Building any dangerous, noxious, radioactive or explosive substance in violation
of applicable environmental laws, except for office products in quantities found
in typical office use.
Section 14.04. Landlord and Tenant each hereby waive any right of
subrogation and right of recovery or cause of action for injury or loss to the
extent that such injury or loss is covered by fire, extended coverage, "All
Risk" or similar policies covering real property or personal property (or which
would have been covered if Tenant or Landlord, as the case may be, was carrying
the insurance required by this Lease), including, without limitation, matters
caused by the sole or concurrent negligence of the parties. Said waivers shall
be in addition to, and not in limitation or derogation or, any other waiver or
release contained in this Lease.
ARTICLE 15
DAMAGE BY FIRE OR OTHER CAUSE
Section 15.01. If the Premises or any portion thereof is damaged or
destroyed by any casualty to the extent that, in Landlord's reasonable judgment,
the damage or destruction to the Building cannot be repaired within one hundred
eighty (180) days after the date of such damage or destruction, Landlord shall
have the right, at Landlord's option, to terminate this Lease by giving Tenant
notice of such termination, within sixty (60) days after the date of such damage
or destruction.
Section 15.02. If the Premises or any portion thereof is damaged or
destroyed by any casualty, and this Lease is not terminated pursuant to Section
15.01 hereof, Rent shall be abated in proportion to the area of the Premises
which cannot be used or occupied by Tenant as a result of such casualty.
Landlord shall in such event, within one hundred eighty (180) days after the
date of such destruction or damage, subject to Force Majeure (as defined in
Section 25.06) or to Tenant Delay, restore the Premises to as near the same
condition as existed prior to such partial damage or destruction.
Section 15.03. If the Building or the Premises or any portion thereof is
destroyed by fire or other causes at any time during the last year of the Term,
then either Landlord or Tenant shall have the right, at the option of either
party, to terminate this Lease by giving written notice to the other within
sixty (60) days after the date of such destruction.
Section 15.04. Landlord shall have no liability to Tenant for inconvenience,
loss of business, or annoyance arising from any repair of any portion of the
Premises or the Building, provided that Landlord shall use good faith,
reasonable efforts to minimize any such inconvenience, loss or annoyance. If
Landlord is required by this Lease or by any mortgagee or lessor of Landlord to
repair, or if Landlord undertakes to repair, Landlord shall use reasonable
efforts to have such repairs made promptly and in a manner which will not
unnecessarily interfere with Tenant's occupancy.
Section 15.05. In the event of termination of this Lease pursuant to
Sections 15.01, 15.02, then all Rent shall be apportioned and paid to the date
of such damage, whichever last occurs, and Tenant shall immediately vacate the
Premises according to such notice of termination; provided, however, that those
provisions of this Lease which are designated to cover matters of termination
and the period thereafter shall survive the termination hereof.
ARTICLE 16
CONDEMNATION
Section 16.01. In the event any portion of the Building, the Premises, the
Parking Facilities, or the Project are taken or condemned by eminent domain or
by any conveyance in lieu thereof (such taking, condemnation or conveyance in
lieu thereof being hereinafter referred to as "condemnation"), which taking, in
Landlord's reasonable judgment, is such that the Building, the Premises, or the
Parking Facilities cannot be restored in an economically feasible manner for use
substantially as originally designed (including in such consideration the
possible use of additional parking facilities in the vicinity of the Building),
then Landlord shall have the right, at Landlord's option, to terminate this
Lease, effective as of the date specified by Tenant in a written notice of
termination from Landlord to Tenant and Rent shall be apportioned as of the date
of such condemnation.
Section 16.02. In the event fifteen percent (15%) or more of the Premises or
the Parking Facilities shall be taken by condemnation, which taking in Tenant's
judgment is such that the Premises and/or the Parking Facilities cannot be
restored for use substantially as originally designed (including in such
consideration
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the possible use of additional parking facilities in the vicinity of the
Building), then Tenant shall have the right, at Tenant's option, to terminate
this Lease, effective as of the date on which such condemnation occurred.
Section 16.03. In the event that a portion of the Premises shall be taken by
condemnation, and this Lease is not terminated pursuant to Section 16.01 or
Section 16.02, then this Lease shall be terminated as of the date of such
condemnation as to the portion of the Premises so taken, and this Lease shall
remain in full force and effect as to the remainder of the Premises, and
Landlord shall promptly following the date of the taking, take such action as
may be required to restore the Project to substantially the same condition as
existed prior to the taking.
Section 16.04. All compensation awarded or paid upon a condemnation of any
portion of the Project shall belong to and be the property of Landlord without
participation by Tenant. Nothing herein shall be construed, however, to preclude
Tenant from prosecuting any claim directly against the condemning authority for
loss of business, loss of good will, moving expenses, damage to, and cost of
removal of, trade fixtures, furniture and other personal property belonging to
Tenant; provided, however, Tenant shall be entitled to pursue a separate award
for loss of business or goodwill or the taking of Tenant's Property, and
Landlord shall have no interest with respect thereto.
Section 16.05. If any portion of the Project other than the Building or the
Parking Facilities is taken by condemnation, or if the temporary use or
occupancy of all or any part of the Premises shall be taken by condemnation
during the Term, this Lease shall be and remain unaffected by such condemnation,
and Tenant shall continue to pay in full the Rent payable hereunder.
ARTICLE 17
INDEMNIFICATION
Section 17.01. Tenant agrees to indemnify and hold harmless, Landlord for
damage to any property or injury to, or death of, any person in, upon, or about
the Project, including the Premises, arising from the negligence or willful
misconduct of Tenant, or its agents, employees, representatives, or contractors,
but not including matters caused by the negligence or willful misconduct of
Landlord, its agents, employees, representatives, or contractors. In no event
shall Tenant indemnify Landlord for damages, costs, expenses and other
liabilities arising from Landlord's negligence or any defects in the design
and/or construction of the Project. Tenant's foregoing indemnity shall include
attorneys' fees, investigation costs, and all other reasonable costs and
expenses incurred by Landlord in any connection therewith. The provisions of
this Article 17 shall survive the expiration or termination of this Lease with
respect to any damage, injury, or death occurring before such expiration or
termination.
Section 17.02. Landlord shall, and hereby agrees to, indemnify and hold
Tenant harmless from any damages in connection with loss of life, bodily or
personal injury or property damage arising in the Project from the negligence of
willful misconduct of Landlord, or its agents, employees, representatives, or
contractors, but not including the negligence or willful misconduct of Tenant,
or its agents, employees, representatives, or contractors. Landlord's foregoing
indemnity shall include attorneys' fees, investigative costs and all other
reasonable costs and expenses incurred by Tenant in connection therewith.
ARTICLE 18
SUBORDINATION AND ESTOPPEL CERTIFICATES
Section 18.01. Subject to Tenant's receipt of the applicable Non-Disturbance
Agreement (as hereinafter defined), this Lease and all rights of Tenant
hereunder are subject and subordinate to all underlying leases now or hereafter
in existence, and to any supplements, amendments, modifications, and extensions
of such leases heretofore or hereafter made and to any deeds to secure debt,
mortgages, or other security instruments which now or hereafter cover all or any
portion of the Project or any interest of Landlord therein, and to any advances
made on the security thereof, and to any increases, renewals, modifications,
consolidations, replacements, and extensions of any of such mortgages. This
provision is declared by Landlord and Tenant to be self-operative and no further
instrument shall be required to effect such subordination of this Lease. Within
twenty (20) business days following Tenant's receipt of written demand, Tenant
shall execute, acknowledge, and deliver to Landlord any further instruments and
certificates evidencing such subordination as Landlord, and any mortgagee or
lessor of Landlord shall reasonably require. Tenant shall not unreasonably
withhold, delay, or defer its written consent reasonable modifications in this
Lease which are a condition of any financing for the Project or any reciprocal
easement agreement with facilities in the vicinity of the Building, provided
that such modifications do not increase the obligations of Tenant hereunder or
materially and adversely affect Tenant's use and enjoyment of the Premises.
Notwithstanding anything contained herein to the contrary: (a) prior to the
Commencement Date, Landlord shall deliver to Tenant an agreement executed by the
holder of any liens currently encumbering the Project and the lessor under any
ground lease affecting the Project confirming its agreement not to disturb
Tenant's possession of the Premises or to terminate this Lease, except as
specifically set forth in this Lease (a "Non-Disturbance Agreement"), (b)
Tenant's obligations under this Lease shall be subject to Tenant's receipt of
such a Non-Disturbance Agreement, and (c) this Lease shall not be subject to any
lien placed against the Project or ground
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lease affecting the Project following the date hereof until such time as
Landlord has delivered to Tenant a Non-Disturbance Agreement executed by the
holder of any such lien or lessor under such ground lease.
Section 18.02. Notwithstanding the generality of the foregoing provisions of
Section 18.01, any mortgagee or lessor of Landlord shall have the right at any
time to subordinate any such mortgage or underlying lease to this Lease, or to
any of the provisions hereof, on such terms and subject to such conditions as
such mortgagee or lessor of Landlord may consider appropriate in its discretion.
At any time, before or after the institution of any proceedings for the
foreclosure of any such mortgage, or the sale of the Building under any such
mortgage, or the termination of any underlying lease, Tenant shall, upon request
of such mortgagee or any person or entities succeeding to the interest of such
mortgagee or the purchaser at any foreclosure sale ("Successor Landlord"),
automatically become the Tenant (or if the Premises has been validly subleased,
the subtenant) of the Successor Landlord, without change in the terms or other
provisions of this Lease (or, in the case of a permitted sublease, without
change in this Lease or in the instrument setting forth the terms of such
sublease); provided, however, that the Successor Landlord shall not be (i) bound
by any payment made by Tenant of Rent or Additional Rent for more than one (1)
month in advance, except for a Security Deposit previously paid to Landlord (and
then only if such Security Deposit has been deposited with and is under the
control of the Successor Landlord), (ii) bound by any termination, modification,
amendment or surrender of the Lease done without the Successor Landlord's
consent, (iii) liable for any damages or subject to any offset or defense by
Tenant to the payment of Rent by reason of any act or omission of any prior
landlord (including Landlord), or (iv) personally or corporately liable, in any
event, beyond the limitations on landlord liability set forth in Section 25.05
of this Lease. This agreement of Tenant to attorn to a Successor Landlord shall
survive any such foreclosure sale, trustee's sale conveyance in lieu thereof or
termination of any underlying lease. Tenant shall, within twenty (20) days
following Tenant's receipt of written demand at any time, before or after any
such foreclosure or termination execute, acknowledge, and deliver to the
Successor Landlord any written instruments and certificates evidencing such
attornment as such Successor Landlord may reasonably require, provided, such
Successor Landlord agrees not to terminate Tenant's possession of the Premises
except as permitted under this Lease.
Section 18.03. Tenant shall, from time to time, within twenty (20) days
after request from Landlord, or from any mortgagee or lessor of Landlord,
execute, acknowledge and deliver in recordable form a certificate certifying, to
the extent true, that this Lease, as the Lease may have been amended, is in full
force and effect; that the Term has commenced and the full amount of the Rent
then accruing hereunder; the dates to which the Rent has been paid; that Tenant
has accepted possession of the Premises and that any improvements required by
the terms of this Lease to be made by Landlord have been completed to the
satisfaction of Tenant; the amount, if any, that Tenant has paid to Landlord as
a Security Deposit; that no Rent under this Lease has been paid more than thirty
(30) days in advance of its due date; that the address for notices to be sent to
Tenant is as set forth in this Lease, or has been changed as set forth in the
certificate; that Tenant has no charge, lien, or claim of offset under this
Lease or otherwise against Rent or other charges due or to become due hereunder;
that, to the knowledge of Tenant, Landlord is not then in default under this
Lease; and such other matters as may be reasonably requested by Landlord or any
mortgagee or lessor of Landlord, which statements nay be modified to reflect
circumstances as they currently exist. Any such certificate may be relied upon
by Landlord, any Successor Landlord, or any mortgagee or lessor of Landlord.
Landlord agrees periodically to furnish, when reasonably requested in writing by
Tenant, certificates signed by Landlord containing information similar to the
foregoing information.
Section 18.04. No act or failure to act on the part of Landlord which would
entitle Tenant under the terms of this Lease, or by law, to be relieved of
Tenant's obligations hereunder or to terminate this Lease, shall result in a
release of such obligations or a termination of this Lease unless (a) Tenant has
given notice by registered or certified mail to any mortgagee or lessor of
Landlord whose address shall have been furnished to Tenant, and (b) Tenant
offers such mortgagee or lessor of Landlord a reasonable opportunity to cure the
default, including time to obtain possession of the Premises by power of sale or
judicial foreclosure, if such should prove necessary to effect a cure.
ARTICLE 19
SURRENDER OF THE PREMISES
Section 19.01. By no later than 11:59 p.m. of the Expiration Date or the
date of earlier termination of this Lease, subject to Section 19.02 below, at
Tenant's sole cost and expense, shall peacefully vacate and surrender the
Premises to Landlord in good order, broom clean and in the same condition as at
the beginning of the Term or as the Premises may thereafter have been improved,
reasonable use and wear thereof and repairs which are Landlord's obligations
under this Lease, casualty and condemnation only excepted, and Tenant shall
remove all of Tenant's Property and turn over all keys for the Premises to
Landlord.
Section 19.02. Notwithstanding the foregoing, Tenant shall be entitled to
continue to occupy the Premises during the thirty (30) day period following the
expiration of this Lease at the Rent rate payable hereunder prior to such
expiration and shall not be liable for any consequential or other damages
suffered by Landlord during such thirty (30) day period. Should Tenant continue
to hold the Premises after the expiration of such thirty (30) day period, such
holding over, unless otherwise agreed to by Landlord in writing, shall
constitute and be construed as a tenancy at sufferance at monthly installments
of Rent equal to one hundred fifty percent (150%) of the monthly portion of Base
Rent in effect as of the date of expiration or earlier termination, and subject
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to all of the other terms, charges and expenses set forth herein except any
right to renew this Lease or to expand the Premises or any right to additional
services. Tenant shall also be liable to Landlord for all damage which Landlord
suffers because of any holding over by Tenant, and Tenant shall indemnify
Landlord against all claims made by any other tenant or prospective tenant
against Landlord resulting from delay by Landlord in delivering possession of
the Premises to such other tenant or prospective tenant. The provisions of this
Article 19 shall survive the expiration or earlier termination of this Lease.
ARTICLE 20
LANDLORD'S RIGHT TO INSPECT
Section 20.01. Landlord shall retain duplicate keys to all doors of the
Premises (except for Tenant's secured areas). Tenant shall provide Landlord with
new keys should Tenant receive Landlord's consent to change the locks (except
for Tenant's secured areas). Landlord shall have the right to enter the Premises
(except for Tenant's secured areas) at reasonable hours following at least
twenty-four (24) hours prior notice (or, in the event of an emergency, at any
hour, or in the event of providing janitorial services, after Business Hours);
provided, however, Landlord shall use reasonable efforts to minimize
interference with Tenant's business. Landlord shall not be liable to Tenant for
the exercise of Landlord's rights under this Article 20 and Tenant hereby waives
any claims for damages for any injury, inconvenience or interference with
Tenant's business, any loss of occupancy or quiet enjoyment of the Premises, and
any other loss occasioned thereby, except for bodily injuries or property
damages caused by the negligence or willful misconduct of Landlord, or its
agents, employees, representatives, or contractors.
ARTICLE 21
SECURITY DEPOSIT
INTENTIONALLY DELETED
ARTICLE 22
BROKERAGE
Section 22.01. Tenant and Landlord each represent and warrant to the other
that it has not entered into any agreement with, or otherwise had any dealings
with, any broker or agent in connection with the negotiation or execution of
this Lease which could form the basis of any claim by any such broker or agent
for a brokerage fee or commission, finder's fee, or any other compensation of
any kind or nature in connection herewith, other than with Broker, and each
party shall, and hereby agrees to, indemnify and hold the other harmless from
all costs (including court costs, investigation costs, and attorneys' fees),
expenses, or liability for commissions or other compensation claimed by any
broker or agent with respect to this Lease which arise out of any agreement or
dealings, or alleged agreement or dealings, between the indemnifying party and
any such agent or broker, other than with Broker, whose commission shall be paid
by Landlord. This provision shall survive the expiration or earlier termination
of this Lease.
