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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM 10-K
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(Mark One)
[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 14 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER 0-21402
INTERLINQ SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1187540
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11255 KIRKLAND WAY
KIRKLAND, WA 98033
(Address of principal executive offices)
(425) 827-1112
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report), 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 the Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on September
22, 1998 as reported on the Nasdaq National Market, was approximately
$26,569,000.
As of September 22, 1998, there were 5,121,777 shares of the Registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Company's definitive proxy statement for the annual
meeting of shareholders of the Company to be held on November 10, 1998, which
will be filed with the Securities and Exchange Commission within 120 days after
June 30, 1998 are incorporated by reference into Part III of this report.
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PART I
ITEM 1. BUSINESS
OVERVIEW
INTERLINQ Software Corporation ("the Company") was founded in Washington
in 1982 and over the last sixteen years has developed, marketed and sold
software for the mortgage lending industry. Through the 1998 fiscal year the
Company concentrated on this industry as a leading business solutions provider
to approximately 2,000 banks, savings institutions, mortgage banks, mortgage
brokers, and credit unions.
Pursuant to a purchase and sale agreement dated June 30, 1998, the Company
acquired substantially all the assets and business of Logical Software Solutions
Corporation ("LSS"), in a transaction accounted for using the purchase method of
accounting. This acquisition included certain technology including FlowMan
version 3.2 ("FlowMan"). FlowMan is an award-winning enterprise software
application that integrates disparate systems and applications in order to
facilitate ongoing process knowledge management by applying its business process
and rules technology across an entire enterprise. In connection with this
acquisition, the Company formed the Enterprise Technology Division ("ETD") and
reorganized the Company's existing mortgage software business into the Mortgage
Technology Division ("MTD"). The Company intends to continue to develop the
FlowMan product internally and expects to release version 4.0 in the latter half
of fiscal year 1999. The Company expects this version will offer significant
enhancements over the current product and will be capable of integration with
current MortgageWare products.
MORTGAGE TECHNOLOGY DIVISION
OVERVIEW
Through its Mortgage Technology Division, the Company works closely with
clients to provide comprehensive software applications and business solutions
for the residential mortgage and construction lending industry. MTD offers a
suite of products, MortgageWare Enterprise, that manages the entire life cycle
of a mortgage loan. MortgageWare Enterprise is designed to provide greater
operational efficiency, real-time access to data, and a cost-effective means for
managing and integrating information. It is designed to allow mortgage lenders
to improve business processes and practices, thereby improving profitability.
MortgageWare Enterprise creates an integrated system of reliable information for
business analysis; data is entered only once, managed from a central point, and
accessible from every desktop licensed to utilize MortgageWare Enterprise.
MortgageWare Enterprise can perform a wide variety of mission critical
enterprise tasks, including matching loan programs for lenders and borrowers,
originating and servicing mortgage loans and risk analysis of all loans within
an organization.
As of June 30, 1998, MortgageWare products had been installed and were
currently supported by the Company for approximately 2,000 financial
institutions.
The Company's target market is the approximately 34,800 financial
institutions in the United States, Puerto Rico and the Virgin Islands. According
to Company estimates based on available industry data, this market is comprised
of approximately 20,000 mortgage banks and brokers, 9,000 banks, 4,000 credit
unions and 1,800 savings institutions.
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The Company intends to generate future revenue growth within the MTD from
the sale of mortgage loan servicing technology and products designed to provide
customers with better information access and content. This growth is expected to
complement the Company's current products, which address operational efficiency
in order to decrease the cost of the mortgage loan cycle. In the near term,
further penetration of the loan production market and the mortgage loan
servicing market (along with additional sales of products and support services
to existing customers with its current products) is expected to provide the
majority of the Company's revenue. The Company has planned releases of new
products and upgrades to existing products targeted for fiscal 1999. In
addition, the Company plans to integrate the new FlowMan product into
MortgageWare TC and MortgageWare Loan Servicing during the latter half of the
1999 fiscal year.
STRATEGY
The Company's strategy with respect to the MTD is to strengthen and
leverage its position as a leading technology provider in the mortgage industry.
This strategy includes extending the scope of the Company's easy-to-use,
PC--based offerings, in order to help customers shape their business activities
through the use of technology and information. The Company is supported in this
strategy by a strong base of recurring revenue from long-term customer
relationships and the activities of a direct sales force.
Easy-to-Use Software
The Company believes its customers require software solutions that are
specifically designed for financial institutions and that are easy to use and
support. Because the residential mortgage and construction lending processes are
complex and many of these processes are performed by individuals with little
computer experience. The Company's strategy is to provide software solutions
that can be easily installed and used. In order to provide consistent,
high-quality support and service, the Company does not create customized
software; however, it does provide customized integration of MortgageWare
Enterprise and has, from time to time, upgraded its products with certain
customers on a "pay for priority" basis. Product upgrades, nevertheless, often
include modifications and enhancements requested by customers.
PC Platform
The Company believes that reductions in the cost of and increases in the
computing power of PCs make its systems increasingly affordable for all
financial institutions. The Company's software runs on industry-standard PCs and
networks, thereby providing power, flexibility, ease of use and distribution of
workload at a price that the Company believes cannot be matched by minicomputer
or mainframe solutions. It is the Company's belief that the underlying trend in
computing price to performance will increasingly favor applications based on
the Windows/Intel environment on which the Company's products run.
Direct Sales Force
The Company believes that industry specific expertise and knowledge are
required to sell its products, and therefore, it employs a direct sales force.
The Company retains sales personnel who it believes are skilled in both
residential mortgage and construction lending, as well as PC-based software
applications. The Company believes that maintaining its own sales force allows
it to develop long-term customer relationships.
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Long-term Customer Relationships
The Company attempts to build long-term relationships with its customers
by providing them with personal contact from management, training and
implementation, and continuing services (such as consulting, toll-free telephone
support and participation in user groups). The Company regularly uses an outside
research firm to monitor customer satisfaction as well as industry-based survey
research to stay abreast of industry needs. The Company believes that its focus
on the customer and the industry strengthens its recurring revenue opportunities
and decreases the possibility of customer attrition to competitive products by
maintaining its responsiveness to changing customer demands.
PRODUCTS AND SERVICES
The Company believes the strength of its MTD lies in its ability to
provide customers with an integrated approach to originating, servicing, and
analyzing loans. The Company offers a variety of products for strategic and
tactical business solutions in the mortgage industry, including the MortgageWare
Loan Management System and MortgageWare(R)TC, MortgageWare for Brokers,
MortgageWare MarketLINQ(R), MortgageWare InvestorLINQ(TM),MortgageWare
Entre(TM), MortgageWare InfoLINQ(TM), MortgageWare Loan Servicing(TM), and
BuilderBLOCK$(TM). Together, these technology tools make up the MortgageWare
Enterprise -- designed to provide a means for greater operational efficiency
enterprise-wide, faster access to information, and cost-effective management of
information content.
The following table briefly describes INTERLINQ's MortgageWare Enterprise
products:
POINT-OF-SALE AND ORIGINATION
Entre Loan officers prequalify applicants in the field through the use
of a Windows-based software that runs on a laptop computer
Origination Loan officers enter loan applications directly into a PC, either
in the office or in the field
MORTGAGE LOAN MANAGEMENT SYSTEM (LMS) AND MORTGAGEWARE TC
Qualifying Allows quick assessment of a potential borrower's ability to
qualify for a loan
Processing Handles loan application data entry, document tracking and
database maintenance
Closing Produces closing documents, including jurisdiction-specific
promissory notes and mortgages or deeds of trust
Settlement Enables a lender or settlement agent to manage checking accounts,
print checks and report IRS data
Tracking Produces management reports designed to meet each customer's
particular needs
MortgageWare Provides brokers with a scaled-down version of the
for Brokers MortgageWare LMS designed to meet their specific needs for
product and pricing
SECONDARY MARKETING
MarketLINQ Serves as a central point of data entry and maintenance for all
mortgage loan programs and rates, providing automatic
distribution enterprise-wide
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LOAN SERVICING
Loan
Servicing Provides lenders with a complete and cost-effective Windows-based
loan servicing solution
Servicing
Gateway A streamlined version of Loan Servicing designed for lenders
holding loans for sale
CONSTRUCTION LENDING
BuilderBLOCK$ Provides ability to service and report essential components of a
construction loan
ANALYSIS AND COMMUNICATIONS
InfoLINQ Provides mortgage lenders with a complete intranet-based
environment in which to collect, extract, and distribute business
analysis
COMLINQ Handles inter-branch electronic communications for MortgageWare
software
MortgageBase Enables customers to access their MortgageWare database from
FoxPro, convert files into an xbase format and print more
sophisticated reports
Interfaces Utilizing SmartLINQ technology, customers can interface with
other products and systems. Interfaces include Fannie Mae's
MortgageLINKS, Fannie Mae's Desk Top, Freddie Mac Loan
Underwriter and the M&I interface
MortgageWare Entre. Provides loan officers or brokers ("Originators") with
tools to tailor loan programs, enabling better customer service and more
expedient completion of each loan application. In order to improve communication
between Originators in the field and the processing department, MortgageWare
Entre is designed to increase accuracy, timeliness, and back-office tracking of
each loan. The Company believes that MortgageWare Entre gives mortgage
originators a competitive advantage by enabling them to quickly prequalify
borrowers for purchases and refinances, show side-by-side comparisons of
different loan programs, take the loan application, give the borrower
conditional loan approval on the spot, and produce professional-looking
open-house flyers. In addition, MortgageWare Entre provides the ability to order
risk grade evaluation and mortgage insurance through Freddie Mac's Loan
Prospector Second Generation, and the ability to request underwriting directly
from Fannie Mae. Additionally, this Windows-based system includes a contact
manager for efficient follow-up.
MortgageWare TC and MortgageWare Loan Management System. MortgageWare TC
and MortgageWare Loan Management System are modular systems for residential
mortgage loan management that address qualifying, point-of-sale origination,
processing, closing, settlement, pipeline tracking and management, and
inter-branch electronic communications. MortgageWare TC, the thin-client version
of the MortgageWare Loan Management System, has been designed to reduce network
traffic, improve performance, simplify hardware requirements and reduce exposure
to network-related problems. These systems can also receive tiered pricing from
MarketLINQ, so that lenders can compare actual locked interest rates against
rate sheet data. This "intelligent" system directs and streamlines the flow of
work throughout a company, supporting the transition from individual workflow to
an organizational workflow that boosts efficiency across the entire enterprise.
MortgageWare TC utilizes a 32-bit Windows client-server architecture.
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MortgageWare MarketLINQ. A Windows--based product, MortgageWare MarketLINQ
serves as a central point of data entry and maintenance for all mortgage loan
programs and rates including tiered pricing, which allows an administrator to
electronically distribute up-to-date information enterprise-wide on demand. This
program ensures that data is entered into the system only one time--whether it's
being used for in-house purposes or by a loan officer working to obtain the best
interest rate for a borrower. Direct links into Knight-Ridder and Dow Jones
Telerate enables the pricing for loan programs to be efficiently managed and
rapidly recalculated as changes in mortgage pricing occur (often multiple times
daily). MortgageWare MarketLINQ utilizes a 32-bit architecture.