ARTICLE 23
OBSERVANCE OF RULES AND REGULATIONS
Section 23.01. Tenant and Tenant's servants, employees, agents, visitors,
and licensees shall observe faithfully and comply strictly with all Rules and
Regulations (herein so called) attached to this Lease as such Rules and
Regulations may be changed from time to time. Landlord shall at all times have
the right to make reasonable changes in and additions to such Rules and
Regulations; provided Landlord gives Tenant prior notice of such changes and
provided that such new rules and regulations or changes in existing rules and
regulations do not conflict with this Lease, and do not materially interfere
with the lawful conduct of Tenant's business in the Premises and are otherwise
reasonable. In the event of a conflict between the terms of this Lease and the
terms of the Rules and Regulations, the terms of this Lease shall control, it
being agreed and understood that such Rules and Regulations shall not limit
Tenant's rights under this Lease.
ARTICLE 24
NOTICES
Section 24.01. All notices, consents, demands, requests, documents, or other
communications (other than payment of Rent) required or permitted hereunder
(collectively, "notices") shall be deemed given, whether actually received or
not, when dispatched for hand delivery or delivery by air express courier (with
signed receipts) to the other party, or on the second Business Day after deposit
in the United States mail, postage prepaid,
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certified, return receipt requested, except for notice of change of address
which shall be deemed given only upon actual receipt. The addresses of the
parties for notices are set forth in Article 1, or any such other addresses
subsequently specified by each party in notices given pursuant to this Section
24.01.
ARTICLE 25
MISCELLANEOUS
Section 25.01. Professional Fees. In any action or proceeding brought by
either party against the other under this Lease, the prevailing party shall be
entitled to recover from the other party its professional fees for attorneys,
appraisers and accountants, its investigation costs, and any other legal
expenses and court costs incurred by the prevailing party in such action or
proceeding.
Section 25.02. Reimbursements. Wherever the Lease requires Tenant to
reimburse Landlord for the cost of any item, unless specifically provided
otherwise herein, such costs will be the reasonable and customary competitive
charge actually incurred by Landlord, plus a 5% fee to Landlord's manager, for
such item.
Section 25.03. Severability. Every agreement contained in this Lease is, and
shall be construed as, a separate and independent agreement. If any term of this
Lease or the application thereof to any person or circumstances shall be invalid
or unenforceable, the remaining agreements contained in this Lease shall not be
affected.
Section 25.04. Non-Merger. There shall be no merger of this Lease with any
ground leasehold interest or the fee estate in the Project or any part thereof
by reason of the fact that the same person may acquire or hold, directly or
indirectly, this Lease or any interest in this Lease as well as any ground
leasehold interest or fee estate in the Project or any interest in such fee
estate.
Section 25.05. Landlord's Liability. Anything contained in this Lease to the
contrary notwithstanding, Tenant agrees that Tenant shall look solely to the
sales proceeds, insurance proceeds and estate and property of Landlord in the
Project for the collection of any judgment or other judicial process requiring
the payment of money by Landlord for any default or breach by Landlord under
this Lease, subject, however, to the prior rights of any mortgagee or lessor of
the Project. No other assets of Landlord or any partners, shareholders, or other
principals of Landlord shall be subject to levy, execution or other judicial
process for the satisfaction of Tenant's claim.
Section 25.06. Force Majeure. Whenever the period of time is herein
prescribed for action to be taken by Landlord or Tenant, Landlord or Tenant
shall not be liable or responsible for, and there shall be excluded from the
computation for any such period of time, any delays due to force majeure, which
term shall include strikes, riots, acts of God, shortages of labor or materials,
war, governmental approvals, laws, regulations, or restrictions, or any other
cause of any kind whatsoever which is beyond the reasonable control of Landlord
or Tenant. Force Majeure shall not excuse or delay Tenant's obligation to Rent
or either party's obligation to pay any other amount due under this Lease.
Section 25.07. Headings. The article headings contained in this Lease are
for convenience only and shall not enlarge or limit the scope or meaning of the
various and several articles hereof. Words in the singular number shall be held
to include the plural, unless the context otherwise requires. All agreements and
covenants herein contained shall be binding upon the respective heirs, personal
representatives, and successors and assigns of the parties thereto.
Section 25.08. Successors and Assigns. All agreements and covenants herein
contained shall be binding upon the respective heirs, personal representatives,
successors and assigns or the parties hereto. If there be more than one Tenant,
the obligations hereunder imposed upon Tenant shall be joint and several. If
there is a guarantor of Tenant's obligations hereunder, Tenant's obligations
shall be joint and several obligations of Tenant and such guarantor, and
Landlord need not first proceed against Tenant hereunder before proceeding
against such guarantor, and any such guarantor shall not be released from its
guarantee for any reason, including any amendment of this Lease, any forbearance
by Landlord or waiver of any of Landlord's rights, the failure to give Tenant or
such guarantor any notices, or the release of any party liable for the payment
or performance of Tenant's obligations hereunder. Notwithstanding the foregoing,
nothing contained in this Section 25.08 shall be deemed to override Article 8.
Section 25.09. Landlord's Representations. Neither Landlord nor Landlord's
agents or brokers have made any representations or promises with respect to the
Premises, the Building, the Parking Facilities, the Land, or any other portions
of the Project except as herein expressly set forth and all reliance with
respect to any representations or promises is based solely on those contained
herein. No rights, easements, or licenses are acquired by Tenant under this
Lease by implication or otherwise except as, and unless, expressly set forth in
this Lease.
Section 25.10. Entire Agreement; Amendments. This Lease and the Exhibits and
Riders attached hereto set forth the entire agreement between the parties and
cancel all prior negotiations, arrangements,
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brochures, agreements, and understandings, if any, between Landlord and Tenant
regarding the subject matter of this Lease. No amendment or modification of this
Lease shall be binding or valid unless expressed in writing executed by both
parties hereto.
Section 25.11. Tenant's Authority. If Tenant signs as a corporation,
execution hereof shall constitute a representation and warranty by Tenant that
Tenant is a duly organized and existing corporation, that Tenant has been and is
qualified to do business in the State of Texas and in good standing with the
State of Texas, that the corporation has full right and authority to enter into
this Lease, and that all persons signing on behalf of the corporation were
authorized to do so by appropriate corporate action. If Tenant signs as a
partnership, trust, or other legal entity, execution hereof shall constitute a
representation and warranty by Tenant that Tenant has complied with all
applicable laws, rules, and governmental regulations relative to Tenant's right
to do business in the State of Texas, that such entity has the full right and
authority to enter into this Lease, and that all persons signing on behalf of
Tenant were authorized to do so by any and all necessary or appropriate
partnership, trust, or other actions.
Section 25.12. Governing Law. This Lease shall be governed by and construed
under the laws of the State of Texas. Any action brought to enforce or interpret
this Lease shall be brought in the court of appropriate jurisdiction in Dallas
County, Texas. Should any provision of this Lease require judicial
interpretation, Landlord and Tenant hereby agree and stipulate that the court
interpreting or considering same shall not apply the presumption that the terms
hereof shall be more strictly construed against a party by reason of any rule or
conclusion that a document should be construed more strictly against the party
who itself or through its agents prepared the same, it being agreed that all
parties hereto have participated in the preparation of this Lease and that each
party had full opportunity to consult legal counsel of its choice before the
execution of this Lease.
Section 25.13. Tenant's Use of Name of the Building. Tenant shall not,
without the prior written consent of Landlord, use the name of the Building for
any purpose other than as the address of the business to be conducted by Tenant
in the Premises, and Tenant shall not do or permit the doing of anything in
connection with Tenant's business or advertising (including brokers' flyers
promoting sublease space) which in the reasonable judgment of Landlord may
reflect unfavorably on Landlord or the Building or confuse or mislead the public
as to any apparent connection or relationship between Tenant and Landlord, the
Building, or the Land.
Section 25.14. Ancient Lights. Any elimination or shutting off of light,
air, or view by any structure which may be erected on lands adjacent to the
Building shall in no way affect this Lease and Landlord shall have no liability
to Tenant with respect thereto; provided, however, Landlord shall not erect any
structure on adjacent property which shall shut off Tenant's light, air or view.
Section 25.15. Changes to Project by Landlord. Landlord shall have the
unrestricted right to make changes to all portions of the Project in Landlord's
reasonable discretion for the purpose of improving access or security to the
Project or the flow of pedestrian and vehicular traffic therein. Landlord shall
have the right at any time, without the same constituting an actual or
constructive eviction and without incurring any liability to Tenant therefor, to
change the arrangement or location of entrances or passageways, doors and
doorways, corridors, elevators, stairs, bathrooms, or any other Common Areas so
long as reasonable access to the Premises remains available. Landlord shall also
have the right to (a) rearrange, change, expand or contract portions of the
Project constituting Common Areas (b) to use Common Areas while engaged in
making improvements, repairs or alterations to the Project, or any portion
thereof, and (c) to do and perform such other acts and make such other changes
in to or with respect to the Project, or any portion thereof, as Landlord may,
in the exercise of sound business judgment, deem to be appropriate.
Section 25.16. Time of Essence. Time is of the essence of this Lease.
Section 25.17. Landlord's Acceptance of Lease. The submission of this Lease
to Tenant shall not be construed as an offer and Tenant shall not have any
rights with respect thereto unless Landlord executes a copy of this Lease and
delivers the same to Tenant.
Section 25.18. Financial Statements. Tenant shall deliver to Landlord its
most recent annual report within thirty (30) days following Tenant's receipt of
written demand therefore. In no event shall Tenant be required to deliver any
other financial statements to Landlord in connection herewith.
Section 25.19. Signage. Tenant shall have the exclusive right, at Tenant's
sole cost, to place its name and corporate logo on signage to be located outside
the Building at a mutually agreeable location, subject to Landlord's reasonable
approval of the design of such signage. Landlord agrees to diligently pursue all
avenues to obtain maximum signage rights for Tenant from the applicable
governmental authorities, with any attendant costs to be solely borne by Tenant.
Landlord will contribute up to $15,000.00 towards the costs of such signage
payable within thirty (30) days of the completion, and Landlord's acceptance, of
the construction of the signage, failing which Tenant shall be entitled to
deduct such amount from the Rent next becoming due hereunder. Tenant shall be
entitled to directory listings and signage in the elevator lobby, on the floors
on which the Premises are located, and on the exterior of the Building. Tenant
shall have the right, subject to Landlord's reasonable approval of the design of
such signage, to obtain from applicable municipal authorities all of the signage
rights Tenant desires and Landlord will cooperate with Tenant in connection with
such efforts.
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Section 25.20. Lease Contingencies. Landlord and Tenant agree that this
Lease shall not be effective until Landlord and Tenant receive a fully executed
Tax Abatement Agreement and Economic Development Incentive Agreement from the
City of Allen, Texas and the Allen Economic Development Corporation. Should the
aforementioned agreements not be received by Landlord and Tenant by on or before
August 31, 1998, either the Landlord or Tenant, upon written notice to the other
party, may terminate this Lease. Further, Landlord agrees that Landlord will not
purchase the Land from the City of Allen, Texas and the Allen Economic
Development Corporation, nor enter into any agreement regarding the purchase of
such land with the City of Allen, Texas or the Allen Economic Development
Corporation, until this Lease has been fully executed by Landlord and Tenant.
ARTICLE 26
OTHER DEFINITIONS
When used in this Lease, the terms set forth hereinbelow shall have the
following meanings: (a) "Business Days" shall mean Monday through Friday (except
for Holidays); "Business Hours" shall mean 8:00 a.m. to 6:00 p.m. on Monday
through Friday and 9:00 a.m. to 1:00 p.m. on Saturdays (except for Holidays);
and "Holidays" shall mean those holidays designated by Landlord, which holidays
shall be consistent with those holidays designated by landlords of other
first-class office buildings in the north Plano, Texas suburban area. (b)
"Common Areas" shall mean those certain areas and facilities of the Building and
the Parking Facilities and those certain improvements to the Land other than the
Premises. (c) The words "day" or "days" shall refer to calendar days, except
where "Business Days" are specified. (d) "Net Rentable Area" shall mean the
BOMA/American National Standard Institute single tenant standard, governed by
Boma Southwest-Dallas, Texas, with all floor area measured from the inside
surface of the outer glass of the Building, excluding only the areas ("Service
Areas") within the outside wall used for the Building's stairs, fire towers,
elevator shafts, vertical penetrations of the Building's central atrium, flues,
vents, stacks, pipe shafts, and vertical ducts (which areas shall be measured
from the mid-point of walls enclosing such areas, but including any Service
Areas which are for the specific use of the particular tenant, such as special
stairs or elevators, plus an allocation of the square footage of the Building's
central areas for providing telephone, electrical, mechanical, janitorial,
security and mail services, as well as, the central entry lobby, ground level
elevator lobby and service elevator lobby, central fire exit corridors, service
exit corridor and central loading dock (the "Central Areas"). No deductions from
Net Rentable Area shall be made for columns or projections necessary to the
Building. (e) The "terms of this Lease" shall be deemed to include all terms,
covenants, conditions, provisions, obligations, limitations, restrictions,
reservations and agreements contained in this Lease. (f) A "year" shall mean a
calendar year.
IN WITNESS WHEREOF, Landlord and Tenant have set their hands hereunto and
have caused this Lease to be executed by duly authorized officials thereof, as
of the day and year set forth on the cover page hereof.
LANDLORD:
PRENTISS PROPERTIES ACQUISITION PARTNERS, L.P.
an Delaware limited partnership
By: Prentiss Properties I, Inc.