MortgageWare Loan Servicing System. The Company believes that its
MortgageWare Loan Servicing enhances a customer's profitability by offering an
alternative to service bureau and mainframe-based servicing. MortgageWare Loan
servicing is offered at a competitive price that provides true economic benefit
to customers. In addition, it provides the benefit of having full access to the
loan servicing information. This allows loan servicers to gain both a cost and
an information advantage. MortgageWare Loan Servicing utilizes a 32-bit Windows
client-server architecture, coupled with advanced information features that
automate and manage business events for a loan servicer.
Servicing Gateway. A streamlined version of Loan Servicing, Servicing
Gateway is an abbreviated, low-cost product designed specifically for those
lenders holding loans for sale. Using Servicing Gateway they can collect
payments and account for interest paid without the cost of a full servicing
operation.
BuilderBLOCK$. For construction lending, BuilderBLOCK$ offers a
Windows-based system that simplifies and streamlines the management of
construction loans. This construction lending product offers an alternative to
manual or spreadsheet calculations. The product enables users to automatically
prepare Forms 1099 and 1098, enter draw requests, track inspections and print
checks. Key features include the automation of IRS reporting for both suppliers
and borrowers; the ability for lenders to compare the percentage of building
completion against the percentage of funds disbursed to date; and the
maintenance of a historical record of all transactions by supplier and
contractor. The system is designed to provide quick and easy entry of inspection
data; one screen captures information for all loans, and the information is then
automatically transferred to each individual loan.
MortgageWare InfoLINQ. MortgageWare InfoLINQ integrates all of INTERLINQ's
products to create the synergy of the MortgageWare Enterprise business model.
InfoLINQ provides mortgage lenders with an intranet-based environment in which
to collect, extract, and distribute business information. Data for the automated
creation and distribution of real-time business reports and analyses is
accessible to users throughout the enterprise through easy-to-use browser-based
desktops. MortgageWare InfoLINQ utilizes a 32-bit architecture.
InfoLINQ allows users to access up-to-date information via a customizable
"desktop" that is similar to a Web site thereby reducing the need to commit
resources towards the collection and analysis of loan data. InfoLINQ
automatically distributes information to each desktop based on what company
information is relevant to each user's job. Information is captured and provided
either on a real-time or a periodic basis, depending on the needs of the users.
Users can tailor their desktops to most efficiently review the information they
want to track, helping them to
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quickly respond to changes in the market, optimize profitability and speed the
process of researching and analyzing the entire mortgage business.
Other MortgageWare Information Management Tools. The Company has developed
and expects to continue to develop products that it believes speed up the cycle
of mortgage loan creation. Other mortgage technology products offered by the
Company include:
COMLINQ. INTERLINQ's electronic communications system is designed to
provide a fast, yet easy, method of transferring MortgageWare data between
headquarters, branch offices and origination systems.
MortgageWare MultiTrac. Multi-tasking capabilities have been added to
MortgageWare Loan Management System and MortgageWare TC via MultiTrac, thereby
providing users with the ability to multi-task and access numerous loan
applications without interrupting in-progress activities.
New Products/Modules Under Development
MortgageWare InvestorLINQ. InvestorLINQ refers to managing the risk of
financial loss in the origination and subsequent selling of mortgage loans.
InvestorLINQ helps secondary marketing departments maximize profits from the
sale of loans in the secondary market, by providing pipeline information to
price loan products and hedge their position.
Integration of FlowMan. During fiscal year 1999 the Company plans to
integrate its newly acquired FlowMan technology into MortgageWare TC and
MortgageWare Loan Servicing. This is expected to further broaden the
capabilities and benefits of these packages and further strengthen the
MortgageWare Enterprise.
Complementary Products and Services
The Company provides training, implementation services and consulting
services to assist its customers in the use of its software. These services are
typically performed at the customer's location and are tailored to meet the
customer's needs. Customers may also attend regional training seminars or
consult one of the Company's regionally based trainers for individual
assistance.
Electronic forms and custom electronic documents necessary in the loan
production process are available to customers through a special marketing
agreement with CBF Systems, Inc., VMP Mortgage Forms Division ("VMP"). Under
this agreement, customers are introduced to these products by the Company's
direct sales force. Responsibility for producing, maintaining compliance, and
shipping documents to customers is held by VMP. The Company receives a portion
of the revenue collected by VMP.
The Company also sells laser fonts and font cartridges and provides laser
logo services. The Company has developed interfaces to Fannie Mae's Mornet
product and Freddie Mac's Midanet product, which facilitate loan delivery once a
loan is closed. In addition, the Company has developed several programs to
export servicing data to loan servicing systems for its customers.
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Customer Service and Support
INTERLINQ believes that excellent customer service is vital to its success
and future growth. For many customers, the MortgageWare Enterprise products
become critical to their daily operations. Accordingly, customers rely on the
Company for continued support and enhancement of its products. Customers who buy
licenses to use the Company's products under its purchase option also purchase
an annual support contract.
Regular feedback on the quality of customer service is an integral part of
the Company's customer service strategy. The Company employs an independent
research firm that calls each customer at least once a year to determine
customer satisfaction. The reports are used by the Company to monitor its
procedures to enhance customer satisfaction. In addition, the Company has
advisory panels for each of its products. Advisory panels consist of customers
who are chosen to be representative of the Company's diverse, mortgage lending,
customer base. As a subset to the advisory panels, the Company holds annual
focus group meetings to obtain information and feedback on specific
cross-product issues. Currently, there are focus groups for regulatory
compliance, loan processing, secondary marketing, closing/settlement, portable
origination and loan servicing.
The Company has a Major Account Services group to serve the needs of its
largest customers. As of June 30, 1998, 48 of its customers were included in the
program. The Major Account Services staff acts as liaison for each major account
customer, following up on issues and setting priorities for system enhancements.
With this program, the Company believes that it can better address the needs of
its largest customers and improve overall service for all its customers.
PRODUCT DEVELOPMENT
The MortgageWare Enterprise continues to evolve, with input from many
sources, including customers who submit software enhancement request forms
suggesting corrections or enhancements, as well as the advisory panels for each
product. The Company also maintains a database of all product support calls,
which provides feedback to its Product Development Department.
The Company has organized its Product Development Department into teams
working on products or closely related groups of products. These teams include
personnel with experience in product analysis, software engineering, research
and technology, quality assurance, and product marketing. Their objective is to
ensure that all products meet the Company's standards. Employees on these teams
are selected for their skills in mortgage lending, software development and
marketing.
The Company examines new technologies and platforms on an ongoing basis to
determine their potential benefits to customers. The Company currently develops
products using Windows NT, Windows 95 and DOS operating systems, ODBC compliant
database options (SQL Server(TM) and MS Access(TM)) Web browser-based interfaces
and thin-client technology, and Visual C++, ActiveX programming tools on a PC
network. Currently, MortgageWare Loan Management System runs on Windows
platforms and uses licensed technology to run on the DOS operating system and on
major PC networks. Other products, such as MortgageWare TC, MortgageWare Entre,
MortgageWare Loan Servicing, MortgageWare MarketLINQ, Servicing Gateway and
BuilderBLOCK$ all run under the Windows operating system.
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During fiscal year 1999, the Company plans to integrate FlowMan into
MortgageWare TC and MortgageWare Loan Servicing. This is expected to further
broaden the capabilities and benefits of these packages and further strengthen
the MortgageWare Enterprise.
SALES AND MARKETING
The Company employs a direct sales force in its MTD because it believes
that considerable expertise is required to sell its mortgage technology products
and that strong customer relationships are key to its success. The Company's
direct sales force consists of a national sales manager and sales executives.
These personnel are supported by sales administration and inside sales
representatives. As of June 30, 1998, the Company employed 11 sales executives
and one national sales manager located throughout the country who are each
responsible for an assigned geographic territory. Certain sales representatives
are exclusively devoted to sales of the Company's servicing products. Sales
executives are expected by the Company to maintain relationships with existing
customers and are responsible for the generation of new business and expansion
of existing business. Sales administration representatives handle contracts and
other administrative details, while inside sales representatives qualify sales
leads, setting appointments for sales executives, and managing much of the sales
follow-up.
Sales leads are generated through various sources, including magazine
advertising, industry databases, trade shows, purchased lists, direct mail,
telemarketing, customer referral and membership in various trade organizations.
The Company tracks lead sources to determine the most cost-effective use of its
promotional budget.
The Company offers an unconditional, 60-day, money-back guarantee on most
of its mortgage-related software products. To date, it has not experienced
significant returns under this guarantee.
Licensing Options
To attract and retain a wide diversity of customers in the residential
mortgage lending industry, the Company has developed three licensing options for
its products:
Purchase Option. Under this option, customers may purchase a standard
non-exclusive software license to use its products. The Company offers financing
for the purchase option and, for an additional annual fee, provides product
support services. Approximately 95% of the MTD's customers select the purchase
option and the additional support services.
Partnership Plan Option. Under the Partnership Plan option, customers pay
an initial commitment fee, plus a monthly fee based upon the number of loan
applications entered into the system. The Partnership Plan option includes the
MortgageWare Loan Management System software and software support and is
targeted to customers who are unwilling or unable to make the capital commitment
associated with the purchase option.
Rental Option. Because customers may not wish to commit to the purchase
option or the Partnership Plan option, the Company created a limited-capacity
version of the MortgageWare Loan Management System software for brokers that is
available on a monthly rental plan.
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CUSTOMERS
The Company's mortgage technology customer base is geographically diverse
and covers a broad range of sizes and types of financial institutions.
MortgageWare products are installed and currently supported for approximately
2,000 customers in 50 states plus Puerto Rico, Guam, and the U.S. Virgin
Islands. As of June 30, 1998, this customer base was comprised of approximately
750 mortgage brokers and bankers, 650 banks, 500 credit unions and 100 savings
institutions. In fiscal year 1998, no single customer accounted for more than 4%
of the Company's net revenues.
COMPETITION
The market for mortgage-related software products is highly competitive.
The Company competes with software vendors offering integrated financial
services packages, software consultants and value-added resellers who deliver
custom or customized software products, in-house management information services
and programming resources of some of the Company's larger existing and potential
customers, as well as software vendors offering specialized products for the
mortgage lending industry. The Company believes the main competitive factors
include price, operating platform compatibility and customer support. Some
competitive products cost significantly less than MortgageWare software, and
price-sensitive buyers tend to choose these products. Many competitors market
competing products on mainframe, mini-computer and PC platforms with a wide
array of pricing and have significantly greater financial, technical, marketing
and sales resources than the Company; some offer financial services products not
offered by the Company. The Company believes it is the leading provider of
PC-based software for residential mortgage lending solutions.