an Delaware corporation
general partner
By: /s/ Dennis J. DuBois
Name: Dennis J. DuBois
Title: Executive Vice President
By: /s/ J. Kevan Dilbeck
Name: J. Kevan Dilbeck
Title: Vice President
TENANT:
MICROGRAFX, INC.,
a Texas corporation
By: /s/ Douglas Richard
Name: Doug Richard
Title: Chief Executive Officer
<PAGE> 25
EXHIBIT A
FLOOR PLAN OF THE PREMISES
ATTACHED
A
Page 1 of 1
<PAGE> 26
EXHIBIT B
THE LAND
A 10.0037 ACRE TRACT OF LAND BEING ALL OF LOT 2, OF THE REPLAT OF LOT 1, BLOCK 1
OF THE MILLENNIUM BUSINESS PARK, AN ADDITION TO THE CITY OF ALLEN, COLLIN
COUNTY, TEXAS, BEING RECORDED IN CABINET I, PAGE 494 OF THE PLAT RECORDS OF
COLLIN COUNTY, TEXAS (PRCCT) AS SHOWN ON THE ATTACHED EXHIBIT "A" AND BEING MORE
PARTICULARLY DESCRIBED AS FOLLOWS:
The POINT OF BEGINNING is a half-inch iron rod with a GBW yellow cap set to mark
the southwest corner of the intersection of Century Parkway (85' right-of-way)
and Millennium Drive (85' right-of-way), said point being in the west
right-of-way for Century Parkway and being the southeast corner of a corner clip
for said southwest intersection, and being in the east line of said Lot 2, said
point also being the beginning of a non-tangent curve to the left having a
radius 5,742.50 feet;
THENCE, with said curve being the west right-of-way of Century Parkway and the
east line of Lot 2, through a central angle of 02 degrees 16'38" an arc distance
of 228.24 feet, said curve having a chord which bears S 15 degrees 10"00" W a
distance of 228.22 feet to a half-inch iron rod with a yellow GBW cap set to
mark the point of tangent;
THENCE, 14 degrees 01'41" W with said right-of-way and east line a distance of
120.00 feet to a one-half inch iron rod with a yellow GBW cap set to mark the
beginning of a tangent curve to the left, said curve having a radius of 1,142.50
feet;
THENCE, with said west right-of-way and east line through a central angle of 09
degrees 21'59" an arc distance of 186.77 feet, said curve having a chord which
bears S 09 degrees 20'42" W a distance of 186.56 feet to a half-inch iron rod
with a yellow GBW cap set to mark the point of tangent;
THENCE, S 04 degrees 39'42" W with said right-of-way and east line of Lot 2 a
distance of 203.47 feet to a half-inch iron rod with a yellow GBW cap set to
mark the beginning of a circular curve to the right, said curve having a radius
of 1,057.50 feet;
THENCE, with said curve continue with said common line through a central angle
of 16 degrees 51'16" an arc distance of 311.08 feet and having a chord which
bears S 13 degrees 05'20" W a distance of 309.96 feet to a half-inch iron rod
with a yellow GBW cap set to mark the northeast end of a corner clip at the
northwest corner of intersection of said Century Parkway and Bethany Drive (110'
right-of-way);
THENCE, S 64 degrees 58'01" W with said corner clip a distance of 14.62 feet to
a half-inch iron rod with a yellow GBW cap set to mark the point at the
southwest end of said corner clip, said point being at the beginning of a
non-tangent curve to the left, having a radius of 786.42 feet;
THENCE, with said curve on the north right-of-way line of Bethany Drive, being
the south line of Lot 2, through a central angle of 03 degrees 04'05" an arc
distance of 42.11 feet, having a chord which bears N 73 degrees 47'19" W a
distance of 42.10 feet to a half-inch iron rod with a yellow GBW cap set to mark
the point, which point is a southwest corner of Lot 2 and a southeast corner of
the Bethany Tech Center Addition, an addition to the City of Allen as recorded
in Cabinet F, Page 273, PRCCT;
THENCE, N 14 degrees 01'41" E departing said right-of-way and with a west line
of said Lot 2, being the east line of said Bethany addition, distance of 426.42
feet to a point, from which point a found half-rod bears N 51 degrees 57'15" W a
distance of 1.27 feet, said point being an interior ell corner of Lot 2, and
being the northwest corner of said Bethany Center addition;
THENCE, N 75 degrees 58'19" W with a south line of said Lot 2 being the north
line of said Bethany Tech Center and also the north line of the N/F Madstone
Properties, as recorded in Volume 92, Page 5975, PRCCT, a distance of 623.14
feet to a point, said point being the southwest corner of Lot 2, being the
southeast corner of Lot 1R of said Millennium Park addition, and being in the
north line of said N/F Madstone Properties, from which point a found 5/8 inch
iron rod bears N 40 degrees 55'55" W a distance of 0.11 feet;
THENCE, N 14 degrees 04'56" E with the west line of Lot 2 being the east line of
Lot 1R a distance of 662.74 feet to a one-half inch iron rod with a yellow GBW
cap set to mark the point, said point being the northwest corner of Lot 2 and
being the northeast corner of Lot 1R of said Lot 1, Block 1, of Millennium
Business Park, said point also being in the south right-of-way drive of
Millennium Drive;
THENCE, S 75 degrees 58'19" E with the north line of said Lot 2 being the south
line of Millennium Drive a distance of 222.34 feet to a one-half inch iron rod
with a yellow GBW cap set to mark the point at the beginning of a tangent curve
to the right, having a radius of 1,957.50 feet;
B
Page 1 of 2
<PAGE> 27
THENCE, with said curve with said south right-of-way and the north line of Lot 2
through a central angle of 02 degrees 53'19" an arc distance of 98.69 feet and
having a chord which bears S 74 degrees 31'39" E a distance of 98.68 feet to a
one-half inch iron rod with a yellow GBW cap set to mark the point of tangent;
THENCE, S 73 degrees 05'00" E with said common line a distance of 288.40 feet to
a one-half inch iron rod with a yellow GBW cap set to mark the point at the
beginning of a corner clip, being at the southwest corner of Millennium Drive
and Century Parkway;
THENCE, S 28 degrees 23'20" E with said corner clip a distance of 26.73 feet to
the POINT OF BEGINNING and containing 10.0037 acres (435,762 square feet) of
land.
B
Page 2 of 2
<PAGE> 28
EXHIBIT C
LEASEHOLD IMPROVEMENTS
ARTICLE 1
DEFINITIONS
The terms defined in Article 1 of this Exhibit C, for all purposes of
this Exhibit C, shall have the meanings herein specified, and in addition to the
terms defined herein, the definitions in the Basic Lease Information and
otherwise in this lease shall also apply to this Exhibit C.
1.01. "Base Building Condition" shall mean the condition of the
Building and the Premises to be constructed by Landlord, which construction
shall be completed with the improvements constructed substantially in accordance
with those certain preliminary plans prepared by Architect (hereinafter
defined), dated August 19, 1998, which plans are listed and made a part hereof
as Attachment C-1 (the "Base Building Plans"). Landlord agrees that, subject to
changes requested by Tenant or governmental authorities, the construction
drawings prepared by Architect shall be a natural evolution of the Base Building
Plans.
1.02. "Building Standard" means the quality of materials, finishes, and
workmanship from time to time specified by Landlord for the Building.
1.03. "Non-Building Standard" means all materials, finishes, and
workmanship used in connection with the construction and installation of the
Leasehold Improvements which deviate from Building Standard in terms of quality.
1.04. "Tenant's Work" means the work, if any, which is supplied,
installed, and finished by Tenant's Contractor, at Tenant's cost, to complete
any leasehold improvements to the Premises.
1.05. "Leasehold Improvements" shall mean the leasehold improvements to
be completed by Landlord, in the Premises as identified in Tenant's Plans and
Specifications.
1.06. " Architect" shall mean Haldeman, Powell & Partners, who is the
architect engaged by Landlord to prepare the Base Building Plans and Tenant's
Plans and Specifications for the Leasehold Improvements as contemplated by
Section 2.02 hereof.
1.07. "Landlord's Contractor" means the person or firm from time to
time selected by Landlord and Tenant, and paid by Tenant, subject to Tenant's
Allowance, to construct and install the Leasehold Improvements in the Premises.
1.08. "Landlord's Manager" shall be the manager of the Building, whose
responsibilities include serving as construction manager for Tenant in
connection with the construction of the Leasehold Improvements.
1.09. "Net Rentable Area of the Building" shall have the meaning
specified in the Basic Lease Information.
1.10. "Net Rentable Area of the Premises" shall have the meaning
specified in the Basic Lease Information.
1.11. "Tenant Expenditure Authorization" means an authorization by
Tenant, prior to the commencement of any Tenant's Work for Landlord's Manager to
contract to expend funds for the Leasehold Improvements.
ARTICLE 2
COMPLETION OF BUILDING AND PREMISES
2.01. Tenant shall provide Architect with sufficient information by
October 1, 1998, to enable Architect to prepare and complete the space plan, the
architectural construction plan with detailed specifications and finish
schedules and the mechanical and electrical construction plan with detailed
specifications (collectively "Tenant's Plans and Specifications") for the
Leasehold Improvements by December 1, 1998. Such Tenant's Plans and
Specifications shall be prepared by Architect and submitted to Tenant for
Tenant's approval within ten (10) Business Days of Tenant's receipt of same.
Landlord's approval of the Tenant's Plans and Specifications, and any changes
thereto, for Tenant's Work shall impose no responsibility or liability on
Landlord for their completeness, design sufficiency, or compliance with all
applicable laws, rules and regulations of governmental agencies or authorities,
but Landlord shall require that Architect make Tenant a third party beneficiary
of Landlord's rights under Landlord's agreement with Architect. After Tenant's
approval of Tenant's Plans and Specifications, the Tenant Expenditure
Authorization, which has been prepared by Landlord's Manager, shall be submitted
to Tenant
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for its approval. Within ten (10) Business Days after Tenant's receipt of such
Tenant Expenditure Authorization, Tenant shall notify Landlord's Manager in
writing as to whether Tenant approves or disapproves such Tenant Expenditure
Authorization. If Tenant fails to expressly disapprove such Tenant Expenditure
Authorization, within this ten (10) Business Day period, then Landlord's Manager
shall be authorized to proceed thereon. All costs, including professional fees,
of Architect which are related to the review of Tenant's information and
instructions and the preparation of the space plan and the Tenant's Plans and
Specifications shall be paid by Tenant, subject to Tenant's Allowance.
2.02. Unless otherwise agreed to in writing by Landlord and Tenant, the
construction and installation of the Leasehold Improvements shall be carried out
by Landlord's Contractor (who shall be reasonably acceptable to Tenant) under
the sole direction of Landlord's Manager, who shall serve as construction
manager. Tenant shall cooperate with Landlord and Architect to promote the
efficient and expeditious completion of such Tenant's Work.
2.03. If there are any changes in the Leasehold Improvements caused by
Tenant from the work as reflected in the final Tenant's Plans and
Specifications, each such change must be signed by Tenant and receive the prior
written approval of the Landlord (which shall not be unreasonably withheld). All
change orders must be signed by Landlord, Tenant and Landlord's Contractor and
shall reference any delay in substantial completion and any additional cost that
may result therefrom.
2.04. Under no circumstances whatsoever will Tenant, or Tenant's
authorized representative, ever alter or modify or in any manner disturb any
system or installation of the Building, including, but not limited to, Central
System. Only under Landlord's express written permission and under direct
supervision of Landlord or Landlord's authorized representative shall Tenant or
Tenant's authorized representative alter or modify or in any manner disturb any
Branch System of the Building which is located within the Premises.
2.05. All design, construction and installation shall conform to the
requirements of applicable building, plumbing and electrical codes and the
requirements of any authority having jurisdiction over, or with respect to, such
work.
2.06. Landlord shall construct, in a good and workmanlike manner and in
compliance with all applicable laws, the Building in accordance with the Base
Building Plans and Tenant's Work in accordance with Tenant's Plans and
Specifications.
2.07. Landlord's Manager shall have no obligation to cause the
commencement of the installation of any of the Leasehold Improvements in the
Premises until Tenant shall have approved the Tenant's Plans and Specification
and the Tenant Expenditure Authorization as required by Section 2.01 hereof.
ARTICLE 3
TENANT'S ALLOWANCE
3.01. Landlord hereby grants Tenant an allowance based upon $30.00 per
square foot of Net Rentable Area of the Premises ("Tenant's Allowance") to be
used towards (i) space planning costs, architectural costs, and engineering
costs for Tenant's Plans and Specifications; (ii) the cost of Tenant's Work for
the Premises; and (iii) a 2.5% of construction costs (labor and materials) fee
for up to $30.00 per Net Rentable square foot to Landlord's Manager. Tenant's
Allowance shall be included in Total Projects Costs. Notwithstanding the
foregoing sentence, if Total Project Costs, including Tenant's Allowance, are
less than $100.00 per square foot of Net Rentable Area of the Premises, Tenant's
Allowance may be increased, at Tenant's sole option, upon written notice to
Landlord, to an amount such that the balance of Total Project Costs, plus
Tenant's Allowance, as increased by Tenant, equals $100.00 per square foot of
Net Rentable Area of the Premises. By way of example, if Total Project Costs,
excluding Tenant's Allowance, equals $65.00 per square foot of Net Rentable Area
of the Premises, Tenant may elect to increase Tenant's Allowance from $30.00 per
Net Rentable square foot to $35.00 per Net Rentable Square foot. Tenant's
Allowance may be increased by Tenant, at Tenant's sole option, by up to an
additional $5.00 per square foot of Net Rentable Area of the Premises. Should
Tenant elect to increase Tenant's Allowance by such $5.00 per square foot (or
some lesser amount), Base Rent (as defined in Section 1.01M of the Lease) shall
be increased by $0.80 (or a proportionately lesser amount if Tenant elects to
increase the Tenant's Allowance by less than $5.00 per square foot) per annum
per square foot of Net Rentable Area of the Premises for each year of the
initial Term ("Additional Tenant's Allowance"). Landlord's Manager shall receive
the aforementioned 2.5% fee on any construction costs associated with the
Additional Tenant's Allowance. In the event that the full amount of Tenant's
Allowance is not expended, Tenant may apply up to $5.00 per square foot of Net
Rentable Area of any remaining monies against cabling and installation costs,
move related costs, and filing fees associated with the installation of the
Leasehold Improvements.
ARTICLE 4
TOTAL PROJECT COSTS
4.01. Landlord and Tenant agree that Base Rent, pursuant to Section
1.01M, of the Lease is currently based upon projected total construction costs
for the Building of $100.00 per square foot of the Building. In the
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event that Total Project Costs exceed, or are less than, $100.00 per square foot
of the Building, Base Rent shall be adjusted accordingly as hereinafter set
forth. Base Rent shall be based upon nine percent (9%) of Total Project Costs
for the initial three (3) years of the initial Term, ten percent (10%) of Total
Project Costs for years four (4) through seven (7) of the initial Term; and
eleven percent (11%) of Total Project Costs for the final three (3) years of the
initial Term. Notwithstanding the foregoing provisions, in no event shall
Landlord be required to contribute in excess of $110.00 per square foot of the
Building to Total Project Costs, inclusive of Tenant's Allowance and Additional
Tenant's Allowance.
4.02. For purposes of this Lease, Total Project Costs shall be defined
to include all costs of predevelopment, development and construction of the
Project heretofore or hereafter incurred by Owner, any partner of Landlord
computed, in each case, in accordance with generally accepted accounting
principles, including, without duplication, the following:
(i) the cost of the Land, together with any fees incurred in
connection therewith, plus any transfer taxes, title insurance
premiums, escrow fees, legal fees, and other costs related to the
acquisition of the Land; as well as carrying costs attributable
to the Land; or any portion thereof, from the date of acquisition
thereof until the Completion Date;
(ii) the cost of all labor, materials, utilities, equipment
(acquired or rented) and similar items incorporated into or
consumed in the construction and development of the Project and
any related site, utility or landscaping work incorporated in or
related to the Project, including all contract prices, including
fees and bonuses, of contractors, subcontractors, and/or
materialmen;
(iii) architectural, topographical and boundary surveying,
legal, consulting, accounting, space planning, and engineering
fees and expenses paid to outside architects, surveyors,
accountants, consultants, attorneys and engineers in connection
with the acquisition, planning, construction, financing and
leasing of the Project and any related site, utility, or
landscaping work, including borings, soil analysis, traffic
studies and market studies;
(iv) to the extent not included in fee and expense
statements from architects and engineers, costs of reproducing
plans and specifications;
(v) all leasing fees and commissions (including those
payable to Landlord or Landlord's manager of the Project), tenant
inducement payments, and tenant coordination costs;
(vi) the cost of the Tenant's Work, including a fee of 2.5%
of construction costs (labor and materials) payable to Landlord's
manager;
(vii) all costs of building and other permits for the
Project and all direct or indirect costs incurred in connection
with obtaining any subdivisions, rezoning, zoning variances or
other approvals required from any governmental entities having
jurisdiction over the Project, or any portion thereof;
(viii) all commitment fees, and other financing costs,
exclusive of interest (financing costs shall include any
attorneys' fees and similar costs incurred in connection with the
negotiation and closing of any construction loan for the
Project);
(ix) all interest costs, including actual interest accruing
on construction financing, and interest on equity funds advanced
by Landlord from time to time in connection with the Project (i)
at the average of the rates in effect from time to time with
respect to the construction financing, or (ii) if no construction
financing is in place, at a rate which is customary for
construction financing of similar projects being developed by
developers of similar creditworthiness, not to exceed 7 1/2%
annual interest;
(x) a development fee to Landlord's manager of 4% of Total
Project Costs (inclusive of construction costs of up to $30.00
per Net Rentable square foot based upon Tenant's Allowance for
Tenant's Work;
(xi) all ad valorem taxes and other taxes and assessments
paid or payable by Landlord with respect to the Project, or any
portion thereof, prior to the Completion Date;
(xii) all direct and indirect costs of all off-site
improvements constructed or paid for by Landlord, including any
such improvements required to be constructed or paid for by
Landlord in connection with the issuance of any building or other
permits by any governmental entities having jurisdiction over the
Project;
(xiii) all direct and indirect costs of acquiring any
easements, air rights, use permits or other off-site rights in
connection with the development of the Project;
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(xiv) all insurance premiums paid or payable by Owner with
respect to the Project, including any builder's risk, fire and
extended coverage, rent loss, or general liability coverage
carried by Landlord prior to the Completion Date;
(xv) the amount of any rent or other sums paid or accrued
under any ground lease of all or any portion of the Land.
4.03. Upon the final determination of Total Project Costs, Landlord and
Tenant shall enter into an amendment to the Lease to adjust, amongst other
matters, the final determination of Base Rent and the final determination of the
square footage to the Premises.
ARTICLE 5
COMMENCEMENT OF RENT
5.01. Tenant's obligation for the payment of the Rent under this Lease
for the Premises shall commence in accordance with Section 3.02 of the Lease;
provided, however, that if the Completion Date is delayed as a result of: (a)
Tenant's failure to provide, or timely provide, Architect with sufficient
instructions to allow Architect to prepare Tenant's Plans and Specifications by
the time period required under Section 2.01 of this Exhibit C, (b) Tenant's
changes in any Base Building Plans and Tenant's Plans and Specifications, (c)
Tenant's failure to timely approve or disapprove, Base Building Plans and
Tenant's Plans and Specifications or the Tenant Expenditure Authorization within
the time period required by Section 2.01 of this Exhibit C, or (d) any long lead
items requested by Tenant as part of Tenant's Work, then Tenant's obligation to
pay Rent under this lease shall be accelerated by the number of days of such
Tenant Delay (herein so called).
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ATTACHMENT C-1
BASE BUILDING PLANS
<TABLE>
<CAPTION>
SHEET DATE
<S> <C>
Site Plan August 19, 1998
Ground Floor August 19, 1998
Second Floor August 19, 1998
Elevations (North, West) August 19, 1998
Elevations (South, East) August 19, 1998
Wall Sections August 19, 1998
</TABLE>
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EXHIBIT D
FORM OF COMMENCEMENT NOTICE
This Commencement Notice is executed this ___ day of _________________,
19__, by Prentiss Properties Acquisition Partners, L.P., an Delaware limited
partnership ("Landlord"), and Micrografx, Inc., a Texas corporation ("Tenant"),
pursuant to the provisions of Section 3.03 of that certain Lease Agreement (the
"Lease") dated ______________, 19__, by and between Landlord and Tenant covering
certain space in the Building known as _______________________. All terms used
herein with their initial letter capitalized shall have the meaning assigned to
such terms in the Lease.
W I T N E S S E T H:
1. The Building, the Premises, the Parking Facilities, and all other
improvements required to be constructed and furnished by Landlord in accordance
with the terms of the Lease have been satisfactorily completed by the Landlord
and accepted by the Tenant.
2. The Premises have been delivered to, and accepted by, the Tenant,
subject to the completion of "punch list" items.
3. The Commencement Date of the Lease is the 1st day of _____________,
19__, and the Expiration Date is the ___ day of ______________________, 19__.
4. The Premises consist of square feet of Net Rentable Area on the
floor of the Building.
5. The Base Rent is $_______________ per annum, payable in monthly
installments of $.
6. Remittance of the foregoing payments shall be made on the first day
of each month in accordance with the terms and conditions of the Lease at the
following address:
Prentiss Properties Acquisition Partners, L.P.
3890 W. Northwest Highway, Suite 400
Dallas, Texas 75220-5166
Attention: Lori Ashley
IN WITNESS WHEREOF, this instrument has been duly executed by Landlord
and Tenant as of the date first written above.
LANDLORD:
PRENTISS PROPERTIES ACQUISITION PARTNERS, L.P.,
a Delaware limited partnership
By: Prentiss Properties I, Inc.,
a Delaware corporation
general partner
By:
Name:
Title:
By:
Name:
Title:
TENANT:
MICROGRAFX, INC.,
a Texas corporation
By: ________________________
Name: ________________________
Title: ________________________
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RIDER NO. 1
RULES AND REGULATIONS
1. Plumbing fixtures and appliances shall be used only for the purpose
for which constructed, and no sweepings, rubbish, rags, or other unsuitable
material shall be thrown or placed therein. The cost of repairing any stoppage
or damage resulting to any such fixtures or appliances from misuse on the part
of a tenant or such tenant's officers, agents, servants, and employees shall be
paid by such tenant.
2. No signs, posters, advertisements, or notices shall be painted or
affixed on any of the windows or doors, or other part of the Building, except of
such color, size, and style, and in such places, as shall be first approved in
writing by the building manager.
3. The Premises shall not be used for conducting any barter, trade, or
exchange of goods or sale through promotional give-away gimmicks or any business
involving the sale of second-hand goods, insurance salvage stock, or fire sale
stock, and shall not be used for any auction or pawnshop business, any fire
sale, bankruptcy sale, going-out-of- business sale, moving sale, bulk sale, or
any other business which, because of merchandising methods or otherwise, would
tend to lower the first-class character of the Building.
4. Tenants shall not do anything, or permit anything to be done, in or
about the Building, or bring or keep anything therein, that will in any way
increase the possibility of fire or other casualty or obstruct or interfere with
the rights of, or otherwise injure or annoy, other tenants, or do anything in
conflict with the valid pertinent laws, rules, or regulations of any
governmental authority.
5. Tenant shall not place a load upon any floor of the premises which
exceeds to floor load per square foot which such floor was designed to carry or
which is allowed by applicable building code. Landlord may prescribe the weight
and position of all safes and heavy installations which Tenant desires to place
in the premises so as properly to distribute the weight thereof. All damage done
to the Building by the improper placing of heavy items which overstress the
floor will be repaired at the sole expense of the Tenant.
6. A tenant shall notify the building manager when safes or other heavy
equipment are to be taken into or out of the Building. Moving of such items
shall be done under the supervision of the building manager, after receiving
written permission from him/her.
7. Corridor doors, when not in use, shall be kept closed.
8. Each tenant shall cooperate with building employees in keeping the
premises neat and clean.
9. Nothing shall be swept or thrown into the corridors, halls, elevator
shafts, or stairways. No birds, animals, or reptiles, or any other creatures,
shall be brought into or kept in or about the building.
10. Business machines and mechanical equipment belonging to Tenant
which cause noise and/or vibration that may be transmitted to the structure of
the Building or to any leased space so as to be objectionable to Landlord or any
tenants in the Building shall be placed and maintained by Tenant, at Tenant's
expense, in setting of cork, rubber, or spring type noise and/or vibration
eliminators sufficient to eliminate vibration and/or noise.
11. Tenants shall not use or keep in the Building any inflammable or
explosive fluid or substance, except in normal office use quantities or any
illuminating material, unless it is battery powered, UL approved.
12. Landlord has the right to evacuate the Building in event of
emergency or catastrophe.
13 If any governmental license or permit shall be required for the
proper and lawful conduct of Tenant's business, Tenant, before occupying the
Premises, shall procure and maintain such license or permit and submit it for
Landlord's inspection; provided, that Landlord shall obtain the initial
certificate of occupancy.
Tenant shall at all times comply with the terms of any such license or permit.
14. Neither Tenant, nor any other person visiting the Building shall be
permitted to use tobacco products in the Building, Premises, or the Common
Areas.
16. Landlord reserves the right to rescind any of these Rules and
Regulations and make such reasonable other and further rules and regulations or
modifications to these rules and regulations.
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RIDER NO. 2
EXTENSION OPTIONS
Tenant shall have the right to extend the original term of this Lease
(the "Original Term") for two (2) periods of five (5) years each, (each an
"Extension Term"), upon and subject to the following terms and conditions:
1. Not later than nine (9) months prior to the expiration of the
Original Term, or the first Extension Term, as the case may be, Tenant may
elect, at its sole option, to extend the Lease for the applicable Extension Term
upon all of the terms and provisions which are applicable to the Original Term,
except that Rent shall be adjusted as provided in Paragraph 3 below. If Tenant
sends notice of such election to Landlord, within thirty (30) days thereafter,
Landlord will provide Tenant with Landlord's calculation of the Fair Market
Rental Rate (defined below) as to the Premises for the applicable Extension Term
(the "Rent Offer"). Landlord and Tenant shall have thirty (30) days after
receipt by Tenant of the Rent Offer from Landlord to reach agreement as to the
appropriate rental rate to be applied for the applicable Extension Term (the
"Agreed Fair Market Rental Rate"). In the event that such agreement is not
reached on or before the expiration of such thirty (30) day period, the Fair
Market Rental Rate shall be determined by arbitration, in accordance with the
terms and conditions set forth in Rider No. 3 ("Arbitration") hereto. Tenant
shall have the right to continue its occupancy of the Premises, subject to the
terms and conditions contained in the Lease and this Rider No. 2, pending the
decision of the arbitration panel. In the event that such agreement is reached
on or before the expiration of such thirty (30) day period, this Lease, subject
to the provisions of this Rider No. 2, shall be automatically extended for the
Extension Term in question with the same force and effect as if the Extension
Term had been originally included in the Term, upon the same terms and
conditions as in this Lease, including the allocations of Parking Permits set
forth in Section 1.01 P of the Lease, except that (a) the Base Rent shall be as
set forth in paragraph 3 below, (b) the terms of the Lease relating to
Landlord's obligations to construct leasehold improvements (including Exhibit C)
shall be of no force or effect and Tenant shall be deemed to accept the Premises
in its "as is" condition, subject to Landlord's obligations under the Lease, and
(c) in connection with the second Extension Term, Tenant shall have no right to
extend or renew the Term for any period beyond the second Extension Term set
forth herein. Notwithstanding the foregoing sentence, the parties may mutually
agree to extend the Term beyond the Second Extension Term.
2. Tenant's right to extend the Term for an Extension Term shall be of
no force or effect if either at the time of exercise of the extension option, in
question, or at the time of commencement of the Extension Term, in question, an
Event of Default then exists. Tenant shall have no right to exercise the second
Extension Option if Tenant fails to exercise the first Extension Option.
3. Base Rent for the Premises for the first Extension Term shall be an
amount equal to 95% of the Fair Market Rental Rate (as defined below),
multiplied by the Net Rentable Area of the Premises. Base Rent for the second
Extension Term shall be an amount equal to 100% of the Fair Market Rental Rate
multiplied by the Net Rentable Area of the Premises. For purposes hereof the
"Fair Market Rental Rate" means the fair market rental rate per square foot of
Net Rentable Area of the Premises (taking into account a new base year for
Operating Costs and all rent concessions and inducements) for a comparable lease
term to comparable tenants for space of comparable size in comparable buildings
in the north Plano, Texas suburban areas, but in no event less than the Base
Rent and Tenant's Operating Costs Payment being paid by Tenant during the last
year of the initial Term or the first Extension Term, as the case may be.
4. Upon the exercise by Tenant of its option in respect of an Extension
Term, the term "Term", as otherwise defined and used in the Lease, shall mean
the Term, as extended for the Extension Term, in question, and the term
"Expiration Date", as otherwise defined and used in the Lease, shall mean the
date of expiration of the Extension Term, in question.
5. Any termination, cancellation or surrender of this Lease shall
terminate any right of extension for an Extension Term in respect of the portion
of the Premises as to which this Lease is terminated, canceled or surrendered.
6. Time shall be of the essence with respect to the exercise by Tenant
of its option under this Rider No. 2.
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RIDER NO. 3
ARBITRATION
1. Applicability. This Rider No. 3 ("Arbitration") shall only apply
with respect to the resolution of a dispute as to Fair Market Rental Rate
pursuant to Rider No. 2 of the Lease. To institute the provisions of this Rider
No. 3, the requesting party shall notify the other party and in such notice
shall designate the first arbitrator. If the first arbitrator is acceptable to
the other party, the other party shall so notify the requesting party within ten
(10) days after such notice is given and the first arbitrator shall proceed to
determine the matter or dispute within twenty (20) days thereafter. If the first
arbitrator is not acceptable to the other party, then within ten (10) days after
the giving of the requesting party's notice, the other party shall designate, in
a written notice, the second arbitrator. If the other party fails to timely
approve the first arbitrator or designate the second arbitrator, then the first
arbitrator shall proceed to determine the matter or dispute within twenty (20)
days after the expiration of such ten (10) day period. If a second arbitrator is
designated, the arbitrators shall meet within ten (10) days after the
designation of the second arbitrator and proceed to jointly appoint a third
arbitrator within ten (10) days after the date the first arbitrator and second
arbitrator first convene for the purpose of selecting the third arbitrator, and
the decision of the third arbitrator shall be made within twenty (20) days after
his or her appointment. A decision of the first arbitrator (if a second
arbitrator is not designated pursuant to this Rider No. 3) or the third
arbitrator, as applicable, shall be binding and conclusive on the parties hereto
and shall be enforceable as a judgment by the prevailing party against the
losing party. If any arbitrator shall fail, refuse, or become unable to act, a
new arbitrator shall be appointed in his or her place following the same method
as was originally followed with respect to the arbitrator to be replaced.
Landlord and Tenant shall each pay the fees and expenses of the arbitrator it
appoints, but if only one arbitrator is used, or if a third arbitrator is used,
the fees and expenses of such sole or third arbitrator, as the case may be,
shall be borne equally by the parties. All other expenses of arbitration shall
be borne equally by the parties. Notwithstanding anything contained herein to
the contrary, each party shall be responsible for the payment of all fees and
expenses associated with such party's legal counsel and arbitrator selection.
All hearings and proceedings held and all investigations and actions taken by
the arbitrators shall take place in Austin, Texas.
2. Court Appointment of Arbitrator. Should it be necessary to appoint a
third arbitrator as provided for in paragraph 1 hereinabove and the initial two
arbitrators are unable to agree upon a third arbitrator within ten (10) days,
then either Landlord or Tenant may apply to the appropriate Court of the State
of Texas, for the appointment of the third arbitrator.
3. Procedures. Any arbitration carried out pursuant to this Agreement
shall be governed by the applicable rules of the American Arbitration
Association and the Texas General Arbitration Act; provided that regardless of
any conflict with any such rules the arbitrators shall afford the parties to
this lease a hearing and the right to submit testimony and other evidence with
respect to the matter in question, as well as the privilege of cross-examining
any witnesses presented by or on behalf of the other party.
4. Qualifications of Arbitrators. Any arbitrator appointed by Landlord
or Tenant and any third arbitrator, shall be a licensed real estate broker(s),
with at least ten (10) years experience in the field of office leasing and who
has been involved in the leasing of at least one (1) million square feet of
office space on a cumulative basis in the greater Dallas-Fort Worth metropolitan
area. Such arbitrator(s) cannot be affiliated with Landlord or Tenant to the
extent that would cause arbitrators to be a biased party in the reasonable
judgment of the parties. No arbitrator shall have been employed by either party
for the prior two (2) years. Any arbitrator designated to serve in accordance
with the provisions of this Rider No. 3 shall not be affiliated with any party
appointing such arbitrator.
5. Arbitration Not Relieve Performance. During any arbitration
proceedings pursuant to this Rider No. 3, the parties hereto shall continue to
perform and discharge all of their respective obligations under this lease;
provided however, that the performance and discharge of such obligations shall
in no event prejudice the rights or positions of such parties with respect to
the matters to be resolved in connection with this Rider No. 3.
6. Restriction on Arbitrator's Authority. In determining any
controversy or dispute, the arbitrator shall apply the provisions of the Lease,
without departure therefrom in any respect. The arbitrator shall not have the
power to add to, modify or change any of the provisions of this Lease, but this
provision shall not prevent in any appropriate case the interpretation,
construction and determination by the arbitrator of the applicable provisions of
this Lease to the extent necessary in applying the same to the matters to be
determined by arbitration. The decision of the arbitration shall be accompanied
by written findings of fact as determined in accordance with applicable lease
provisions.
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RIDER NO. 4
RIGHT OF FIRST OFFER
1. If Landlord decides to offer all or any part of the Project,
including the Premises, and the fee interest in the Land, for sale to third
parties, then Landlord shall first offer to sell same to Tenant on such
reasonable terms and conditions as Landlord is then willing to accept. Tenant's
right to first offer shall be an on-going right during the Term. Landlord shall
set forth such acceptable terms and conditions in writing (the "Offer Notice")
delivered to Tenant. Tenant shall have thirty (30) days from the date of such
delivery of the Offer Notice to notify Landlord, in writing, of Tenant's
interest in purchasing the Project, or such portion thereof being offered for
sale, on substantially the same terms as set forth in the Offer Notice,
whereupon Landlord shall prepare and submit a written proposed contract to
Tenant embodying substantially the same terms and conditions as set forth in the
Offer Notice. Landlord and Tenant shall negotiate in good faith the terms and
conditions of the contract on comparable business terms as would be typically
found in contracts for the sale of similar office buildings of a similar age and
tenant composition in the greater Dallas-Fort Worth metropolitan area. If
Landlord and Tenant are unable, in good faith, to mutually execute a contract
within thirty (30) days of the date on which Tenant provides notice of its
interest in purchasing the Project, or such portion thereof, including the
Premises and the Land, or if Tenant fails or refuses to accept the terms and
conditions set forth in the Offer Notice, Landlord can sell the portion of the
Project as indicated in the Offer Notice on the same or better economic terms as
set forth in the Offer Notice without further submissions to Tenant for a period
of twelve (12) months without reoffering the portion of the Project as indicated
in the Offer Notice for sale to Tenant.