In addition to the Company's current competitors, there are many companies
involved in providing software and related services to segments of the financial
services industry other than residential mortgage lending. Because of
similarities both in the customer base and the types of products and services
provided by these other companies compared to those of the Company, these
companies are potential competitors of the Company. There is no assurance that
the Company would be successful in competing against these potential
competitors, should any of them decide to enter the Company's market.
MORTGAGE LENDING REGULATIONS
The residential mortgage lending industry is subject to a variety of
government regulations, including the Equal Credit Opportunity Act, the
Truth-in- Lending Act, the Real Estate Settlement Procedures Act and the Home
Mortgage Disclosure Act, which prohibit discrimination and require the
disclosure of certain basic information to borrowers concerning credit terms and
settlement costs. Additionally, there are various federal, state and local laws
and regulations that govern mortgage lending activities, including consumer
protection and usury statutes. Entities engaged in making and selling mortgage
loans are often subject to the rules and regulations of one or more of the
investors, guarantors and insurers of residential mortgage loans, including the
Federal Housing Authority, the Veteran's Administration, Fannie Mae, Freddie Mac
and the Government National Mortgage Association. These agencies regulate the
origination, processing, underwriting, selling, securitizing and servicing of
mortgage loans, prohibit discrimination, establish underwriting guidelines,
provide for inspections and appraisals, require credit reports on prospective
borrowers and fix maximum loan amounts and interest rates.
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Failure to comply with these laws and regulations could lead to a lender's
loss of approved status, termination of its servicing contracts without
compensation, demands for indemnification or loan repurchase, class action
lawsuits and administrative enforcement actions. Should loan production
processes or documentation arising from use of the Company's products result in
a customer's violation of such requirements, such customer, or the government
authority whose requirements were not met, might claim that the Company is
responsible, which could have an adverse effect upon the Company and its
reputation in the mortgage lending industry. On October 2, 1995 the Company
entered into an agency and compliance delegate agreement with CBF Systems, Inc,
VMP Mortgage Forms Division (VMP). Under the terms of this agreement VMP assumes
compliance responsibility for all documents sold by and through the Company.
ENTERPRISE TECHNOLOGY DIVISION
OVERVIEW
Through its Enterprise Technology Division, the Company intends to enter
the Enterprise Application Integration ("EAI") market by marketing FlowMan
through OEMs, system integrators and third-party application developers. FlowMan
is an award-winning technology that integrates disparate systems and
applications in order to facilitate ongoing process knowledge management, by
applying its business process and rules technology across an entire enterprise.
FlowMan is designed to coordinate the execution and timing of all tasks, events
and decisions for key business processes across legacy systems, enterprise
applications, client-server systems and Internet technologies. The Company
expects sales of FlowMan to begin in the first half of fiscal year 1999.
The Company's target markets for FlowMan include the EAI market as well as
a variety of vertical markets (such as healthcare, insurance, government,
transportation and utilities, etc.). EAI technologies attempt to integrate
applications at the business process level rather than at the data level. The
Company believes that FlowMan enables reusability of integration techniques and
processes across departments and environments and allows users to implement
application integration and reengineer processes without extensive user
knowledge or training in the specific underlying technologies. The Company also
believes that software providers in vertical markets can use FlowMan as an
integration/workflow toolkit or component to enhance their products'
functionality and architecture.
STRATEGY
The Company's strategy with respect to the ETD is to establish FlowMan as
a leading technology in the EAI and workflow market contributing to overall
Company growth and diversification by providing access to markets outside of the
mortgage lending industry. The Company plans to establish partnerships with
industry experts with the required knowledge and skills to compete both as an
enterprise solutions provider within the EAI market and as a leader in certain
vertical markets.
Enterprise Application Integration & Workflow Market
The EAI market is a new and growing marketplace, which according to some
industry analysts could reach $1 billion within a few years. This large, new and
growing marketplace provides the Company access to both a much larger technology
market and business opportunity. In addition, the Company believes a need exists
in numerous vertical markets
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(such as healthcare, insurance, government, transportation and utilities, etc.)
for an application integration/workflow technology that can be used to enhance
existing and development stage products. The Company believes that these markets
offer a significant business opportunity for the Company.
Although demand for EAI software products has grown in recent years, the
EAI market is still an emerging market. The Company's future financial
performance will depend in large part on continued growth in the number of
organizations adopting EAI computing environments and the number of applications
developed for use in those environments. There can be no assurance that the
market for EAI software will continue to grow. If the EAI software market fails
to grow or grows more slowly than the Company currently anticipates, the
Company's business, operating results and financial condition would be
materially adversely affected.
Indirect Sales Channel
The Company believes that successful companies in the EAI market will be
those that develop relationships with other experts in the field who have either
specific software and hardware expertise in the EAI market and/or specialized
industry knowledge in particular vertical markets. The Company plans to develop
partnerships with key software and solution providers to jointly offer EAI
solutions or integrated/workflow-enabled products. As such, the marketing and
sales efforts primarily will be made through OEMs, system integrators and
third-party application providers.
There can be no assurance that the Company will be able to attract OEMs,
system integrators and third-party application providers that will be able to
market the Company's products effectively and will be qualified to provide
timely and cost-effective customer support and service. In addition, the Company
anticipates that its agreements with OEMs, system integrators and third-party
application providers will not be exclusive and many of the Company's OEMs,
system integrators and third-party application providers may carry competing
product lines. Therefore, there can be no assurance that any OEM, system
integrator or third-party application provider will be dependable in
representing the Company's products, and the inability to recruit, or the loss
of important OEMs, system integrators or third-party application providers could
adversely affect the Company's results of operations. In addition, if it is
successful in selling products through these channels, the Company expects that
any material increase in the Company's indirect sales as a percentage of total
revenue will adversely affect the Company's average selling prices and gross
margins due to the lower unit prices that the Company receives when selling
through indirect channels.
PRODUCTS AND SERVICES
FlowMan
FlowMan is comprised of an enterprise application framework, engineering
tools and a user interface. The enterprise application framework manages and
controls transactions throughout the enterprise allowing collaboration between
application components. The framework serves as a communication "pipeline"
throughout the enterprise. The framework core elements, the business process
engine, business rules engine and component interface, allow abstraction of the
process model and business rules from third-party and legacy applications and
technology components such as imaging, forms, DBMS and other products connected
into the FlowMan framework. This tight integration results in one common
enterprise-wide system, protects the
12
<PAGE> 13
organization's technology investment and removes the need to mandate standard
enterprise components in favor of a best-of-breed approach. FlowMan also
provides flexibility through rapid implementation and modification of the
enterprise technology framework. Applications can be added, removed, or replaced
by other application components in a plug-and-play fashion. The interface layer
of the FlowMan framework provides a means for the easy integration of each
component into the overall enterprise framework allowing interoperability
between applications and across the enterprise.
FlowMan has won numerous awards over the past several years, including:
- 1998 AIIM Process Innovation Award
- 1998 GIGA Silver Award
- 1997 GIGA Gold Award
- 1996 GIGA Merit Award
- 1995 and 1996 CIPA Winning Solutions Provider
Complementary Products and Services
Depending on the sales channel, the Company either provides training and
support to the channel partner or the end user (if it is a direct sale).
Additionally, the Company offers consulting services, which may include a
combination of a workshop to educate the customer on the business process
engine, the physical integration of FlowMan with disparate systems and
applications, and training on the setup and ongoing use of the technology.
Customer Service and Support
For many customers, the Company expects that FlowMan will become critical
to their daily operations. Accordingly, customers will rely on the Company for
continued support and enhancement of its products. The Company expects that
customers who buy licenses to use FlowMan products under the Company's purchase
option will typically purchase an annual support contract. Depending on the
sales channel and partner agreement, the support contract is made with the
customer's OEM, system integrator, reseller or directly through the Company.
PRODUCT DEVELOPMENT
The Company is committed to enhancing the FlowMan technology to ensure
that it maintains its recognition as a leading, award-winning and innovative
technology. Flowman version 4.0, anticipated for commercial release during the
second half of fiscal year 1999, will offer significant enhancements over
version 3.2, including three-tier architecture for expanded scalability,
Component Object Model (COM) technology, object-oriented methodology and ActiveX
controls. FlowMan version 4.0 will be deployable across distributed network
environments.
The EAI software market is characterized by rapid technological change,
frequent new product introductions and evolving industry standards. The
introduction of products embodying new technologies and the emergence of new
industry standards can render existing products obsolete and unmarketable. The
Company's future success in this market will depend upon its ability to enhance
its current products and to develop and introduce new products on a timely basis
that keep pace with technological developments and emerging industry standards
and address the increasingly sophisticated needs of its customers. There can be
no assurance that
13
<PAGE> 14
the Company will be successful in developing and marketing product enhancements
or new products that respond to technological change or evolving industry
standards, that the Company will not experience difficulties that could delay or
prevent the successful development, introduction and marketing of these
products, or that its new products and product enhancements will adequately meet
the requirements of the marketplace and achieve market acceptance. If the
Company is unable, for technological or other reasons, to develop and introduce
new products or enhancements of existing products in a timely manner in response
to changing market conditions or customer requirements, the Company's business,
operating results and financial condition will be materially adversely affected.
SALES AND MARKETING
The Company employs an indirect sales channel with respect to its ETD
because it believes that partnerships with experts and industry leaders will be
necessary to create a leveraged business model.
Channel development and sales leads are generated through various sources,
including industry databases, trade shows, purchased lists, direct mail,
telemarketing, customer referral and membership in various trade organizations.
The Company tracks lead sources to determine the most cost-effective use of its
promotional budget.
CUSTOMERS
The Company currently has 20 end-user installations of FlowMan. This
customer base is industry and geographically diverse including customers in
healthcare, insurance, government, education, transportation and utilities.
COMPETITION
The EAI software market is intensely competitive and subject to rapid
change. Competitors vary in size and in the scope and breadth of the products
and services offered. The majority of these companies are interested in
providing specialized services or products to complement true EAI provider's
products. Some suppliers are contending for position as full-fledged EAI
software system providers. These include IBM and New Era of Networks among
others.
The Company believes the main competitive factors include price, operating
platform compatibility, ease of implementation and use, and customer service.
Some competitive products cost less than the Company's software, and price-
sensitive buyers tend to choose those products.
Increased competition is likely to result in price reductions and
reduced gross margins which could materially adversely affect the Company's
business, operating results and financial condition. Many of the Company's
current and potential, competitors have significantly greater financial,
technical, marketing and other resources than the Company; some offer
complementary products not offered by the Company. As a result, they may be
able to respond more quickly to new or emerging technologies and changes in
customer requirements, or to devote greater
14
<PAGE> 15
resources to the development, promotion and sale of their products than the
Company can. There can be no assurance that the Company will be able to compete
successfully against current and future competitors or that competitive
pressures faced by the Company will not materially adversely affect its
business, operating results and financial condition.
GENERAL CORPORATE INFORMATION
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company regards its software as proprietary and essential to its
business. The Company relies primarily on a combination of copyright, trademark
and trade secret laws, employee and third-party nondisclosure agreements,
license agreements and other intellectual property protection methods to protect
its proprietary technology. The Company received a patent covering part of the
FlowMan technology in September of 1998, which will expire in April 2015.
There has been frequent litigation in the computer industry regarding
intellectual property rights. There can be no assurance that third-parties will
not in the future claim infringement by the Company with respect to current or
future products, trademarks or other proprietary rights. Any such claims could
be time-consuming, result in costly litigation, cause diversion of management's
attention, cause product release delays, require the Company to redesign its
products or require the Company to enter into royalty or licensing agreements.
These royalty or licensing agreements, if required, may not be available on
terms acceptable to the Company, or at all, any of which occurrences could have
a material adverse effect upon the Company's business, financial condition and
results of operations.
MANUFACTURING
The principal materials used in the Company's products include computer
diskettes and documentation. The manufacturing process includes the development
and testing of software by the Company, plus the production of a master copy for
duplication. The Company contracts with an outside source for all disk
duplication for major product releases and updates. Accompanying documentation,
which is minimal since most documentation is on-line, is created by the Company
and sent to an outside source to be reproduced. The Company generally ships
products within a few business days after receipt of an order. Normally the
Company has little or no backlog, but has experienced occasional backlogs. At
June 30, 1998, the Company's backlog was not material.
CERTAIN ADDITIONAL FACTORS AFFECTING FUTURE RESULTS
There is no assurance that the Company will be successful in attracting
new customers in the mortgage technology market, or that its existing customers
will continue to purchase its products and support services. In addition, there
is no assurance that the Company's new mortgage technology products and services
will be released in a timely fashion and that, if and when released, new
products or services or its efforts to integrate its FlowMan product into its
existing mortgage software products will be well received by its target market
or that others will not successfully develop competing products and services.
Each of these events could have a material adverse effect upon the Company's
revenues, financial condition, and results of operations.
There is no assurance that the Company will be successful in attracting
new customers in the EAI market, or that its existing customers will continue to
purchase its products and support services. In addition, there is no assurance
that FlowMan 4.0
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<PAGE> 16
will be released in a timely fashion or that, if and when released, it will be
well received by its target market or that others will not successfully develop
competing products and services. Each of these events could have a material
adverse effect upon the Company's revenues, financial condition, and results of
operations.
Expansion of the Company's operations in the EAI software market will
require significant additional expenses and capital and could strain the
Company's management, financial and operational resources. Furthermore, there
can be no assurance that the Company's experience and leadership in the
mortgage-related software market will benefit the Company as it enters new
markets, and gross margins attributable to new business areas may be lower than
those associated with the Company's existing business activities. There can be
no assurance that the Company will be able to expand its operations in a
cost-effective or timely manner. Furthermore, any new business launched by the
Company that is not favorably received by consumers could damage the Company's
reputation or the INTERLINQ brand. The lack of market acceptance of such efforts
or the Company's inability to generate satisfactory revenues from such expanded
services or products to offset their cost could have a material adverse effect
on the Company's business, prospects, financial condition and results of
operations.
The Company is unable to accurately estimate unit sales of its products
and the volume of annual support contracts that its customers will purchase due
in general to the nature of the software markets, and specifically to the
cyclical and volatile nature of the residential mortgage lending market, and the
development stage of the EAI market. In early 1994, the residential mortgage
lending market experienced a reduction in mortgage refinance volumes due to a
rise in interest rates. The Company experienced a significant decrease in net
revenues, operating income and net income during the fourth quarter of fiscal
1994 which continued through most of fiscal year 1995. During fiscal years 1998
and 1997, in part due to the increase in mortgage lending and refinance volumes,
the Company has seen increases in revenues, operating income and net income.
EMPLOYEES
As of August 31, 1998, the Company employed 154 people, including 36 in
sales and marketing, 53 in product development, 41 in customer service and 24 in
operations. None of the Company's employees is represented by a labor union, and
the Company believes that its relationship with its employees is good.
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<PAGE> 17
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, as of September 25, 1998, are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jiri M. Nechleba 40 President and Chief Executive Officer
Stephen A. Yount 41 Executive Vice President - Enterprise Technology Division,
Chief Financial Officer and Secretary
Patricia R. Graham 45 Executive Vice President, Mortgage Technology Division
</TABLE>
JIRI M. NECHLEBA has been President and Chief Executive Officer since September
11, 1995. From 1993 through August, 1995, he served as Senior Vice President and
General Manager of SolutionWare, a subsidiary of A.C. Nielsen, a division of Dun
& Bradstreet, and a provider of information systems to the consumer packaged
goods industry. From 1985 to 1993, Mr. Nechleba was an independent management
consultant to a variety of industries. Mr. Nechleba holds two Bachelor of
Science degrees from the Massachusetts Institute of Technology.
STEPHEN A. YOUNT has been Executive Vice President - Enterprise Technology
Division, Chief Financial Officer and Secretary of the Company since July 1,
1998. Prior to this position he was the Vice President-Finance, Chief Financial
Officer and Secretary since October 1991. Additionally, upon the resignation of
the Company's President and Chief Executive Officer, Robert M. Delf in January,
1995, Mr. Yount was appointed Interim President by the Board of Directors. He
continued in this capacity until the hiring of Jiri Nechleba as President and
Chief Executive Officer on September 11, 1995. During 1991, Mr. Yount held a
temporary position with PF Industries & Acrotech, Inc., an aerospace company,
where he served as Chief Financial Officer. From 1989 to 1991, Mr. Yount was the
President and Chief Financial Officer of PacSoft Incorporated, a civil
engineering software firm. Mr. Yount earned a CPA certificate in 1982 and holds
a BA in Business Administration from the University of Washington.
PATRICIA R. GRAHAM has been Executive Vice President-Mortgage Technology
Division since July 1, 1998. Prior to her promotion, Ms. Graham was Vice
President -- Sales and Marketing since March 25, 1996. From 1990 to 1995, she
served in various capacities with A.C. Nielsen Co., a subsidiary of Dun &
Bradstreet, including executive vice president. From 1981 to 1990 she was
employed by Information Resources, Inc. and departed holding the position of
Senior Vice President. Ms. Graham holds a Masters degree in Political Science
from Rutgers University.
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<PAGE> 18
ITEM 2. PROPERTIES
The Company is currently subleasing and occupying approximately 46,000 square
feet of office space in Kirkland, Washington. This sublease expires in November
1998 and does not contain a renewal option. The Company has entered into a seven
year agreement to lease approximately 35,000 square feet of office space in
Bellevue, Washington. The Company believes that its new facilities will be
adequate for its needs through the end of fiscal year 1999.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any litigation that would have a material adverse
effect on the Company or its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock has traded on the Nasdaq National Market under the symbol
INLQ since April 27, 1993. The Company had 2,312 shareholders as of September
22, 1998, based on computations including participants in security positions
listings, as defined by Rule 17Ab-8 of the Exchange Act. Presented below are
quarterly closing stock price ranges as reported on Nasdaq National Market for
the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
------------- ------------
<S> <C> <C>
Fiscal year ended June 30, 1998
Fourth quarter $7.50 $4.50
Third quarter 5.50 3.88
Second quarter 4.75 3.75
First quarter 4.63 3.50
Fiscal year ended June 30, 1997
Fourth quarter $4.13 $3.63
Third quarter 6.00 3.75
Second quarter 5.50 3.50
First quarter 4.50 3.38
</TABLE>
The Company has never paid dividends on its Common Stock. The Company
intends to retain future earnings for use in its business and therefore does not
anticipate paying dividends in the foreseeable future. There is no assurance
that the Company will ever pay dividends on its Common Stock.
On June 30, 1998, the Company issued 233,334 shares of Common Stock in
connection with the acquisition of substantially all the assets and business of
LSS. No underwriters were used and the recipient of the shares of Common Stock
was LSS, which subsequently distributed the shares to its shareholders. The
shares were not registered under the Securities Act of 1933, as amended,
pursuant to the exemption set forth in Section 4(2) thereof. All recipients of
shares of the Company's Common Stock possessed a sufficient level of financial
sophistication and received or had access to information about the Company. The
shares issued in the transactions are subject to restrictions on transfer
absent registration under the Securities Act, and no offers to sell the
securities were made by any form of general solicitation or general
advertisement.
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<PAGE> 19
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended June 30, 1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(In thousands except per share data)
STATEMENTS OF OPERATIONS DATA:
Net revenues:
Software license fees $ 9,647 $ 7,055 $ 6,232 $ 4,314 $ 11,438
Software support fees 6,976 6,073 5,773 5,483 4,707
Other 1,723 1,239 1,088 1,196 2,344
-------- -------- -------- -------- --------
Total net revenues 18,346 14,367 13,093 10,993 18,489
-------- -------- -------- -------- --------
Cost of revenues:
Software license fees 1,778 1,500 1,653 1,424 1,244
Software support fees 2,445 1,856 1,678 1,788 2,062
Other 859 683 589 642 1,014
-------- -------- -------- -------- --------
Total cost of revenues 5,082 4,039 3,920 3,854 4,320
-------- -------- -------- -------- --------
Gross profit 13,264 10,328 9,173 7,139 14,169
-------- -------- -------- -------- --------
Operating expenses:
Product development 1,609 2,147 2,060 1,123 891
Sales and marketing 5,675 4,011 4,230 4,244 5,801
General and administrative 3,754 3,152 3,010 3,404 3,278
Purchase of in-process R&D 3,615 _____ _____ _____ _____
Other general expenses - nonrecurring _____ _____ _____ 952 _____
-------- -------- -------- -------- --------
Total operating expenses 14,653 9,310 9,300 9,723 9,970
-------- -------- -------- -------- --------
Operating income (loss) (1,389) 1,018 (127) (2,584) 4,199
Net interest and other income 745 719 811 676 322
-------- -------- -------- -------- --------
Income (loss) before income taxes
and cumulative effect
of change in accounting principle (644) 1,737 684 (1,908) 4,521
Income taxes 907 627 251 (780) 1,532
-------- -------- -------- -------- --------
Income (loss) before cumulative effect of
change in accounting principle (1,551) 1,110 433 (1,128) 2,989
Cumulative effect of change
in accounting principle _____ _____ _____ _____ (109)
-------- -------- -------- -------- --------
Net income (loss) $ (1,551) $ 1,110 $ 433 $ (1,128) $ 2,880
======== ======== ======== ======== ========
PER SHARE DATA:
Net income (loss)-- basic $ (.30) $ .19 $ .07 $ (.19) $ .51
-------- -------- -------- -------- --------
Net income (loss)-- diluted $ (.30) $ .19 $ .07 $ (.19) $ .45
-------- -------- -------- -------- --------
Shares used to calculate net income (loss) --
basic 5,213 5,707 5,965 5,831 5,635
Shares used to calculate net income (loss)--
diluted 5,213 5,842 6,171 5,831 6,471
BALANCE SHEET DATA:
Cash, cash equivalents and investments $ 13,908 $ 13,831 $ 14,218 $ 14,373 $ 14,585
Working capital 8,150 11,623 12,823 13,638 13,753
Total assets 24,153 21,067 22,321 21,609 23,838
Total shareholders' equity 14,599 16,050 17,771 17,338 18,703
</TABLE>
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<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
MORTGAGE TECHNOLOGY
Prior to the mid-1980s, mortgage loans in the United States were
originated in a manual and paper-intensive process. Then, beginning in the
mid-1980s and running through the mid-1990s, the mortgage lending industry
implemented its first wave of automation with PC-based software solutions for
mortgage originations. During this period of time, the Company experienced rapid
revenue and customer growth by providing its MortgageWare(R) Loan Management
System - a robust, full-featured and cost-effective PC-based software solution.