2. If Tenant fails to indicate Tenant's interest in purchasing the
property on substantially the same terms and conditions in the Offer Notice and
Landlord later reduces the economic value of the terms and conditions that
Landlord is willing to accept by more than five percent (5%) in the aggregate,
then Landlord will send a new thirty (30) day Offer Notice to Tenant setting
forth such new terms and conditions as Landlord is willing to accept for the
Project, and Tenant shall have a right to accept the terms and conditions in the
new Offer Notice on the same basis as set forth in the foregoing paragraph.
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RIDER NO. 5
EXPANSION AREA
1. Notwithstanding anything to the contrary contained in this Lease,
Tenant shall have the right, upon written notice, to Landlord to expand the size
of the Building and Premises at anytime during the initial five (5) years of the
initial Term; provided that Tenant requires an expansion of not less than 40,000
square feet of Net Rentable Area nor more than 70,000 of Net Rentable Area (the
"Expansion Area"). Tenant's right to expand the Building and Premises shall
expire, if unexercised prior to such date on the fifth (5th) anniversary of the
Commencement Date.
2. In the event that Tenant desires to expand the Building and Premises
as set forth in paragraph 1 herein, Tenant shall provide Landlord written notice
of such intention to expand advising Landlord of the approximate square footage
of Net Rentable Area of the proposed Expansion Area. In the event that Tenant
exercises such expansion right by no later than the fifteen (15) month
anniversary of the Commencement Date, the term of the leasing of the Expansion
Area shall be coterminous with the initial Term. Further, Tenant's Allowance (as
defined in Exhibit C hereof) shall be equal to a prorata portion of the Tenant's
Allowance of $30.00 per square foot of Net Rentable Area applicable to the
initial Premises, based upon the portion of the initial Term remaining on the
commencement date of the leasing of the Expansion Area. By way of example, in
the event that Tenant elects to lease the Expansion Area on the fifteen (15)
month anniversary of the Commencement Date and the Expansion Area is
substantially completed on the twenty-four (24) month anniversary of the
Commencement Date, Tenant shall be entitled to an allowance equal to $24.00 per
square foot of Net Rentable Area of the Expansion Area, based upon the eight (8)
years remaining in the initial Term.
3. In the event that Tenant exercises Tenant's right to lease the
Expansion Area at anytime after the fifteen (15) month anniversary of the
Commencement Date, the term, solely as it applies to the leasing of the
Expansion Area, shall be ten (10) years. Further, Tenant shall have the right to
extend the initial Term for the initial Premises to be coterminous with the ten
(10) year term of the leasing of the Expansion Area. Tenant shall be entitled to
receive the full amount of Tenant's Allowance of $30.00 per square foot of Net
Rentable Area for any Expansion Area with a term of ten (10) years.
4. (a) Base Rent for the Expansion Area shall be based upon Total
Project Costs (as defined in Article 4 of Exhibit C hereof) for such Expansion
Area. For purposes of the Expansion Area only, annual Base Rent for the
Expansion Area shall be based upon the greater of (i) the then current Base Rent
rate under the Lease for the initial Premises, or (ii) an amount equal to Total
Project Costs times the prime rate of interest plus two and one-half percent (2
1/2%), as determined at the time of Tenant's exercise of its right to lease the
Expansion Area, as publicly announced by Bank One, Texas, N.A., or any successor
thereof, not to exceed the maximum rate permitted under federal law or the laws
of the State of Texas. This annualized Base Rent shall be divided by the number
of square feet of Net Rentable Area within the Expansion Area in order to
determine the annual Base Rent per square foot of Net Rentable Area of the
Expansion Area. The annual Base Rent shall continue at the aforementioned rate
for each year of the term of the leasing of the Expansion Area.
(b) In the event that the election to lease the Expansion Area occurs
after the fifteen (15) month anniversary of the Commencement Date and Tenant
elects to extend the initial Term for the initial Premises in order to be
coterminous with the leasing of the Expansion Area, Base Rent, for the initial
Premises only, for any period after the Expiration Date (as defined in Section
1.01G of the Lease) and ending on the date of the expiration of the term of the
leasing of the Expansion Area shall be equal to (i) the rate per square foot of
Net Rentable Area of the Premises during the last year of the initial Term, plus
(ii) ten percent (10%) per annum of the average annual Base Rent for the initial
Term for the initial Premises, for each three (3) year incremental extension of
the initial Term. By way of example, if the annual average Base Rent during the
initial Term equaled $10.00 per square foot, Base Rent, for the initial Premises
only, shall be increased by $1.00 per square foot for each year of the extension
of the initial Term. Base Rent for the initial three (3) years of the extension
of the term beyond the current Expiration Date, would be based upon $12.00 per
square foot, with Base Rent to adjust to $13.00 per
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<PAGE> 39
square foot for any period of the extension of the initial Term beyond the third
(3rd) anniversary of the Expiration Date.
(c) Notwithstanding the foregoing provisions or anything to the
contrary in this Rider No. 5, in no event shall Landlord be required to incur
Total Project Costs in excess of $100.00 per square foot of the Expansion Area.
5. Except as set forth herein, the leasing of the Expansion Area shall
be upon the same terms and conditions as set forth in the lease, except that the
Parking Facilities shall be adjusted in order to account for the expansion of
the Building and Premises by the Expansion Area. Upon the leasing of the
Expansion Area by Tenant, the Building and the Premises shall be deemed to
include the Expansion Area for all purposes herein, including Tenant's rights to
extend the Term for the Premises as set forth in Rider No. 4.
6. In the event that Tenant extends the initial Term pursuant to this
Rider No. 5, the Extension Options set forth in Rider No. 4 shall not be deemed
to have been exercised, so that Tenant shall continue to have the right to
extend the Term for two (2) successive five (5) year periods following the
expiration of the initial Term, as it may be extended pursuant to this Rider No.
5.
7. Time is of the essence in connection with the exercise of Tenant's
rights pursuant to this Rider No. 5.
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<PAGE> 1
EXHIBIT 10.17
ASSET PURCHASE AND LICENSE AGREEMENT
This Asset Purchase and License Agreement (this "AGREEMENT") is made
and entered into as of September 3, 1998, by and between Learning Company
Properties Inc. a Delaware corporation (the "BUYER") and Micrografx, Inc., a
Texas corporation (the "SELLER").
Preliminary Statement
The Buyer desires to acquire the rights to, and the Seller desires to
license and transfer, certain of the assets of the Seller related to Seller's
CreataCard product line, for the consideration set forth below, subject to the
terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual promises hereinafter set
forth and other good and valuable consideration, the receipt of which is hereby
acknowledged, the parties hereby agree as follows:
1. Sale and License of the Assets
1.1 Assets to be Licensed.
(a) Subject to and upon the terms and conditions of this Agreement at
the closing of the transactions contemplated by this Agreement (the "CLOSING"),
the Seller shall license the following properties to Buyer:
(i) License of Software Programs. Subject to the terms of this
Agreement, effective as of the Closing Date, Seller hereby grants to Buyer the
exclusive (other than existing OEM agreements), fully paid-up (when the Seller
receives the payment called for by Section 1.7(a)), perpetual right and license
to publish, use, reproduce, sublicense, translate and distribute the Software
Programs (defined below), including all documentation associated therewith.
Buyer shall have the exclusive (other than existing OEM agreements), fully
paid-up (when the Seller receives the payment called for by Section 1.7(a)),
perpetual right and license to publish, use, reproduce, sublicense, translate
and distribute the Software Programs in any media, for sale, resale and/or
license to end users, throughout the world, in all channels of trade unless
otherwise restricted under the Assumed Agreements (as hereinafter defined),
including, without limitation, (a) sales directly to end users, (b) sales
through resellers, dealers and distributors, (c) sales through arrangements with
original equipment manufacturers ("OEMS"), (d) sales through on-line services,
the Internet and other online channels and (e) sales in the educational channel.
Subject to the terms of this Agreement, the rights granted hereunder include all
marketing, production, retail, wholesale, television offer, direct mail and
telesales rights, and all other sales and distribution rights (other than
existing OEM
- -------------------------
* Denotes the omission of information pursuant to the request for confidential
treatment. The complete contract has been filed separately with the Securities
and Exchange Commission.
<PAGE> 2
agreements) for the Software Programs. The License granted is granted subject to
all the rights of American Greetings Corporation contained in the Assumed
Agreements and the obligations of the Seller thereunder are hereby assumed by
the Buyer. The "SOFTWARE PROGRAMS" shall mean Micrografx's rights in the one or
more software application programs now known as "CreataCard" and related family
of programs using the CreataCard name listed in Schedule 1.1 including the
Windows, MAC and all other platform and foreign language versions thereof
(including, without, limitation, the Carleton Cards product), and all related
documentation. The rights licensed herein shall expressly exclude the right to
prepare derivative works to the source code based on this license. Buyer shall
however have the right to prepare derivative works that do not require
modifications to the source code such as to create derivative versions based
upon modifications to screens, packaging, manuals, collateral materials,
modifications to the E-reg program, modifications to the "unlockables" programs,
and OEM and other similar derivative versions.
(ii) a non-exclusive, fully paid-up (when the Seller received
the payment called for by Section 1.7(a)), perpetual license to publish, use and
distribute any and all product content owned by Seller, demos, golden masters,
film, translation kits, and localized versions relating to the Software
Programs, any and all promotional and advertising materials, and a
non-exclusive, fully paid-up, perpetual license to use any confidential
information (to the extent owned by Seller) which has been reduced to writing
relating to the Software Programs;
(iii) a non-exclusive, perpetual, fully paid-up (when the
Seller receives the payment called for by Section 1.7(a)), license to publish,
use and distribute any and all web site materials relating to the Software
Programs to the extent owned by Seller; and
(iv) a non-exclusive, perpetual, fully paid-up (when the
Seller receives the payment called for by Section 1.7(a)) license to use in any
manner the list of all registered end users for each and every version of the
Software Program. For a period of * following the Closing Date, within 30 days
of the end of each calendar quarter, Seller shall provide Buyer with an updated
electronic list of new registered end users with the names and other information
described in Section 4(j) below.
1.2 Assets to be Purchased.
(a) Subject to and upon the terms and conditions of this Agreement, at
the Closing, the Seller shall transfer, convey, assign, deliver, and the Buyer
shall receive from the Seller, the following properties, assets and other
claims, rights and interests of the Seller:
(i) all executory contracts and agreements * attached hereto
including the * dated *, as amended * and *, as amended, entered into thereunder
as amended, and in their entirety (collectively, the "ASSUMED AGREEMENTS"),
which an affiliate of Buyer (Mindscape, Inc.) * by execution hereof; and
(ii) all rights in and to the gold master CD and film for each
version of the Software Programs (including any collateral materials required
for Buyer to manufacture the Software Programs), the packaging, manuals, CD ROM
inserts, other inserts, the "unlockable"
<PAGE> 3
collateral materials, and transkits for each version of the software and any
rights of the Seller in the trade dress to the Software Programs (collectively,
the "INTANGIBLE PROPERTY").
(b) The Software Programs, Intangible Property and other properties,
assets and business of the Seller described in paragraph (a) above shall be
referred to collectively as the "ASSETS."
(c) Buyer shall have the right to modify any of the Assets, to the
extent owned by Seller (except as provided in the last two sentences of Section
1.1(a)(i)).
1.3 Inventory, Purchase and Sale of Inventory by Buyer, and Returns.
(a) Effective as of September 1, 1998, Seller and its
distributors (other than under the existing OEM agreements) shall have ceased
fulfilling any and all unfulfilled purchase orders it receives for the Software
Programs and Seller shall forward to Buyer all such open purchase orders at the
Closing. On the Closing Date, Seller shall assign to Buyer any and all inventory
of the Software Programs identified on Schedule 2.5. Promptly following the
Closing Date, Seller shall ship, at Buyer's expense, such inventory to Buyer
pursuant to Buyer's written instructions. Buyer shall remove Seller's
"MICROGRAFX" logos from such inventory as soon as commercially practicable. It
is however expressly agreed that Buyer may market and sell such inventory and
sell sheets with the "MICROGRAFX" logo for a commercially practicable period of
time.
(b) The channel inventory as of the Closing Date and wholesale
costs are set forth by account on Schedule 2.5 attached hereto. Seller shall be
liable to Buyer for returns to the extent that channel inventory of the Software
Programs sold by Seller exceed a maximum of * as set forth in Schedule 2.5 as of
the Closing Date. Seller shall indemnify Buyer for any and all Software Program
channel inventory, but only if and to the extent that channel inventory is in
excess of the amounts described in Schedule 2.5. Any indemnification payments
under this Section 1.3(b) shall be made by Seller to Buyer within * days from
the date of such excess channel returns or, at Buyer's option, Buyer may take a
credit against any of the payments owing to Seller hereunder including those set
forth in Section 1.7 hereof, provided such sums are not in dispute.
(c) Buyer shall be responsible for all product returns
associated with the Software Programs arising from and after the Closing Date,
including, stock balances, defective product returned pursuant to the published
warranty, price protection related returns. Seller shall remain liable for any
bad debt relating to the Software Programs shipped prior to the Closing Date.
Buyer shall be responsible for marketing development funds ("MDF") presently
existing for versions 1.0, 2.0 and 3.0 of the CreataCard Software Program not to
exceed * as set forth on Schedule 1.3(c), and all MDF commitments initiated by
the Seller arising after the Closing Date for CreataCard Software Programs
shipped prior to the Closing Date not to exceed * as set forth on Schedule
1.3(c). Seller shall be liable for MDF in excess of such respective * and *
amounts and shall indemnify Buyer for such amounts. Any such indemnification
payments under this Agreement shall be paid to Buyer within * days of demand.
(d) Seller shall retain all responsibility for redeeming
coupon rebates for the Software Programs in connection with the promotional
program being administered by Continental Promotions or any other party for
sales of the Software Programs into the retail channel prior to the Closing
Date.
<PAGE> 4
(e) Notwithstanding any other provision in any other
agreement, Seller hereby acknowledges and agrees that Buyer has full discretion
with respect to the marketing of the Software Programs, subject however to the
approval rights of American Greetings Corporation contained in separate
agreements which the Buyer hereby acknowledges, and that any approval or review
rights that Seller may have under any agreement are hereby waived and
terminated.
1.4 No Liabilities. Except as set forth in Sections 1.1(a)(i),
1.2(a)(i) and 1.3 above, the Buyer shall assume no liabilities, obligations or
agreements of the Seller whatsoever and the Seller shall remain responsible for,
and shall indemnify the Buyer against, all such liabilities, obligations and
agreements, as set forth in Section 6 hereof.
1.5 Excluded Assets. Notwithstanding anything in Section 1.1 or 1.2 to
the contrary, the Assets shall not include (i) any assets associated with
Seller's other software products or (ii) the assets identified on Schedule 1.5
attached hereto or (iii) ownership of source code and other code and
intellectual property rights in the underlying Software Programs not explicitly
licensed or transferred hereunder (the "EXCLUDED ASSETS").
1.6 Further Assurances. At any time and from time to time after the
Closing, at the Buyer's request and without further consideration, the Seller
promptly shall execute and deliver such instruments of sale, transfer,
conveyance, assignment and confirmation, and take such other action, as the
Buyer may reasonably request to more effectively transfer, convey and assign to
the Buyer, and to confirm the Buyer's rights herein granted to, all of the
Assets, to put the Buyer in actual possession and operating control thereof, to
assist the Buyer in exercising all rights with respect thereto and to carry out
the purpose and intent of this Agreement. Without limiting the foregoing, from
the date of execution of this Agreement until the Closing Date, the Buyer and
Seller shall each use reasonable best efforts to obtain all required consents
and approvals, including the consent of American Greetings Corporation, required
in order for Seller to consummate the transactions contemplated by this
Agreement.
1.7 Purchase Price.
(a) The purchase price for the Assets shall be * (the
"PURCHASE PRICE"). The Purchase Price shall be paid to Seller on January 5, 1999
in cash by wire transfer.