This first wave of automation was accelerated and amplified from 1992 to early
1994 as mortgage interest rates reached historically low levels and mortgage
refinance volumes soared. Then, in early 1994, the Federal Reserve raised
interest rates, which immediately caused mortgage refinance volumes to plummet.
As a result, lenders found themselves with excess labor and mortgage processing
capacity. During the remainder of 1994 and for most of 1995, the Company
believes that the industry was focused more on staff reduction than adding new
automated loan management systems.
Beginning in fiscal year 1996, and continuing into fiscal years 1997 and
1998, mortgage lending rates have reflected a lending environment that has
experienced a high degree of volatility. In spite of this volatility, the
overall lending conditions have been considered favorable for the borrower
compared to most historical measures. With this overall favorable lending
environment, mortgage lending activity has increased, driven by an increase in
financing of home sales and refinancing of existing mortgages. During the last
half of fiscal year 1997, the Company began to observe a shift in the mortgage
origination business. There appeared to be excess production capacity coupled
with a reduced profit margin. Over the 1998 fiscal year, it appears that most of
this excess production capacity has been fulfilled, yet profit margins continue
to be low.
During the fiscal year ended June 30, 1998, the Company experienced
increased license fees due to a combination of lenders once again needing
additional production capacity and the immediate acceptance of MortgageWare(R)TC
by existing and new customers. Looking forward, the Company believes that due to
continued lower profit margins, its customers are shifting their long-term
purchasing decisions to solutions that reduce unit costs and, accordingly,
increase profit margins, rather than solely increasing production capacity.
During fiscal years 1996 and 1997, the Company focused its product development
effort to provide a more diverse and integrated "enterprise" solution for the
mortgage lending industry. It is the Company's belief that this broader
enterprise solution has positioned the Company well for this recent change in
the mortgage lending industry and has contributed to the increases in software
license revenues. This broader product offering focuses more on reducing the
cost of originating, processing, and servicing a mortgage, than on solely
increasing production capacity.
ENTERPRISE TECHNOLOGY
Pursuant to a purchase and sale agreement dated June 30, 1998, the Company
acquired substantially all the assets and business of Logical Software Solutions
Corporation ("LSS"), in a transaction accounted for using the purchase method of
accounting. This acquisition included the LSS technology and specifically
FlowMan(R) version 3.2. Since this transaction was consummated on the last day
of the 1998 fiscal year and was accounted for using the purchase method of
accounting, the operations of the acquired company are
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<PAGE> 21
included beginning on June 30, 1998. As a result of the purchase, the Company
recorded a charge of $3,615,304 for the purchase of in-process research and
development. This acquisition resulted in the formation of two INTERLINQ
divisions - the Mortgage Technology Division ("MTD") and the Enterprise
Technology Division ("ETD").
The Company has a two-prong strategy with regard to this acquisition. In
the first prong, the Company intends to integrate the FlowMan product with the
Company's MortgageWare(R) Enterprise product suite. This is expected to further
broaden the Mortgage Technology Division's product offering and strengthen the
commitment of the Company to enterprise solutions. In the second prong, the
Company intends to enter the Enterprise Application Integration ("EAI") market
by marketing FlowMan on a "stand alone" basis, primarily through OEMs, system
integrators and third-party application developers. The Company believes that
the product can be sold as an application package into other vertical markets
and as a toolkit for use by other application providers. The Company believes
that the EAI marketplace is in its early stages and will grow significantly over
the next few years. This two-prong strategy is intended to provide growth and
diversification for INTERLINQ, while allowing the Company to continue to expand
and excel in its core market of mortgage technology.
NET REVENUES
<TABLE>
<CAPTION>
(In thousands) 1998 Increase 1997 Increase 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Software license fees $ 9,647 37% $ 7,055 13% $ 6,232
Software support fees 6,976 15% 6,073 5% 5,773
Other 1,723 39% 1,239 14% 1,088
------- ------- ------- ------- -------
Total net revenues $18,346 28% $14,367 10% $13,093
======= ======= ======= ======= =======
</TABLE>
Net revenues consist of software license fees, software support fees, and
other revenues (which include training fees, consulting fees, custom document
fees and other miscellaneous sales), net of discounts and sales returns.
Software license fees increased by 37% for fiscal year 1998 compared to
fiscal year 1997, and increased by 13% for fiscal year 1997 compared to fiscal
year 1996. The increase in software license fees in fiscal year 1998 compared to
fiscal year 1997 was primarily due to a combination of the overall favorable
lending conditions discussed above as well as sales of the Company's newer
products which make up the MortgageWare Enterprise. The Company continued to
experience increasing sales of its flagship product MortgageWare Loan Management
System, as well as the new thin client version, MortgageWare TC (released in
fiscal year 1998). In addition, sales volume increased for products such as
MortgageWare Loan Servicing, MortgageWare InfoLINQ(TM), and MortgageWare
MarketLINQ(TM), all of which were released during fiscal year 1997. In addition,
sales of MortgageWare Entre(TM) (released in fiscal year 1996) continued to
increase. The increase in software license fees in fiscal year 1997 compared to
fiscal year 1996 was primarily due to a combination of the overall favorable
lending conditions discussed above, which increased software license fees for
previously developed products, and software license fees for products released
in that year.
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<PAGE> 22
Software support fees increased by 15% for fiscal year 1998 compared to
fiscal year 1997, and by 5% for fiscal year 1997 compared to fiscal year 1996.
These year-to-year increases reflected a combination of a modest number of new
customer additions and an increase in the volume of software licenses sold to
new and existing customers, offset slightly by a low but fairly constant
attrition rate in the installed customer base. Due in part to changes, from time
to time, in government regulations applicable to documentation required for
residential mortgage lending, the vast majority of the Company's customers
purchase annual software support agreements. However, because software support
fees are recognized ratably over the term of the annual support agreement,
whereas software license fees are recognized on product shipment, the percentage
increase in software support fees compared to software license fees is not
directly proportional. The Company believes that due to higher expected software
license fees and higher support fees charged on MortgageWare TC and MortgageWare
Loan Servicing, that software support fees are likely to continue to increase at
a modest rate in fiscal year 1999.
Other revenues increased by 39% for fiscal year 1998 compared to fiscal
year 1997, and by 14% for fiscal year 1997 compared to fiscal year 1996. The
increase in other revenues in fiscal year 1998 compared to fiscal year 1997 was
primarily due to increases in training revenues and consulting fees. The Company
sold two significant consulting engagements during the 1998 fiscal year, which
accounted for the majority of the consulting revenue. The increase in other
revenues in fiscal year 1997 compared to fiscal year 1996 was primarily due to
an increase in on-site training fees. This increase in training fees was
primarily due to an increase, beginning in the first quarter of fiscal year
1997, in the daily fee charged for on-site training. Additionally, the document
fees from the marketing agreement with VMP Electronic Laser Forms increased
substantially in fiscal year 1997 compared to fiscal year 1996. Because training
is usually purchased with the Company's software, the Company expects training
fees to increase as software license fees increase (although not
proportionately). Additionally, the Company expects consulting fees to increase
during fiscal year 1999 due primarily to increases in demand for MortgageWare
Loan Servicing (which can require higher levels of customization and
implementation services than the Company's other mortgage technology products)
and the expected customization and implementation services that will be sold
with FlowMan.
Looking forward, the Company anticipates an increasing contribution to
software license fees, and related increases to software support fees and other
revenues, from its newer products, MortgageWare Loan Servicing, MortgageWare
InfoLINQ, and MortgageWare MarketLINQ. The Company also anticipates a
contribution to software license fees, and related increases to software support
fees and other revenues, from FlowMan, acquired through the LSS acquisition as
discussed above. Since the acquisition of LSS was made at the end of the fiscal
year, there were no sales of this product or revenues recorded in the Company's
statement of operations for fiscal year 1998. The Company believes that sales of
FlowMan will begin in the first half of fiscal year 1999; however, as the
Company will be spending significant resources developing an indirect sales
channel for FlowMan, the majority of the sales will occur in the latter half of
fiscal year 1999. As discussed above, the Company believes the overall lending
environment to be favorable as of the end of fiscal year 1998. Nonetheless,
there can be no assurance that mortgage lending rates will not increase or
experience a high degree of volatility. Such increases or volatility could have
a material adverse effect on the Company's revenues, profitability, and
financial condition. Even if lending rates stabilize, if such rates are
perceived as being too high, homeowners and potential homeowners may delay
decisions that would otherwise result in mortgage lending transactions. Such
delays may have an adverse effect upon the Company's customers, and upon the
Company and its operations. The Company is just entering the EAI marketplace,
which is a relatively new, constantly changing
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<PAGE> 23
and intensely competitive market. In addition, many of the Company's competitors
in this market have longer operating histories, greater name recognition, and
significantly greater financial, technical and marketing resources than the
Company. There is no assurance that the Company's products will be accepted by
the market or that the Company will be competitive within the market, which
would have a material adverse effect on the Company's revenues, profitability
and financial condition. In addition, the Company believes that while the U.S.
economy has been generally strong in fiscal year 1998, changes in economic
conditions could have a material adverse effect on the Company's revenues,
profitability and financial condition.
COST OF REVENUES
<TABLE>
<CAPTION>
Increase
(In thousands) 1998 Increase 1997 (Decrease) 1996
-------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Software license fees $1,778 19% $1,500 (9)% $1,653
Percentage of software license fees 18% _____ 21% _____ 27%
Software support fees 2,445 32% 1,856 11% 1,678
Percentage of software support fees 35% _____ 31% _____ 29%
Other 859 26% 683 16% 589
Percentage of other revenues 50% _____ 55% _____ 54%
Total cost of revenues $5,082 26% $4,039 3% $3,920
Percentage of total net revenues 28% _____ 28% _____ 30%
</TABLE>
Cost of software license fees consists primarily of the amortization of
capitalized software development costs and, to a lesser extent, the purchase and
duplication of disks and product documentation. As a percentage of software
license fees, cost of software license fees decreased to 18% for fiscal year
1998 compared to 21% for fiscal year 1997, and decreased to 21% for fiscal year
1997 compared to 27% for fiscal year 1996. The decrease for fiscal year 1998
compared to fiscal year 1997 was due primarily to revenues increasing at a rate
substantially faster than cost of software license fees. The decrease for fiscal
year 1997 compared to fiscal year 1996 was primarily due to a combination of
software license fees increasing and the cost of software license fees
decreasing. The dollar amount of the cost of software license fees increased by
19% from $1.50 million in fiscal year 1997 to $1.78 million in fiscal year 1998.
This dollar increase was primarily the result of higher amortization of
capitalized software development costs for MortgageWare Loan Servicing and
MortgageWare Entre, offset by a decrease in amortization for MortgageWare Loan
Management System. The dollar amount of cost of software license fees decreased
9% to $1.50 million for fiscal year 1997, compared to $1.65 million for fiscal
year 1996. This decrease was primarily due to a decrease in amortization of
capitalized software development costs associated with the MortgageWare Loan
Management System, that was partially offset by the introduction of amortization
of capitalized software development costs for MortgageWare Loan Servicing
released during the first quarter of fiscal year 1997. Amortization of
capitalized software development costs was $1,560,000, $1,290,000 and $1,430,000
for fiscal years 1998, 1997 and 1996, respectively. The Company expects the
dollar amount of its amortization of capitalized software development costs to
continue to increase for fiscal year 1999 compared to fiscal year 1998 primarily
due to the stage of development and the timing of release of several of the
Company's products.
23
<PAGE> 24
Cost of software support fees includes salaries and other costs related to
providing telephone support, and the purchase, duplication, and shipping of
disks associated with software updates. As a percentage of software support
fees, cost of software support fees increased to 35% for fiscal year 1998
compared to 31% for fiscal year 1997, and increased to 31% for fiscal year 1997
compared to 29% for fiscal year 1996. These year-to-year increases were
primarily due to a higher salary cost and a less efficient ratio of customer
support staff to customers as well as an increase in other direct cost of
support expenses associated with supporting a higher software license volume.
Looking forward, the Company expects the dollar cost of software support fees to
increase due to the increased staffing that will be required to support a higher
installed base of the Company's products and in order to support the FlowMan
product. The Company also expects that these factors will lead to a modest
increase in the ratio of the cost of software support fees to software support
fees.
Cost of other revenues includes the salaries and reimbursable expenses for
the employees who provide training and consulting services, the purchase and
duplication of disks associated with custom documents, and the net cost of the
Company's annual MortgageWare software users' group meeting. As a percentage of
other revenues, cost of other revenues decreased to 50% for fiscal year 1998
compared to 55% for fiscal year 1997, and increased slightly to 55% for fiscal
year 1997 compared to 54% for fiscal year 1996. The improvement in 1998 compared
to 1997 was due primarily to higher gross profit earned on training and
consulting services. The slight increase in fiscal year 1997 compared to fiscal
year 1996 was primarily due to a combination of a slightly higher payroll cost
and increased depreciation from upgrading the trainers' equipment. Looking
forward, the Company expects the cost of other revenues to increase as the
revenues for customization and implementation fees increase. Additional
headcount and contract labor will be required both for customization and
implementation services on MTD and ETD projects.
OPERATING EXPENSES
<TABLE>
<CAPTION>
Increase Increase
(In thousands) 1998 (Decrease) 1997 (Decrease) 1996
--------- ------------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
Product development $1,609 (25)% $2,147 4% $2,060
Percentage of net revenues 9% _____ 15% _____ 16%
Sales and marketing 5,675 41% 4,011 (5)% 4,230
Percentage of net revenues 31% _____ 28% _____ 32%
General and administrative 3,754 19% 3,152 5% 3,010
Percentage of net revenues 20% _____ 22% _____ 23%
Purchase of in-process R&D 3,615 _____ _____ _____ _____
Percentage of net revenues 20% _____ _____ _____ _____
</TABLE>
Product development expenses include salaries for software developers and
analysts, facility costs and expenses associated with computer equipment used in
software development, net of costs capitalized. As a percentage of net revenues,
product development expenses decreased to 9% for fiscal year 1998 compared to
15% for fiscal year 1997, and decreased to 15% for fiscal year 1997 compared to
16% for fiscal year 1996. The decrease for 1998 consisted of a dollar decrease
of $539,000, which was due primarily to an increase in the costs of software
development which were capitalized, offset somewhat by increases in headcount
24
<PAGE> 25
and the related salary expenses. The percentage decrease for fiscal year 1997
compared to fiscal year 1996 was primarily due to net revenues increasing more
than product development expenses. The Company capitalized $1,846,000, $877,000
and $790,000 of product development expenditures for fiscal years 1998, 1997 and
1996, respectively. The increase in capitalized product development expenses
during fiscal year 1998 compared to fiscal year 1997 was due primarily to the
fact that the Company had no significant capitalized costs for MortgageWare TC,
MortgageWare Entre, and MortgageWare MarketLINQ during the 1997 fiscal year, but
capitalized $750,000 of costs related to these products in fiscal year 1998.
These costs related to the development of significant enhancements to these
products during the year. During fiscal year 1999, the Company plans additional
enhancements to these products as well as significant enhancements to FlowMan
associated with the planned release of FlowMan 4.0. Accordingly, the Company
anticipates an increase in the dollar value of capitalized development
expenditures and an increase in the dollar value of product development expenses
for fiscal year 1999.
Sales and marketing expenses include salaries, sales commissions, travel,
and facility costs for the Company's sales and marketing personnel. Sales and
marketing expenses also includes advertising, telemarketing and trade shows. As
a percentage of net revenues, sales and marketing expenses increased to 31% for
fiscal year 1998 compared to 28% for fiscal year 1997, and decreased to 28% for
fiscal year 1997 compared to 32% for fiscal year 1996. The increase for fiscal
year 1998 represented a dollar increase of $1,663,000, which was due primarily
to higher salaries and related payroll taxes, recruiting costs and commissions
associated with a higher performing direct sales force. These expenses increased
with the increases in revenue as discussed above (although not in direct
proportion). In addition, the Company incurred increases in advertising, sales
promotion and public relations, as well as travel and related direct costs of
sales efforts in order to promote new products and the MortgageWare Enterprise
offering. The decrease in dollars and percentage for fiscal year 1997 compared
to fiscal year 1996 was primarily due to revenue increasing and sales and
marketing expenses decreasing. The decrease in sales and marketing expenses was
primarily due to the elimination of outsourced telemarketing fees during the
quarter ended March 31, 1996. The Company expects sales and marketing expenses
to increase on a dollar basis but to remain relatively consistent on a
percentage of revenue basis for fiscal year 1999 compared to fiscal year 1998.
This will be primarily due to the completion of the ramp-up in the sales and
marketing department which occurred in fiscal year 1998 and additional expenses
that are expected for the launch of the Enterprise Technology Division's sales
efforts.
General and administrative expenses include costs associated with finance,
accounting, purchasing, order fulfillment, administration and facilities. As a
percentage of net revenues, general and administrative expenses decreased to 20%
for fiscal year 1998 compared to 22% for fiscal year 1997, and to 22% for fiscal
year 1997 compared to 23% for fiscal year 1996. The decrease for both fiscal
years was primarily due to revenue increasing at a faster rate than general and
administrative expenses. The Company expects general and administrative expenses
on a dollar basis to increase for fiscal year 1999 compared to fiscal year 1998,
but hold relatively steady as a percentage of net revenues.
25
<PAGE> 26
Purchase of in-process R&D represents a one-time charge incurred by the
Company upon acquisition of LSS (as discussed above). The Company believes that
the technology obtained in this acquisition requires significant further
development so that it may be successfully integrated with the existing
MortgageWare products and so that it may successfully compete in the Enterprise
Application Integration market, and has no future alternative uses. As such,
$3,615,304 of the purchase price was recorded as in process R&D and expensed on
the date of acquisition.
NET INTEREST AND OTHER INCOME (EXPENSE)
<TABLE>
<CAPTION>
(In thousands) 1998 Increase 1997 Decrease 1996
---------- ------------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Net interest and other income (expense) $745 4% $719 (11)% $811
Percentage of net revenues 4% _____ 5% _____ 6%
</TABLE>
Interest income was $766,000, $747,000 and $801,000, for the fiscal years
ended June 30, 1998, 1997 and 1996, respectively. Interest income remained
relatively consistent from 1997 to 1998 due primarily to stable to slightly
decreasing interest rates combined with a slightly increasing average portfolio
balance during the 1998 fiscal year. The decrease for fiscal year 1997 was
primarily due to a combination of a slightly lower average portfolio balance and
a lower average rate of return on the portfolio.
As of June 30, 1998, the Company had no interest-bearing debt outstanding,
and anticipates no new debt financing in the foreseeable future. Accordingly,
the Company expects net interest and other income (expense) for the foreseeable
future to reflect net interest income.
INCOME TAXES
<TABLE>
<CAPTION>
(In thousands) 1998 Increase 1997 Increase 1996
-------------- ------------- ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C>
Income taxes $907 45% $627 151% $251
Effective income tax rate NM _____ 36% _____ 37%
</TABLE>
The provision for income taxes includes federal and state income taxes
currently payable, and deferred taxes arising from temporary differences in
determining income for financial statement and tax purposes. The Company
recorded income tax expense for fiscal year 1998 even though it incurred a net
loss, due to the fact that the charge for purchased in-process R&D is not
currently deductible for income tax purposes. This charge will be deducted over
a period of 15 years in accordance with current IRS regulations. Although the
non-deductibility of this charge in fiscal year 1998 resulted in a deferred tax
asset, the Company has recorded a substantial valuation allowance on this asset
due to the length of time over which the charge is deductible and the
uncertainties inherent in the software industry. As such, the effective tax rate
is not meaningful for the fiscal year ended June 30, 1998. The effective tax
rate for 1997 was relatively consistent with that rate in 1996. Looking forward,
the Company expects its effective tax rate to decrease slightly as the charge
for in-process R&D is actually deducted for tax purposes.
26
<PAGE> 27
LIQUIDITY AND CAPITAL RESOURCES
Working capital, which consists principally of cash, cash equivalents and
short-term investments, was $8,150,000 as of June 30, 1998, compared to
$11,623,000 at June 30, 1997. Cash and cash equivalents decreased by $560,000
for fiscal year 1998. Cash and cash equivalents provided by operating activities
was $5,092,000 in fiscal year 1998. Principal uses of cash and cash equivalents
included the repurchase of $1,362,000 of Company common stock, the cash outlay
of $1,267,000 for the purchase of LSS (an additional $2,600,000 was paid on July
1, 1998), the purchase of $572,000 of furniture and equipment, and $1,846,000 of
capitalized software costs.
The Company's capital expenditures for fiscal years 1998 and 1997 were
$572,000 and $547,000, respectively. The Company expects to spend about
$1,100,000 in fiscal year 1999. The Company's current facility lease expires in
November of 1998 and the Company has negotiated a seven-year lease for a new
facility. Net occupancy costs are not expected to change materially as a result
of this move; however, the Company anticipates that approximately $300,000 of
tenant improvement costs will be incurred.