(b) Seller may assign its rights to receive payment of the
Purchase Price and the rights of enforcement to a third party without notice or
Buyer's consent. Buyer agrees to reasonably cooperate with Seller in order to
facilitate such a "factoring" transaction. Buyer and Seller agree to expressly
pay * of all discounts and transaction related costs associated with respect to
a factoring transaction with Sanwa Bank (or another mutually agreed upon
financial institution).
1.8 The Closing. The Closing shall take place at the offices of Buyer
on or before September 3, 1998 or at such other place, time or date (in person
or by fax) as may be mutually agreed upon in writing by the parties hereto. The
transfer of the Assets by the Seller to the Buyer shall be deemed to occur at
1:30 p.m., Boston time, on the date of the Closing (the "CLOSING DATE"). Except
as required by law, neither party shall make a public announcement of said asset
transfer until the other party approves in writing the timing and text of such
announcement.
<PAGE> 5
1.9 Press Releases. Either party may issue a press release relating to
the transactions contemplated under this Agreement, subject to the approval of
the other party which shall not be unreasonably withheld.
2. Representations and Warranties of the Seller
The Seller represents and warrants to the Buyer as follows:
2.1 Organization. The Seller is a corporation duly organized, validly
existing and in good standing under the laws of the state of its incorporation,
and has all requisite power and authority (corporate and other) to own its
properties, to carry on its business as now being conducted, to execute and
deliver this Agreement and the agreements contemplated herein, and to consummate
the transactions contemplated hereby. The Seller is qualified to do business and
is in good standing in all jurisdictions in which its ownership of property or
the character of its business requires such qualification.
2.2 Authorization.
(a) The execution and delivery of this Agreement by the Seller, and the
agreements provided for herein, and the consummation by the Seller of all
transactions contemplated hereby, have been duly authorized by all requisite
corporate action. This Agreement and all such other agreements and obligations
entered into and undertaken in connection with the transactions contemplated
hereby to which the Seller is a party constitute the valid and legally binding
obligations of the Seller, enforceable against the Seller in accordance with
their respective terms. The execution, delivery and performance by the Seller of
this Agreement and the agreements provided for herein, and the consummation by
the Seller of the transactions contemplated hereby and thereby, will not, with
or without the giving of notice or the passage of time or both, (a) violate the
provisions of any law, rule or regulation applicable to the Seller; (b) violate
the provisions of the Certificate of Incorporation or By-laws of the Seller; (c)
violate any judgment, decree, order or award of any court, governmental body or
arbitrator; or (d) conflict with or result in the breach or termination of any
term or provision of, or constitute a default under, or cause any acceleration
under, or cause the creation of any lien, charge or encumbrance upon the
properties or assets of the Seller pursuant to, any indenture, mortgage, deed of
trust or other instrument or agreement to which the Seller is a party or by
which the Seller or any of its properties is or may be bound; provided, however,
assignment of the Assumed Agreements with American Greetings Corporation to
Buyer requires the consent of American Greetings Corporation.
(b) Schedule 2.2(b)(i) attached hereto sets forth a true, correct and
complete list of (i) all material contracts which relate to the Software
Programs, (ii) all consents and approvals of third parties that are required in
connection with the consummation by the Seller of the transactions contemplated
by this Agreement (it being understood that Buyer shall not be bound from and
after the Closing by any agreements to which Seller is a party other than those
agreements listed on Schedule 1.2(a)(i)), and (iii) all royalties, advances
against royalties and other fees or amounts owed to third parties relating to
the Software Programs except amounts payable to American Greetings Corporation.
<PAGE> 6
(c) Schedule 2.2(c) attached hereto sets forth a true, correct and
complete list of all OEM, license and distribution agreements or other similar
agreements of any kind with respect to the Software Programs. Seller has not
entered into any OEM, license or distribution agreement or other similar
agreements of any kind with respect to the Software Programs except as
specifically identified on Schedule 2.2(c) attached hereto. Seller has not
entered into any OEM, license or distribution agreement that grants a third
party any exclusive or worldwide distribution rights in any channel to the
Software Programs other than (i) the rights of American Greetings Corporation
under the Assumed Agreements, (ii) a distribution agreement with Cendant
Corporation which Seller agrees to terminate on or before the Closing date, and
(iii) the OEM Agreements listed on Schedule 2.2(c).
2.3 Ownership of the Assets. Schedule 2.3 attached hereto sets forth a
true, correct and complete list of all claims, liabilities, liens, pledges,
charges, encumbrances and equities of any kind affecting the Assets
(collectively, the "ENCUMBRANCES"). The Seller is, and at the Closing will be,
the true and lawful owner of the Assets, and will have the right to sell and
transfer to the Buyer good, clear, record and marketable title to the Assets,
free and clear of all Encumbrances of any kind. The delivery to the Buyer of the
instruments of transfer of ownership contemplated by this Agreement will vest
good and marketable title to the Assets in the Buyer, free and clear of all
liens, mortgages, pledges, security interests, restrictions, prior assignments,
encumbrances and claims of any kind or nature whatsoever.
2.4 Litigation and Claims. Except as disclosed on Schedule 2.4 attached
hereto, the Seller is not a party to, or to the Seller's best knowledge
threatened with, and none of the Assets are subject to, any litigation, suit,
action, investigation, proceeding or controversy before any court,
administrative agency or other governmental authority relating to or affecting
the Assets. The Seller is not in violation of or in default with respect to any
judgment, order, writ, injunction, decree or rule of any court, administrative
agency or governmental authority or any regulation of any administrative agency
or governmental authority relating to the Assets.
2.5 Inventory. Schedule 2.5 attached hereto sets forth a true, correct
and complete list of the inventory of the Software Programs (including
quantities of each SKU thereof) as of the Closing Date, separated into one list
for Seller's inventory on hand and a another list for field inventory, by
customer and SKU.
2.6 Trade Names and Other Intangible Property.
(a) Schedule 2.6 attached hereto sets forth a true, correct
and complete list and, where appropriate, a description of, all Intangible
Property. True, correct and complete copies of all licenses and other agreements
relating to the Intangible Property have been previously delivered by the Seller
to the Buyer.
(b) Except for material licensed to Seller under the Assumed
Agreements and the Excluded Assets, the Seller is the sole and exclusive owner
of the Software Programs and the Intangible Property and all designs, permits,
labels and packages used on or in connection therewith, and no third party has,
or has asserted, any rights to the Software Programs or the Intangible Property
(except to the extent the underlying technology has been licensed to others) or
which may
<PAGE> 7
adversely affect the rights of the Buyer. To the best of Seller's knowledge, the
Software Programs and the Intangible Property do not infringe on any United
States trademark, trade name, copyright or other proprietary right of any third
party. The Seller has no disputes with or claims against any third party for
infringement by such third party of any trade name or other Intangible Property
of the Seller included in the Assets. The Seller has taken all steps reasonably
necessary to protect its right, title and interest in and to the Intangible
Property.
2.7 Regulatory Approvals. All consents, approvals, authorizations and
other requirements prescribed by any law, rule or regulation which must be
obtained or satisfied by the Seller and which are necessary for the execution
and delivery by the Seller of this Agreement and the documents to be executed
and delivered by the Seller in connection herewith have been obtained and
satisfied.
2.8 Version 3.0 of CreataCard Gold and CreataCard Plus. Seller
represents and warrants to Buyer that Version 3 of CreataCard Gold and Version 3
of CreataCard Plus Programs have been delivered to American Greetings and that
such programs will perform according to the attached specifications.
3. Representations and Warranties of the Buyer
The Buyer represents and warrants to the Seller as follows:
3.1 Organization. The Buyer is a corporation duly organized, validly
existing and in good standing under the laws of the state of its corporation,
and has the requisite power and authority (corporate and other) to own its
properties and to carry on its business as now being conducted.
3.2 Authorization. The Buyer has full corporate power and authority to
execute and deliver this Agreement and to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement by
the Buyer, and the agreements provided for herein, and the consummation by the
Buyer of all transactions contemplated hereby, have been duly authorized by all
requisite corporate action. This Agreement and all such other agreements and
written obligations entered into and undertaken in connection with the
transactions contemplated hereby constitute the valid and legally binding
obligations of the Buyer, enforceable against the Buyer in accordance with their
respective terms. The execution, delivery and performance of this Agreement and
the agreements provided for herein, and the consummation by the Buyer of the
transactions contemplated hereby and thereby, will not, with or without the
giving of notice or the passage of time or both, (a) violate the provisions of
any law, rule or regulation applicable to such party; (b) violate the provisions
of the Certificate of Incorporation or By-laws of Buyer; (c) violate any
judgment, decree, order or award of any court, governmental body or arbitrator;
or (d) conflict with or result in the breach or termination of any term or
provision of, or constitute a default under, or cause any acceleration under, or
cause the creation of any lien, charge or encumbrance upon the properties or
assets of the Buyer pursuant to, any indenture, mortgage, deed of trust or other
agreement or instrument to which it or its properties is a party or by which the
Buyer is or may be bound.
<PAGE> 8
3.5 Regulatory Approvals. All consents, approvals, authorizations and
other requirements prescribed by any law, rule or regulation which must be
obtained or satisfied by the Buyer and The Learning Company and which are
necessary for the consummation of the transactions contemplated by this
Agreement have been obtained and satisfied.
3.6 Disclosure. No representation or warranty by the Buyer in this
Agreement contains or will contain any untrue statement of a material fact known
by Buyer on the Closing Date or omits or will omit any material fact known by
Buyer on the Closing Date necessary in order to make the statements contained
therein and herein not misleading.
4. Conditions to Obligations of the Buyer
The obligations of the Buyer under this Agreement are subject to the
fulfillment, at the Closing Date, of the following conditions precedent, each of
which may be waived in writing in the sole discretion of the Buyer:
4.1 Continued Truth of Representations and Warranties of the Seller;
Compliance with Covenants and Obligations. The representations and warranties of
the Seller shall be true on and as of the Closing Date as though such
representations and warranties were made on and as of such date, except for any
changes permitted by the terms hereof or consented to in writing by the Buyer.
The Seller shall have performed and complied with all terms, conditions,
covenants, obligations, agreements and restrictions required by this Agreement
to be performed or complied with by it prior to or at the Closing Date.
4.2 Corporate Proceedings. All corporate and other proceedings required
to be taken on the part of the Seller to authorize or carry out this Agreement
and to convey, assign, transfer and deliver the Assets shall have been taken.
4.3 Governmental Approvals. All governmental agencies, departments,
bureaus, commissions and similar bodies, the consent, authorization or approval
of which is necessary under any applicable law, rule, order or regulation for
the consummation by the Seller of the transactions contemplated by this
Agreement and the operation of the Seller's business as it relates to the Assets
by the Buyer shall have consented to, authorized, permitted or approved such
transactions.
4.4 Consents of Lenders, Lessors, Licensors and Other Third Parties.
The Seller shall have received all requisite consents and approvals of American
Greetings Corporation, all lenders, lessors, Licensors and other third parties
whose consent or approval is required in order for the Seller to consummate the
transactions contemplated by this Agreement, including, without limitation,
those set forth on Schedule 2.2(b)(ii) attached hereto.
4.5 Adverse Proceedings. No action or proceeding by or before any court
or other governmental body shall have been instituted or threatened by any
governmental body or person whatsoever which shall seek to restrain, prohibit or
invalidate the transactions contemplated by this Agreement or which might affect
the right of the Buyer to own or use the Assets after the Closing.
<PAGE> 9
4.6 The Assets. At the Closing the Buyer shall receive good, clear,
record and marketable title to the Intangible Property, free and clear of all
liens, liabilities, security interests and encumbrances of any nature whatsoever
other than as contemplated by the Assumed Agreements.
4.7 Closing Deliveries. The Buyer shall receive within five (5)
business days of the Closing Date each of the following:
(a) the assignments of the Assumed Agreements identified on
Schedule 1.2(a)(i), in form reasonably satisfactory to the Buyer;
(b) technical data, product literature and other documentation
relating to the Seller's greeting card software business as it relates to the
Assets;
(c) such contracts, files and other data and documents
pertaining to the Assets as the Buyer may reasonably request;
(d) a certificate of the Secretary of the Seller attesting to
the incumbency of the Seller's officers, respectively, and the authenticity of
the resolutions authorizing the transactions contemplated by the Agreement;
(e) required consents from those parties identified on
Schedules 2.2;
(f) masters of the Software Programs and related collateral
materials including artwork for packaging and marketing materials, film,
translation kits, website materials via an electronic media transfer; and
(g) a list of "frequently asked questions" to technical
support and customer support relating to the Software Programs;
(h) a list on electronic tape of all registered end users for
each and every version of the Software Programs, including all
biographical, product and credit card related information; and
(i) such other documents, instruments or certificates as the
Buyer may reasonably request.
5. Conditions to Obligations of the Seller
The obligations of the Seller under this Agreement are subject to the
fulfillment, at the Closing Date, of the following conditions precedent, each of
which may be waived in writing at the sole discretion of the Seller:
5.1 Continued Truth of Representations and Warranties of the Buyer;
Compliance with Covenants and Obligations. The representations and warranties of
the Buyer in this Agreement shall be true on and as of the Closing Date as
though such representations and warranties were made on and as of such date,
except for any changes consented to in writing by the Seller. The Buyer shall
have performed and complied with all terms, conditions, obligations, agreements
and restrictions required by this Agreement to be performed or complied with by
it prior to or at the Closing Date.
<PAGE> 10
5.2 Corporate Proceedings. All corporate and other proceedings required
to be taken on the part of the Buyer to authorize or carry out this Agreement
shall have been taken.
5.3 Governmental Approvals; Consents. All governmental agencies,
departments, bureaus, commissions and similar bodies, the consent, authorization
or approval of which is necessary under any applicable law, rule, order or
regulation for the consummation by the Buyer of the transactions contemplated by
this Agreement shall have consented to, authorized, permitted or approved such
transactions. All consents from those parties listed on Schedule 2.2 shall have
been obtained. The parties listed on Schedule 1.2(a)(i) shall have released
Seller from all obligations under the Assumed Agreements, including without
limitation, American Greetings Corporation shall have terminated Seller's
obligations to it under all Assumed Agreements.
5.4 Adverse Proceedings. No action or proceeding by or before any court
or other governmental body shall have been instituted or threatened by any
governmental body or person whatsoever which shall seek to restrain, prohibit or
invalidate the transactions contemplated by this Agreement or which might affect
the rights of Seller contemplated by this Agreement.
5.5 Adverse Proceedings. No action or proceeding by or before any court
or other governmental body shall have been instituted or threatened by any
governmental body or person whatsoever which shall seek to restrain, prohibit or
invalidate the transactions contemplated by this Agreement or which might affect
the right of the Seller to transfer the Assets.
5.6 Closing Deliveries. The Seller shall have received at the Closing
each of the following documents:
(a) such documents, instruments or certificates as
the Seller may reasonably request; and
(b) the payment from Buyer of the Purchase Price
shall have been received by Seller.
6. Indemnification
6.1 Scope. For a period of five (5) years from the Closing Date, Seller
hereby indemnifies and holds harmless Buyer against all claims, damages, losses,
liabilities, costs and expenses (including, without limitation, settlement costs
and any reasonable legal, accounting or other expenses for defending any actions
or threatened actions) reasonably incurred by Buyer in connection with each and
all of the following:
(a) Any breach by the Seller of any representation or warranty
in this Agreement;
(b) Any breach of any covenant, agreement or obligation of the
Seller contained in this Agreement or any other agreement, instrument or
document contemplated by this Agreement;
(c) Any liabilities or obligations of the Seller or relating
to the Assets not disclosed herein;
<PAGE> 11
(d) The failure of the Buyer to obtain the protections
afforded by compliance with the notification and other requirements of the bulk
sales laws in force in the jurisdictions in which such laws may be applicable to
either the Seller or the transactions contemplated by this Agreement;
(e) Any intellectual property or other proprietary claim
relating to Software Programs;
(f) Any tax liabilities or obligations of the Seller; and
(g) any claim brought by Cendant Corporation or any of its
affiliates or successors relating to the Software Programs or the distribution
rights thereto.
6.2 Claims for Indemnification. Whenever any claim shall arise for
indemnification hereunder the Buyer (the "INDEMNIFIED PARTY"), shall promptly
notify the Seller (the "INDEMNIFYING PARTY") of the claim and, when known, the
facts constituting the basis for such claim. In the event of any such claim for
indemnification hereunder resulting from or in connection with any claim or
legal proceedings by a third party, the notice to the Indemnifying Party shall
specify, if known, the amount or an estimate of the amount of the liability
arising therefrom. The Indemnified Party shall not settle or compromise any
claim by a third party for which it is entitled to indemnification hereunder
without the prior written consent of the Indemnifying Party, which shall not be
unreasonably withheld.
6.3 Defense by Indemnifying Party. In connection with any claim giving
rise to indemnity hereunder resulting from or arising out of any claim or legal
proceeding by a person who is not a party to this Agreement, the Indemnifying
Party at its sole cost and expense may, upon written notice to the Indemnified
Party, assume and control the defense of any such claim or legal proceeding. The
Indemnified Party shall be entitled to participate in (but not control) the
defense of any such action, with its counsel and at its own expense. If the
Indemnifying Party does not assume the defense of any such claim or litigation
resulting therefrom within 30 days after the date such claim is made, (a) the
Indemnified Party may defend against such claim or litigation, in such manner as
it may deem appropriate, including, but not limited to, settling such claim or
litigation, after giving notice of the same to the Indemnifying Party, on such
terms as the Indemnified Party may deem appropriate, and (b) the Indemnifying
Party shall be entitled to participate in (but not control) the defense of such
action, with its counsel and at its own expense.
7. Post-Closing Agreements
7.1 Non-Competition Agreement.
(a) Following the Closing Date neither the Seller nor any
affiliate thereof shall develop, market or sell any product containing any
content from American Greetings or under the American Greetings trademark and
brand, the CreataCard trademark, the John Sands trademark or any confusingly
similar brand or name that competes with the Software Programs. Buyer agrees
that (i) the development, licensing, marketing or selling, or (ii) the licensing
of any of Seller's technology to a third party for use in connection with the
<PAGE> 12
development, marketing or selling, of a greeting card or social expression
product that does not violate the foregoing will not be a violation of this
Section 7.1.
(b) The parties hereto agree that the duration and geographic
scope of the non-competition provision set forth in this Section 7.1 are
reasonable. In the event that any court determines that the duration or the
geographic scope, or both, are unreasonable and that such provision is to that
extent unenforceable, the parties hereto agree that the provision shall remain
in full force and effect for the greatest time period and in the greatest area
that would not render it unenforceable. The parties intend that this
non-competition provision shall be deemed to be a series of separate covenants,
one for each and every county of each and every state of the United States of
America and each and every political subdivision of each and every country
outside the United States of America where this provision is intended to be
effective. The Seller agrees that damages are an inadequate remedy for any
breach of this provision and that the Buyer shall, whether or not it is pursuing
any potential remedies at law, be entitled to equitable relief in the form of
preliminary and permanent injunctions without bond or other security upon any
actual or threatened breach of this non-competition provision.
7.2 Sharing of Data.
(a) The Buyer shall have the right for a period of four (4)
years following the Closing Date to have reasonable access, at Buyer's expense
and during normal business hours, to those books, records and accounts,
including financial and tax information, correspondence, production records, and
other records which are retained by the Seller pursuant to the terms of this
Agreement to the extent that any of the foregoing relates to the Assets of the
Seller transferred to the Buyer hereunder or is otherwise needed by the Buyer in
order to comply with its obligations under applicable securities, tax, or other
laws and regulations.
(b) The Seller and the Buyer agree that from and after the
Closing Date they shall cooperate fully with each other to facilitate the
transfer of the Assets from the Seller to the Buyer and the operation thereof by
the Buyer.
7.3 Use of Names and Trade Dress. The Seller agrees not to use the
names "CREATACARD" and "AMERICAN GREETINGS" or any confusingly similar
derivation thereof or any confusingly similar trade dress from any of the
Software Programs after the Closing Date in connection with any business related
to, or competitive with the greeting card software application business
conducted by the Seller on the date hereof. Except as specifically permitted by
this Agreement, the Buyer agrees not to use the name "MICROGRAFX" after the
Closing Date in connection with any business related to, competitive with, or an
outgrowth of, the business conducted by the Seller on the date hereof.
7.4 Training. The Seller shall provide * of training and transition
engineering to Buyer at no charge prior to *. Any training in excess of * hours
will be at the mutual agreement of the parties and shall be at an hourly rate to
be determined by dividing the employee's documented annual salary and benefits
by the documented number of hours that such employee works on the project. If
Buyer desires to have the training identified in this Section 7.6 performed at
Buyer's site, Buyer shall be responsible for all reasonable transportation,
lodging and meal costs for Seller's employees, except that Seller agrees that
Buyer shall not be obligated
<PAGE> 13
to pay any such costs if such training occurs within fifty (50) miles of
Seller's location. At Buyer's request, Seller shall perform modifications to any
of the versions of the source code of the Software Programs, including, without
limitation, an OEM v2.3 version, and modifications to the "unlockables" in the
Software Programs or other reasonable requests up to *.
7.5 End User Support. The Seller shall provide all technical support
and customer service support to the end Users of the Software Programs until *
irrespective of whether Buyer or Seller sold such Software Programs. Commencing
*, Buyer shall provide all technical support and customer service support to the
end Users of the Software Programs. Seller shall provide at least five (5) days
of training to the Buyer in the areas of such support. In the event that Buyer
desires to have the training identified in this Section 7.5 be performed at
Buyer's site, then Buyer shall be responsible for reasonable transportation
costs and allocable out-of-pocket portion of the salary of its technical support
personnel providing the training contemplated under this Section 7.5. After *,
Seller agrees to forward all such technical and customer support calls to Buyer
pursuant to Buyer's written instructions.
7.6 Non-Solicitation. For a period of * from the Closing Date, neither
Buyer nor Seller (including such parties' affiliates or partners) shall not
solicit for employment or employ any employee of the other party.
7.7 Management of CREATACARD.COM Web Site. The Seller shall continue to
manage the creatacard.com web site until * at which time Seller transfer
management of this web site to Buyer and Buyer shall commence management of the
site. At Buyer's request, Seller shall establish one or more links from such
creatacard.com site to site(s) designated by Buyer.
7.8 "Unlockable" Revenue. All revenue received by Seller from the
content "unlockables" shall be paid to Buyer within 30 days of the quarter in
which such amounts are received (other than any such revenue from the existing
OEM agreements which shall belong to Seller.)
8. Transfer and Sales Tax
Notwithstanding any provisions of law imposing the burden of such taxes
on the Seller or the Buyer, as the case may be, the Seller shall be responsible
for and shall pay (a) all sales, use and transfer taxes, and (b) all
governmental charges, if any, upon the transfer of any of the Assets hereunder.
9. Brokers
9.1 For the Seller. The Seller represents and warrants that it has not
engaged any broker or finder or incurred any liability for brokerage fees,
commissions or finder's fees in connection with the transactions contemplated by
this Agreement. The Seller agrees to indemnify and hold harmless the Buyer
against any claims or liabilities asserted against it by any person acting or
claiming to act as a broker or finder on behalf of the Seller.
<PAGE> 14
9.2 For the Buyer. The Buyer agrees to pay all fees, expenses and
compensation owed to any person, firm or corporation who has acted in the
capacity of broker or finder on its behalf in connection with the transactions
contemplated by this Agreement. The Buyer agrees to indemnify and hold harmless
the Seller against any claims or liabilities asserted against it by any person
acting or claiming to act as a broker or finder on behalf of the Buyer.
10. Miscellaneous.
10.1 Notices
Any notices or other communications required or permitted hereunder
shall be sufficiently given if delivered personally or sent by telex, federal
express, registered or certified mail, postage prepaid, addressed as follows or
to such other address of which the parties may have given notice:
If to Seller: If to Buyer:
Attention: John Moore, Chief Executive
Officer
Attention: Douglas Richard Mindscape, Inc.
Chief Executive Officer
Micrografx, Inc. 88 Rowland Way
1303 E. Arapaho Road Novato, CA 94945
Richardson, TX 75081
Telephone: (972) 994-6114 Telephone: (415) 895-2000
Facsimile: (972) 994-6868 Facsimile: (415) 895-2108
Copy of Notices to: Copy of Notices to:
Legal Department Legal Department
Fax: (972) 994-6030 The Learning Company
Fax: (617) 494-5660
Unless otherwise specified herein, such notices or other communications
shall be deemed received (a) on the date delivered, if delivered personally; or
(b) five business days after being sent, if sent by registered or certified
mail.
10.1 Successors and Assigns
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns, except that the
Buyer and the Seller may not assign any or all their respective rights or
obligations hereunder without the prior written consent of the other party;
provided, however, that the Buyer may assign this Agreement, and its rights and
obligations hereunder, to a subsidiary or affiliate provided, the Buyer should
remain liable for the payment obligations under Section 1.7(a), or by either
Buyer or Seller upon the merger of the party or the sale of all or substantially
all of Buyer's business, all without the consent of Seller, upon providing
notice to Seller. Any assignment in contravention of this provision shall be
void.
<PAGE> 15
10.2 Entire Agreement; Amendments; Attachments
(a) This Agreement, all Schedules and Exhibits hereto, and all
agreements and instruments to be delivered by the parties pursuant hereto
represent the entire understanding and agreement between the parties hereto with
respect to the subject matter hereof and supersede all prior oral and written
and all contemporaneous oral negotiations, commitments and understandings
between such parties. The Buyer and the Seller, by the consent of their
respective Boards of Directors, or officers authorized by such Boards, may amend
or modify this Agreement, in such manner as may be agreed upon, by a written
instrument executed by the Buyer and the Seller.
(b) If the provisions of any Schedule or Exhibit to this Agreement are
inconsistent with the provisions of this Agreement, the provision of the
Agreement shall prevail. The Exhibits and Schedules attached hereto or to be
attached hereafter are hereby incorporated as integral parts of this Agreement.
10.3 Expenses
Except as otherwise expressly provided herein, the Buyer and the Seller
shall each pay their own expenses in connection with this Agreement and the
transactions contemplated hereby.
10.4 Governing Law
This Agreement shall be governed by and construed in accordance with
the laws of Delaware.
10.5 Section Headings
The section headings are for the convenience of the parties and in no
way alter, modify, amend, limit, or restrict the contractual obligations of the
parties.
10.6 Severability
The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement.
10.7 Counterparts
This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original, but all of which shall be one and the
same document.
10.8 Confidentiality of Agreement
The terms of this Agreement shall be kept confidential and shall not be
disclosed to any third party (except for the Press Release contemplated above or
unless such disclosure is required by law).
<PAGE> 16
IN WITNESS WHEREOF the parties hereto have caused this Agreement to be
signed under seal as of the date first set forth above.
LEARNING COMPANY PROPERTIES INC. MICROGRAFX, INC.
By: /s/ R. Scott Murray By: /s/ Douglas Richard
---------------------------------- ------------------------------
R. Scott Murray Name: Douglas Richard
Executive Vice President and Title: Chief Executive Officer
Chief Financial Officer
As to Section 1.2(a)(i)
MINDSCAPE, INC.
By: /s/ R. Scott Murray
- -------------------------------------
R. Scott Murray
Executive Vice President and
Chief Financial Officer
<PAGE> 17
SCHEDULE 1.1
CREATACARD PRODUCT LIST
The Software Programs shall include the entire CreataCard software
product line consisting of each and every version and derivative of the software
programs now known as CreataCard, including, without limitation, the attached
list of programs.
<PAGE> 18
<TABLE>
<CAPTION>
CREATACARD PRODUCT LISTING
- ------------------------------------------------------------------------------------------------------------------------------------
PRODUCT SHIP DATE PRIMARY DISTRIBUTION COUNTRY NOTES UNLOCK PACKS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AG CreataCard Plus Version 1.0 International Sep-96 Retail Outside US/Canada None
AG CreataCard Gold Version 1.0 English Mar-97 Retail US, Canada None
AG CreataCard Gold Version 1.0 International Mar-97 Retail Outside US/Canada None
AG CreataCard Plus Version 2.0 English Sep-97 Retail US, Canada 16 packs
AG CreataCard Gold Version 2.0 English Sep-97 Retail US, Canada 16 packs
Carlton CreataCard Gold Version 2.0 Sep-97 Retail UK 7 packs
International
AG CreataCard Gold Version 2.0 International Sep-97 Retail Outside US/Canada 7 packs
AG CreataCard Gold Version 2.0 Walmart Sep-97 Walmart US, Canada Box Change Only 16 packs
AG CreataCard Plus Version 2.0 Walmart Sep-97 Walmart US, Canada Box Change Only 16 packs
AG CreataCard Plus Version 2.1 English Mar-98 Retail US, Canada 22 packs
AG CreataCard Gold Version 2.1 English Mar-98 Retail US, Canada 22 packs
Carlton CreataCard Gold Version 2.1 Mar-98 Retail UK 11 packs
International
AG CreataCard Gold Version 2.1 International Mar-98 Retail Outside US/Canada 11 packs
AG CreataCard Gold Version 2.1 Walmart Mar-98 Walmart US, Canada Box Change Only 22 packs
AG CreataCard Plus Version 2.1 Walmart Mar-98 Walmart US, Canada Box Change Only 22 packs
AG CreataCard Plus 2.1 Upgrade Mar-98 Current 2.0 Customers US, Canada 22 packs
AG CreataCard Gold 2.1 Upgrade Mar-98 Current 2.0 Customers US, Canada 22 packs
AG CreataCard Internet Edition Version 1.0 Jan-97 Internet - Free 0 packs
AG CreataCard Internet Edition Version 2.0 Oct-97 Internet - Free Spring/Fall 0 packs
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PROPOSED PRODUCT SHIP DATE PRIMARY DISTRIBUTION COUNTRY NOTES UNLOCK PACKS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AG CreataCard Plus Version 3.0 English Sep-98 Retail US, Canada 31 packs
AG CreataCard Gold Version 3.0 English Sep-98 Retail US, Canada 30 packs
Carlton CreataCard Gold Version 3.0 International Sep-98 Retail UK 18 packs
AG CreataCard Gold Version 3.0 International Sep-98 Retail Outside US/Canada 18 packs
AG CreataCard Gold Version 3.0 Walmart Sep-98 Walmart US, Canada Box Change Only 30 packs
AG CreataCard Plus Version 3.0 Walmart Sep-98 Walmart US, Canada Box Change Only 30 packs
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Seller shall only be required to deliver the version 3.0 Golden Master at
the closing. Seller shall deliver any other versions upon request of Buyer.
<PAGE> 19
SCHEDULE 1.2(A)(I)
ASSUMED AGREEMENTS
1. Master Agreement between American Greetings Corporation ("AG") and
Seller, dated February 9, 1996, as amended April 1, 1997.
2. Centerpiece Product, Subagreement A, between American Greetings
Corporation ("AG") and Seller, dated February 9, 1996, as amended April
1, 1997.
3. Design Packs, Subagreement B, between American Greetings Corporation
("AG") and Seller, dated February 9, 1996, as amended April 1, 1997.
4. Micrografx Remote Fulfillment Software, Subagreement D, between
American Greetings Corporation ("AG") and Seller, dated April 1, 1997.
5. Centerpiece Japan Product, Subagreement E, between American Greetings
Corporation ("AG") and Seller, dated April 1, 1997.
<PAGE> 20
SCHEDULE 1.2(C)
MDF COMMITMENTS
To be provided by Seller.