Long-term cash requirements, other than normal operating expenses, are
anticipated for development of new software products and enhancement of existing
products; financing anticipated growth; the possible acquisition of other
software products, technologies and businesses; and the possible repurchase of
the Company's common stock. The Company believes that its existing cash, cash
equivalents, short-term investments, and cash generated by operations will be
sufficient to satisfy its currently anticipated cash requirements for fiscal
year 1999.
YEAR 2000
The Year 2000 problem arose because many existing computer programs use
only the last two digits to refer to a year. Therefore, these computer programs
do not properly recognize a year that begins with "20" instead of the familiar
"19." If not corrected, many computer applications could fail or create
erroneous results.
The Company has initiated efforts to mitigate the impact of the Year 2000
problem on three levels: (i) the products that the Company uses internally to
conduct its business, (ii) the products that it sells, and (iii) the Year 2000
readiness of the Company's customers and vendors.
(i) Internal Products
The Company has taken an inventory of all software and hardware
systems used internally to conduct its ongoing business. These systems
include client/server systems, LAN systems, PC systems and related
software, security systems and voice mail systems. Certain of these
systems have already been made Year 2000-ready, while others are scheduled
for purchase and/or update during the 1999 fiscal year. The Company has
not performed significant testing to confirm Year 2000 readiness on any of
these systems, but intends to do so during the 1999 fiscal year. Based on
the inventory of these internal systems, the Company does not believe the
cost of addressing their Year 2000 readiness will be material. The Company
believes that significant record-keeping and operational deficiencies
could occur should the Company's internal products not be made ready for
the
27
<PAGE> 28
Year 2000, which could have material adverse effects. The Company has
no contingency plans in place should this occur.
(ii) The Company's Products
The products that the Company sells in the operation of its business
have reached varying degrees of Year 2000 readiness. All of the products
have been evaluated for the Year 2000 problem and significant strides have
been made to make the products ready for the Year 2000. The following
products have been made ready and have been subjected to testing for the
Year 2000: MortgageWare Loan Servicing, MortgageWare Loan Management
System, MortgageWare TC, MortgageWare Entre and MortgageWare MarketLINQ.
In addition to internal testing, the Company has published recommendations
to its customers with regards to the testing that they should be
performing in house to ensure Year 2000 readiness. The following products
have been made ready and are currently being tested for the Year 2000:
MortgageWare InfoLINQ, MortgageWare InvestorLINQ, BuilderBlock$(TM) and
FlowMan version 3.2. After subjecting these products to testing, the
Company plans to publish recommendations to its customers with regards to
the testing that they should be performing in house to ensure Year 2000
readiness. The following products have not been made Year 2000-ready:
MortgageBase and Secondary Marketing for DOS. The Company has announced
discontinuation of these products and is not currently selling them.
Customers who use these products can (at their own discretion) upgrade to
current products sold by the Company that are Year 2000-ready.
The Company believes that all of its products will be ready for the
Year 2000 by the end of the 1999 fiscal year and that no material costs
will remain at that time. However, there are no assurances that there are
not undetected errors in the Company's products relating to the Year 2000
that may result in material additional cost or liabilities, the magnitude
of which cannot be predicted, which could have a material adverse effect
on the Company. In addition, the Company believes that the purchasing
patterns of customers and potential customers may be affected by Year 2000
issues in a variety of ways. Some customers may defer purchasing the
Company's products because they are diverting resources to address their
own Year 2000 issues. However, other customers may accelerate their
decisions to purchase the Company's products to replace non-Year 2000
ready applications. The Company believes that it is not possible to
predict the overall impact of these decisions. The Company has no
contingency plan should the Company be unable to make all of its products
ready for the Year 2000.
(iii) The Company's Customers and Vendors
The Company has identified third-party vendors upon which it places
significant reliance and plans to ascertain their readiness for the Year
2000 during the 1999 fiscal year. The Company believes that although
prudent measures are required in this area, it is unable to reasonably or
accurately predict the impact to the Company if certain customers or
vendors are not made ready for the Year 2000. Significant disruption in
the businesses of the Company's customers and third-party vendors may have
material adverse effects on the Company's business, financial condition
and results of operations.
28
<PAGE> 29
NEW ACCOUNTING STANDARDS
In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
("SOP") 97-2, Software Revenue Recognition, which supersedes SOP 91-1. This SOP
provides guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions and is effective for transactions
entered into in fiscal years beginning after December 15, 1997. The Company does
not expect the impact of adoption of SOP 97-2 to be material.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, Reporting Comprehensive Income ("SFAS No. 130"). SFAS No. 130
establishes standards for reporting and disclosure of comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. SFAS No. 130, which is effective for
fiscal years beginning after December 15, 1997, requires reclassification of
financial statements for earlier periods to be provided for comparative
purposes. The Company has not determined the manner in which it will present the
information required by SFAS No. 130.
In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of
an Enterprise and Related Information ("SFAS No. 131"). SFAS No. 131 establishes
standards for the way that public business enterprises report information about
operating segments. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997. In the initial
year of application, comparative information for earlier years must be restated.
The Company has not determined the manner in which it will present the
information required by SFAS No. 131.
FORWARD-LOOKING STATEMENTS
When used in this discussion, the words "believes," "anticipates,"
"expects," "intends," and similar expressions are intended to identify
forward-looking statements. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
projected. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
29
<PAGE> 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page #
--------------
<S> <C>
Independent Auditors' Report 31
Balance Sheets as of June 30, 1998 and 1997 32
Statements of Operations for the years ended June 30, 1998, 1997 and 1996 33
Statements of Shareholders' Equity for the years ended June 30, 1998, 1997 and 1996 34
Statements of Cash Flows for the years ended June 30, 1998, 1997 and 1996 35
Notes to Financial Statements 36 - 45
Schedule II-- Valuation and Qualifying Accounts 47
</TABLE>
30
<PAGE> 31
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
INTERLINQ Software Corporation:
We have audited the accompanying financial statements of INTERLINQ Software
Corporation as listed in the accompanying index. In connection with our audits
of these financial statements, we have also audited the financial statement
schedule as listed in the accompanying index. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of INTERLINQ Software Corporation
as of June 30, 1998 and 1997, and the results of its operations and its cash
flows for each of the years in the three-year period ended June 30, 1998 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/ KPMG Peat Marwick LLP
Seattle, Washington
July 30, 1998
31
<PAGE> 32
INTERLINQ SOFTWARE CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
As of June 30, 1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,233,826 $ 7,793,761
Investments available-for-sale, at fair value 3,406,389 4,024,651
Investments held-to-maturity, at amortized cost 3,267,534 2,012,894
Accounts receivable, less allowance for
doubtful accounts of $255,900 in 1998
and $176,000 in 1997 3,400,194 1,602,220
Inventory 39,556 55,246
Prepaid expenses 341,717 408,909
Deferred income taxes ____ 267,660
----------- -----------
Total current assets 17,689,216 16,165,341
----------- -----------
Property and equipment, at cost 6,434,017 5,836,895
Less accumulated depreciation and amortization 5,434,285 4,364,628
----------- -----------
Net property and equipment 999,732 1,472,267
----------- -----------
Capitalized software costs, less accumulated
amortization of $2,438,852 in 1998 and
$1,718,683 in 1997 4,421,806 3,358,016
Goodwill 932,333 ____
Other assets 110,102 70,899
----------- -----------
$24,153,189 $21,066,523
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 690,138 $ 235,895
Accrued compensation and benefits 1,745,908 555,402
Other accrued liabilities 695,387 498,276
Purchase consideration payable 2,600,000 ____
Customer deposits 374,151 199,636
Deferred software support fees 3,434,092 3,052,822
----------- -----------
Total current liabilities 9,539,676 4,542,031
----------- -----------
Noncurrent liabilities, excluding current installments:
Deferred rent and other lease obligations ____ 160,443
Deferred software support fees 14,864 6,746
Deferred income taxes ____ 306,950
----------- -----------
Total noncurrent liabilities 14,864 474,139
----------- -----------
Shareholders' equity:
Series A convertible preferred stock, $.01 par value. Authorized 5,000,000
shares; no shares issued and outstanding in 1998 and 1997
---- ----
Common stock, $.01 par value. Authorized 30,000,000 shares; issued and
outstanding 5,350,559 shares in 1998 and 5,416,512 shares in 1997
53,506 54,165
Additional paid-in capital 10,442,835 10,343,087
Retained earnings 4,102,308 5,653,101
----------- -----------
Total shareholders' equity 14,598,649 16,050,353
Commitments
----------- -----------
$24,153,189 $21,066,523
=========== ===========
</TABLE>
See accompanying notes to financial statements.
32
<PAGE> 33
INTERLINQ SOFTWARE CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended June 30, 1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net revenues:
Software license fees $ 9,646,819 $ 7,055,457 $ 6,232,011
Software support fees 6,975,959 6,072,544 5,772,791
Other 1,723,615 1,239,045 1,087,613
------------ ------------ ------------
Total net revenues 18,346,393 14,367,046 13,092,415
------------ ------------ ------------
Cost of revenues:
Software license fees 1,778,263 1,499,645 1,652,627
Software support fees 2,445,025 1,856,486 1,678,255
Other 859,269 682,666 588,987
------------ ------------ ------------
Total cost of revenues 5,082,557 4,038,797 3,919,869
------------ ------------ ------------
Gross profit 13,263,836 10,328,249 9,172,546
------------ ------------ ------------
Operating expenses:
Product development 1,608,840 2,147,546 2,060,427
Sales and marketing 5,674,475 4,011,440 4,229,994
General and administrative 3,754,222 3,151,761 3,010,223
Purchase of in-process research and development 3,615,304 0 0
------------ ------------ ------------
Total operating expenses 14,652,841 9,310,747 9,300,644
------------ ------------ ------------
Operating income (loss) (1,389,005) 1,017,502 (128,098)
Net interest and other income 744,865 719,275 811,272
------------ ------------ ------------
Income (loss) before income tax expense (644,140) 1,736,777 683,174
Income tax expense 906,653 626,900 250,398
------------ ------------ ------------
Net income (loss) $ (1,550,793) $ 1,109,877 $ 432,776
============ ============ ============
Net income (loss) per share -- basic and diluted $ (.30) $ .19 $ .07
Shares used to calculate net income (loss)
per share - basic 5,213,217 5,707,374 5,964,877
Shares used to calculate net income (loss)
per share - diluted 5,213,217 5,841,764 6,171,210
</TABLE>
See accompanying notes to financial statements.