<PAGE> 21
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
CAC PHASE OUT COMMITMENTS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
* * * Promo Date Activity Products Agreement Comments Add'l Comments
- ------------------------------------------------------------------------------------------------------------------------------------
* * * 8/1/98 End Cap AG CAC Plus V2.0 AG CAC Yes Phase Out/Signed Agreed to per contract
Gold V2.0
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL * *
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
* * 8/1/98 End Cap AG CAC Plus V2.0 Yes Phase Out/Signed *
- ------------------------------------------------------------------------------------------------------------------------------------
* * 8/1/98 Instant AG CAC Plus V2.0 Yes *
Rebate
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL *
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
* * * 8/1/98 Insert AG CAC Plus V2.0 AG Yes Phase Out/Signed Agreed to per contract
CAC Gold V2.0 AG CAC
Budget
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL * *
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
* * * 7/1/98 AD CAC Plus Yes Signed Agreed to per contract
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL * *
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
* * * 7/1/98 Insert AG CAC Plus V2.0 Yes Phase Out/Signed Agreed to per contract
- ------------------------------------------------------------------------------------------------------------------------------------
* * * 8/1/98 Insert AG CAC Plus V2.1 Yes Phase Out/Signed Agreed to per contract
- ------------------------------------------------------------------------------------------------------------------------------------
* * * 9/1/98 Insert All new product Yes Signed
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL * *
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
* * * 7/1/98 Endcap Carlton Cards Yes Phase Out
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL *
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
* * * 7/1/98 Insert AG CAC Plus V2.0 Yes Signed
- ------------------------------------------------------------------------------------------------------------------------------------
* * * 7/1/98 Rebates AG CAC Plus V2.1 Yes Signed
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL * *
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
* *
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Schedule 1.2 (c)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 22
<TABLE>
<CAPTION>
CAC 3 LAUNCH COMMITMENTS
- ----------------------------------------------------------------------------------------------------------
* * Promo Date Activity Products Agreement Comments
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
* * * End Cap AG CAC Plus V3.0 AG Yes
CAC Gold V3.0
TOTAL *
* * * EC W/Radio AG CAC Gold V3 Yes
* * * Insert AG CAC Gold V3 Yes
* * * Insert AG CAC Plus V3 Yes
* * * Insert All Products Yes
* * * Insert AG CAC Plus V3 Yes
* * * Insert AG CAC Plus V3 Yes
* * * Insert AG CAC Gold V3 Yes
* * * Insert AG CAC Plus V3 Yes
TOTAL *
* * * End Cap AG CAC Plus V3.0 AG Yes
AG CAC Gold V3.0
* * * Insert AG CAC Plus V3.0 AG Yes Signed
AG CAC Gold V3.0
* * * Insert AG CAC Plus V3.0 AG Yes
AG CAC Gold V3.0
* * * Insert AG CAC Plus V3.0 AG Yes
AG CAC Gold V3.0
* * * Insert AG CAC Plus V3.0 AG Yes
AG CAC Gold V3.0
TOTAL *
* * * Insert AG CAC Plus V3 Yes
* * * Insert AG CAC Gold V3 Yes
* * * End Cap/Red Rack AG CAC Plus V3.0 AG Yes
AG CAC Gold V3.0
TOTAL *
* * * Pop Display All new product Yes
* * * Insert All new product Yes Signed
* * * Insert AG CAC Plus V3 Yes
TOTAL *
* * * Ad/Display AG CAC Plus V3.0 AG Yes Signed
AG CAC Gold V3.0
TOTAL *
* * * Display AG CAC Gold V3 Yes
TOTAL *
* *
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 23
SCHEDULE 1.5
EXCLUDED ASSETS
1. CreataCard J-Version based on Micrografx Windows Draw
2. Standard OEM License Agreement between Avery Dennison Corporation
("Distributor") and Seller, dated March 15, 1997.
3. Standard OEM License Agreement between Avery Dennison UK Limited
("Distributor") and Seller, dated August 5, 1997.
4. Amended and Restated License Agreement between Canon Computer Systems,
Inc. ("Distributor") and Seller, dated March 31, 1997, as further
amended May ___, 1998.
5. Promotional Program Software Distribution Agreement between Canon
Computer Systems, Inc. ("CCSI") and Seller, dated May 22, 1998.
6. Standard OEM License Agreement between Epson America, Inc.
("Distributor") and Seller, dated April 15, 1998.
7. License to Incorporate Copyrighted Works between Lexmark International,
Inc. ("Lexmark") and Seller, dated March 31, 1998.
8. Standard OEM License Agreement between Mindscape, Inc. ("Distributor")
and Seller, dated July 31, 1997.
9. All Micrografx trade names, logos, service marks and trade dress.
10. The agreements listed as items #8-12 on Schedule 2.2(c).
<PAGE> 24
SCHEDULE 2.2(B)(I)
AGREEMENTS AND CONSENTS
(i) All contracts which relate to the Software Programs (Section 2.2(b)
(i):
1. Master Agreement between American Greetings Corporation ("AG") and
Seller, dated February 9, 1996, as amended April 1, 1997.
2. Centerpiece Product, Subagreement A, between American Greetings
Corporation ("AG") and Seller, dated February 9, 1996, as amended April
1, 1997.
3. Design Packs, Subagreement B, between American Greetings Corporation
("AG") and Seller, dated February 9, 1996, as amended April 1, 1997.
4. On-Line and Internet Special Products, Subagreement C, between American
Greetings Corporation ("AG") and Seller, dated February 9, 1996.
5. Micrografx Remote Fulfillment Software, Subagreement D, between
American Greetings Corporation ("AG") and Seller, dated April 1, 1997.
6. Centerpiece Japan Product, Subagreement E, between American Greetings
Corporation ("AG") and Seller, dated April 1, 1997.
7. Bitstream Inc. License Agreement between Bitstream Inc. ("Bitstream")
and Seller, dated December 17, 1992, as amended. For licensed fonts.
8. Bitstream Inc. TrueDoc(R) License Agreement between Bitstream Inc.
("Bitstream") and Seller, dated May 30, 1997. For licensed fonts.
9. Leadtools Windows Based Products License Agreement between Lead
Technologies, Inc. ("Licensor") and Seller, dated June 8, 1995, as
amended. For licensed filters.
10. Pretty Simple Master OEM Agreement between Pretty Good Privacy, Inc.
("PGP") and Seller, dated June 30, 1997. Licensed encryption.
11. LZW Software Patent License Agreement between Unisys Corporation
("Unisys") and Seller, dated December 14, 1995. License of LZW
technology.
12. Standard OEM License Agreement between Avery Dennison Corporation
("Distributor") and Seller, dated March 15, 1997.
13. Standard OEM License Agreement between Avery Dennison UK Limited
("Distributor") and Seller, dated August 5, 1997.
14. Amended and Restated License Agreement between Canon Computer Systems,
Inc. ("Distributor") and Seller, dated March 31, 1997, as further
amended May ___, 1998.
<PAGE> 25
15. Promotional Program Software Distribution Agreement between Canon
Computer Systems, Inc. ("CCSI") and Seller, dated May 22, 1998.
16. Standard OEM License Agreement between Epson America, Inc.
("Distributor") and Seller, dated April 15, 1998.
17. License to Incorporate Copyrighted Works between Lexmark International,
Inc. ("Lexmark") and Seller, dated March 31, 1998.
18. Standard OEM License Agreement between Mindscape, Inc. ("Distributor")
and Seller, dated July 31, 1997.
(ii) Consents and approvals.
BANK BOSTON - REVOLVING CREDIT AGREEMENT
AMERICAN GREETINGS CORPORATION - ASSUMED AGREEMENTS
(iii) All Royalties, Advances and other Fees relating to the Software
Programs (Section 2.2(b)(iii): None except for those due American
Greetings Corporation pursuant to the various Assumed Agreements.
<PAGE> 26
SCHEDULE 2.2(C)
OEM AND LICENSING AGREEMENTS
(a) OEM Agreements:
1. Standard OEM License Agreement between Avery Dennison Corporation
("Distributor") and Seller, dated March 15, 1997.
2. Standard OEM License Agreement between Avery Dennison UK Limited
("Distributor") and Seller, dated August 5, 1997.
3. Second Amended and Restated License Agreement between Canon Computer
Systems, Inc. ("Distributor") and Seller, dated May 29, 1998.
4. Promotional Program Software Distribution Agreement between Canon
Computer Systems, Inc. ("CCSI") and Seller, dated May 22, 1998.
5. Standard OEM License Agreement between Epson America, Inc.
("Distributor") and Seller, dated April 15, 1998.
6. License to Incorporate Copyrighted Works between Lexmark International,
Inc. ("Lexmark") and Seller, dated March 31, 1998.
7. Standard OEM License Agreement between Mindscape, Inc. ("Distributor")
and Seller, dated July 31, 1997.
(B) License Agreements:
8. Bitstream Inc. License Agreement between Bitstream Inc. ("Bitstream")
and Seller, dated December 17, 1992, as amended.
9. Bitstream Inc. TrueDoc(R) License Agreement between Bitstream Inc.
("Bitstream") and Seller, dated May 30, 1997.
10. Leadtools Windows Based Products License Agreement between Lead
Technologies, Inc. ("Licensor") and Seller, dated June 8, 1995, as
amended.
11. Pretty Simple Master OEM Agreement between Pretty Good Privacy, Inc.
("PGP") and Seller, dated June 30, 1997.
12. LZW Software Patent License Agreement between Unisys Corporation
("Unisys") and Seller, dated December 14, 1995.
<PAGE> 27
SCHEDULE 2.3
ENCUMBRANCES
None
<PAGE> 28
SCHEDULE 2.4
LITIGATION AND CLAIMS
Micrografx, Inc. v. Corel Corporation, Corel Corporation and Michael C.J.
Cowpland, in the United States District Court for the Northern District of
Texas, Dallas Division, Case No. 3-98CV0050-R
American Greetings has asserted claims against Micrografx for violation of the
Assumed Agreements. Seller shall obtain a release of Buyer and Seller from any
such claims.
<PAGE> 29
SCHEDULE 2.5
INVENTORY
See Attached
The attached list represents all of the existing inventory.
o (3 pages omitted pursuant to the request for confidential treatment)
<PAGE> 30
<TABLE>
<CAPTION>
Inventory at MGX Richardson
Part Number Description Quantity
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
AD1L10ENG AM CREATE-A-CARD GOLD CDROM LIVE 1.0 ENG *
AM1A10ENG AM CREATACARD UK CDROM LIVE 1.0 ENG *
AM1C10ENG AM CREATACARD INT'L CDROM LIVE 1.0 ENG *
AM1W20ENG CAC PLUS CD 2.0 ENG WALMART *
AM20CDOEM AM 1.0 CREATACARD 20 "OEM" CD DISPLAY *
</TABLE>
<TABLE>
<CAPTION>
Part Number Description Quantity
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
AD1A20ENG CAC GOLD UK LIVE 2.0 ENG *
</TABLE>
<TABLE>
<CAPTION>
Inventory at Softbank
Part Number Description Quantity
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
AD1FU21ENG CAC GOLD CD Upgrade Pack 2.1 ENG *
AD1L10ENG AM CREATE-A-CARD GOLD CDROM LIVE 1.0 ENG *
AD1L20ENG CAC GOLD CD LIVE 2.0 ENG *
AD1W20ENG CAC GOLD CD 2.0 ENG WALMART *
AM1L20ENG CAC PLUS CD LIVE 2.0 ENG *
AM1W20ENG CAC PLUS CD 2.0 ENG WALMART *
</TABLE>
<TABLE>
<CAPTION>
INVENTORY AT MGX VENLO
Part Number Description Quantity
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
AD1A20ENG CAC GOLD UK LIVE 2.0 ENG *
AD1C20ENG CAC GOLD CD INT'L LIVE 2.0 ENG *
AM1A10ENG AM CREATACARD UK CDROM LIVE 1.0 ENG *
AM1C10ENG AM CREATACARD INT'L CDROM LIVE 1.0 ENG *
</TABLE>
<PAGE> 31
SCHEDULE 2.6
INTANGIBLE PROPERTY
1. Trademarks: None (all owned by American Greetings)
2. Registered Trademarks or Pending Applications: None
3. Registered Copyrights:
<TABLE>
<CAPTION>
Program/Version Registration # Date
---------------------------------------------------------------------------
<S> <C> <C>
CREATACARD GOLD 1.0 TX4-574-621 10/20/1997
CreataCard Gold 2.0 TX4-574-620 10/20/1997
CreataCard Gold 2.1 TXu-814-555 02/10/1998
CreataCard Plus 1.0 TX4-574-623 10/20/1997
CreataCard Plus 2.0 TX4-574-622 10/20/1997
CreataCard Plus 2.1 TXu-814-556 02/10/1998
CreataCard Japanese version 1.0 TX-576-71 01/20/1996
CreataCard Studio Source Code TX4-321-216 08/23/1996
</TABLE>
1. Unregistered Copyrights:
<TABLE>
<CAPTION>
Program/Version Date
----------------------------------------
<S> <C>
CreataCard Gold 3.0
CreataCard Plus 3.0
</TABLE>
Note: Buyer's rights to registered and unregistered copyrights relate
only to packaging, trade dress and other collateral materials identified in
Section 1.2(a)(ii).
<PAGE> 32
SPECIFICATIONS
CreataCard Program Features
o Card Rack Browsing
o Find-A-Card Browsing
o ForgetMeNot Address Book & Calendar
o Greeting Card Generation
o Print
o E-mail
o Personal Delivery
o Creative Workshop
o Art Book
o Message Book
o Drawing Tools
o All project templates
o Themed Projects
o Multi-media Greetings
o Add-A-Photo Greetings
Content Project Types
o Greeting Cards
o Invitations
o Announcements
o Add-A-Photo Cards
o Signs/Certificates and Stationery
o Postcards
o Business Cards
o Envelopes
o Labels & Gift Tags
o Stickers
o Banners
o Calendar
o Labels
o Multimedia Greeting Cards (e-mail only)
<PAGE> 1
EXHIBIT 21.1
MICROGRAFX, INC.
SUBSIDIARIES OF REGISTRANT
Information is set forth below concerning all subsidiaries of the Company as of
June 30, 1998:
<TABLE>
<CAPTION>
Name of Subsidiary Incorporation Company
- ------------------ ------------- -------
<S> <C> <C>
Micrografx France, SARL France 100%
Micrografx Deutschland GmBH Germany 100%
Micrografx Japan. K.K. Japan 100%
Micrografx B.V. The Netherlands 100%
Micrografx Technology N.V. Netherlands Antilles 100%
Micrografx, Ltd. United Kingdom 100%
Micrografx Australia Pty. Limited Australia 100%
Micrografx Italia S.r.l. Italy 100%
Visual Acquisition, Inc. Delaware 100%
AdvanEdge Acquisition, Inc. Delaware 100%
WebKnight Acquisition, Inc. Delaware 100%
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 33-37913, 33-41664, 33-41665, 33-41783, 33-65754, 33-71008,
33-71010, 33-86368, 33-86370, 33-86372, 333-03427, 333-03429) pertaining to the
Micrografx, Inc. Incentive and Nonstatutory Stock Option Plan, the Micrografx,
Inc. Employee Stock Purchase Plan, the Micrografx, Inc. Restricted Stock
Purchase Plan and the Micrografx, Inc. Directors Stock Purchase Plan of our
report dated August 11, 1998 (except Note 14, as to which the date is September
18, 1998), with respect to the consolidated financial statements and schedule of
Micrografx, Inc. included in the Annual Report (Form 10-K) for the year ended
June 30, 1998.
/s/ Ernst & Young LLP
Dallas, Texas
September 18, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, into the Company's previously filed
Registration Statements on Form S-8, File Nos. 33-37913, 33-41664, 33-41665,
33-41783, 33-65754, 33-71010, 33-71008, 33-86368, 33-86370, 33-86372, 333-03429,
and 333-03427. It should be noted that we have not audited any financial
statements of the Company subsequent to June 30, 1996, or performed any audit
procedures subsequent to the date of our report.
/s/ Arthur Andersen LLP
Dallas, Texas
September 21, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS PRESENTED IN THE 1998 FORM 10-K AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,475
<SECURITIES> 23,322
<RECEIVABLES> 15,761
<ALLOWANCES> 3,049
<INVENTORY> 980
<CURRENT-ASSETS> 44,273
<PP&E> 12,258
<DEPRECIATION> 10,312
<TOTAL-ASSETS> 55,141
<CURRENT-LIABILITIES> 26,161
<BONDS> 0
0
0
<COMMON> 115
<OTHER-SE> 28,455
<TOTAL-LIABILITY-AND-EQUITY> 55,141
<SALES> 71,792
<TOTAL-REVENUES> 71,792
<CGS> 21,466
<TOTAL-COSTS> 21,466
<OTHER-EXPENSES> 49,953
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5
<INCOME-PRETAX> 934
<INCOME-TAX> 327
<INCOME-CONTINUING> 607
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 607
<EPS-PRIMARY> .06
<EPS-DILUTED> .05
</TABLE>