33
<PAGE> 34
INTERLINQ SOFTWARE CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Total
Common Additional Retained Shareholders'
Years Ended June 30, 1998, 1997 and 1996 Stock Paid-in Capital Earnings Equity
--------- --------------- ------------ --------------
<S> <C> <C> <C> <C>
Balances at June 30, 1995 $59,680 $13,167,991 $4,110,448 $17,338,119
Issuance of 170,550 shares of common stock
1,706 214,487 ____ 216,193
Tax benefit realized upon exercise of stock options
____ 96,651 ____ 96,651
Repurchase of 100,000 shares of common stock
(1,000) (311,500) ____ (312,500)
Net income for the year ended June 30, 1996
____ ____ 432,776 432,776
-------- ------------ ----------- -------------
Balances at June 30, 1996 60,386 13,167,629 4,543,224 17,771,239
Issuance of 19,962 shares of common stock
199 17,321 ____ 17,520
Tax benefit realized upon exercise of stock options
____ 10,967 ____ 10,967
Repurchase of 642,000 shares of common stock
(6,420) (2,852,830) ____ (2,859,250)
Net income for the year ended June 30, 1997
____ ____ 1,109,877 1,109,877
-------- ------------ ----------- -------------
Balances at June 30, 1997 54,165 10,343,087 5,653,101 16,050,353
Issuance of 251,447 shares of common stock
2,515 1,444,882 ____ 1,447,397
Tax benefit realized upon exercise of stock options
____ 13,793 ____ 13,793
Repurchase of 317,400 shares of common stock
(3,174) (1,358,927) ____ (1,362,101)
Net loss for the year ended June 30, 1998
____ ____ (1,550,793) (1,550,793)
-------- ------------ ----------- -------------
Balances at June 30, 1998 $53,506 $10,442,835 $4,102,308 $14,598,649
======== ============ =========== =============
</TABLE>
See accompanying notes to financial statements.
34
<PAGE> 35
INTERLINQ SOFTWARE CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended June 30, 1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,550,793) $ 1,109,877 $ 432,776
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization of property and equipment 1,094,884 1,111,438 1,014,452
Amortization of capitalized software costs 1,559,201 1,287,881 1,430,111
Gain on disposition of equipment ____ ____ (1,473)
Purchase of in-process research and development 3,615,304 ____ ____
Deferred income tax benefit (39,290) (2,217) (156,727)
Tax benefit realized upon exercise of stock options 13,793 10,967 96,651
Change in certain assets and liabilities (net of acquisition):
Accounts receivable (1,505,816) 369,287 (745,365)
Income taxes refundable ____ ____ 987,429
Inventory and prepaid expenses 82,882 (60,485) (88,508)
Other assets (39,203) (44,878) 9,613
Accounts payable 99,527 77,669 34,971
Accrued compensation and benefits, other accrued liabilities and
deferred rent and other lease obligations 1,197,140 47,235 51,136
Customer deposits 174,515 (164,067) 256,613
Deferred software support fees 389,388 411,835 93,400
------------ ------------ ------------
Net cash provided by operating activities 5,091,532 4,154,542 3,415,079
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (571,646) (547,059) (689,857)
Capitalized software costs (1,845,881) (877,334) (789,792)
Purchase of source code ____ (275,000) (2,000,000)
Purchases of investments (7,402,921) (14,511,012) (18,734,310)
Proceeds from sales and maturities of investments 6,766,543 16,180,313 12,498,246
Proceeds from sale of equipment ____ ____ 5,435
Cash paid for acquisition (1,266,520) ____ ____
------------ ------------ ------------
Net cash used in investing activities (4,320,425) (30,092) (9,710,278)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 31,059 17,520 216,193
Repurchase of common stock (1,362,101) (2,859,250) (312,500)
------------ ------------ ------------
Net cash used in financing activities (1,331,042) (2,841,730) (96,307)
------------ ------------ ------------
Net increase (decrease) in cash & cash equivalents (559,935) 1,282,720 (6,391,506)
------------ ------------ ------------
Cash and cash equivalents at beginning of year 7,793,761 6,511,041 12,902,547
------------ ------------ ------------
Cash and cash equivalents at end of year $ 7,233,826 $ 7,793,761 $ 6,511,041
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
$ 703,816 $ 615,891 $ (691,880)
Net cash paid (received) during the year for income taxes
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Acquisition effected through issuance of common stock and
purchase consideration payable $ 4,016,338 ____ ____
</TABLE>
See accompanying notes to financial statements.
35
<PAGE> 36
INTERLINQ SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF BUSINESS
INTERLINQ Software Corporation ("Company") provides technology
that helps organizations effectively manage complex,
information-intensive business transactions. The Company's mortgage
technology division provides business solutions to banks, savings
institutions, mortgage banks, mortgage brokers, and credit unions.
This division's product line encompasses all major components of the
mortgage loan production process, secondary marketing activities,
mortgage loan servicing, and construction loan servicing. The
Company's enterprise technology division provides application
integration/workflow solutions that integrate disparate systems and
applications to route information and processes seamlessly across an
entire enterprise. These solutions coordinate activities across
legacy systems, enterprise applications, databases and Internet
technologies.
The Company sells its products through a direct sales force,
third-party application developers, OEMs and system integrators.
(b) CASH EQUIVALENTS
All highly liquid investments purchased with a maturity of three
months or less are considered to be cash equivalents.
(c) INVESTMENTS
Investments at June 30, 1998 and 1997 consist principally of
investment-grade, interest-bearing securities.
The Company classifies investment securities as either
available-for-sale or held-to-maturity depending upon its intentions
at the time the securities are acquired. Investments
available-for-sale are carried at fair value, with any unrealized
holding gains and losses reported as a separate component of
shareholders' equity. Investments held-to-maturity are carried at
amortized cost.
At June 30, 1998 and 1997, the fair value of all securities
approximated amortized cost and there were no material unrealized
holding gains or losses.
Investments held-to-maturity have contractual maturities of less
than one year. Investments available-for-sale have contractual
maturities ranging from two years to thirty-two years and carry
adjustable rates of interest with periodic reset dates.
(d) INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or
replacement market.
(e) PROPERTY AND EQUIPMENT
Depreciation and amortization of property and equipment are provided
on the straight-line method over the estimated useful lives of the
assets or respective lease terms if shorter.
Management periodically evaluates property and equipment for
impairment whenever events or circumstances indicate that the
carrying amount may not be recoverable.
(f) PRODUCT DEVELOPMENT AND CAPITALIZED SOFTWARE COSTS
Software development costs incurred in conjunction with product
development are charged to product development expense in the period
the cost is incurred until technological feasibility is established.
Thereafter, all software product development costs are capitalized
and
36
<PAGE> 37
reported at the lower of unamortized cost or net realizable value.
Software costs incurred in conjunction with acquisition of
technologically feasible products developed externally are
capitalized and reported at the lower of unamortized cost or net
realizable value.
Amortization of capitalized software costs begins when the related
software is available for general release to customers and is
provided for each software product based on the greater of (i) the
ratio of current gross revenues to total current and anticipated
future gross revenues for the related software or (ii) the
straight-line method over two to five years, based on the remaining
economic life of the software.
The estimates of anticipated future gross revenues and remaining
economic life of the Company's products are subject to risks
inherent in the software industry, such as changes in technology and
customer perceptions. Management regularly reviews these estimates
and makes adjustments as appropriate.
(g) GOODWILL
Goodwill represents the excess of the cost of Logical Software
Solutions Corporation - acquired on June 30, 1998, over the fair
value of tangible and identifiable intangible assets at the date of
acquisition. Goodwill will be amortized over its estimated useful
life of four years. Management will evaluate goodwill for impairment
whenever events or circumstances indicate that the carrying amount
may not be recoverable.
(h) REVENUE RECOGNITION
Net revenues consist of software license fees, software support
fees, and other revenues.
Software license fees are earned under three different types of
licensing agreements. Under the purchase option, a one-time license
fee is recognized when the goods are shipped if no significant
obligations remain on the part of the Company, and collection of any
resulting receivables is deemed probable. Under the Partnership Plan
option, revenues are recognized each month based on the monthly
volume of loan transactions processed by the customer using the
Company's software. Under the software rental option, revenues are
recognized each month based on the monthly license fee.
Software support fees relate only to licensing agreements under the
purchase option and are charged separately, on an annual or
quarterly basis, and are recognized over the life of the related
service contracts. Deferred software support fees represent fees
charged to customers but not yet recognized as revenue.
Other revenues include training fees, consultation services, and
custom document fees. These revenues are recognized when the related
service is completed or when the goods are shipped, as applicable.
(i) COST OF REVENUES
Cost of software license fees includes costs related to sales of
licenses such as disks and supplies, amortization of capitalized
software costs and other direct costs. Cost of software support fees
includes salaries and other costs related to providing telephone
support and the costs of disks and supplies related to product
enhancements provided under support contracts. Cost of other
revenues includes direct costs related to training, consultation
services, custom document fees and other revenue.
(j) STOCK-BASED COMPENSATION
The Company accounts for its stock option plans using the intrinsic
value method. As such, compensation expense is recorded if, on the
date of grant, the current market price of the underlying stock
exceeded the exercise price.
37
<PAGE> 38
(k) INCOME TAXES
The Company records income taxes under the asset and liability
method, whereby deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases, and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Management evaluates the
need to establish valuation allowances for deferred tax assets based
upon the amount of existing temporary differences, the period in
which they are expected to be recovered, and expected levels of
taxable income.
(l) EARNINGS PER SHARE
The Company calculates earnings per share in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128
Earnings Per Share. SFAS No. 128 requires the presentation of basic
earnings per share, and for companies with complex financial
structures, diluted earnings per share. Basic earnings per share is
computed using the weighted average number of common shares
outstanding during the period. Diluted earnings per share is
computed using the weighted average number of common and dilutive
common equivalent shares outstanding during the period. Since the
Company was in a net loss position for the year ended June 30, 1998,
basic and diluted net loss per share are the same.
The following table reconciles the shares used in calculating basic
earnings per share to the shares used in calculating diluted
earnings per share:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Shares used to calculate basic earnings per share 5,213,217 5,707,374 5,964,877
Dilutive effect of outstanding stock options ____ 134,390 206,333
--------- --------- ---------
Shares used to calculate diluted earnings
per share 5,213,217 5,841,764 6,171,210
========= ========= =========
</TABLE>
Excluded from the computation of diluted earnings per share for the
year ended June 30, 1998, are options to acquire 1,031,041 shares of
common stock with a weighted-average exercise price of $3.87,
because their effects would be anti-dilutive.
(m) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
(n) CONCENTRATION OF MARKET RISK
The Company markets a substantial portion of its products to
businesses involved in the residential loan production process.
Changes in mortgage lending rates and other economic factors could
affect the economic stability of these businesses and their ability,
as a group, to purchase the Company's products. As a result, the
Company's success in marketing its products may fluctuate in
accordance with these economic factors.
(o) RECLASSIFICATIONS
Certain reclassifications have been made to the prior period
financial statements to conform with the current year presentation.
38
<PAGE> 39
(p) NEW ACCOUNTING STANDARDS
In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement
of Position ("SOP") 97-2, Software Revenue Recognition, which
supersedes SOP 91-1. This SOP provides guidance on applying
generally accepted accounting principles in recognizing revenue on
software transactions and is effective for transactions entered into
in fiscal years beginning after December 15, 1997. The Company does
not expect the impact of adoption of SOP 97-2 to be material.
In June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income ("SFAS No. 130"). SFAS No. 130
establishes standards for reporting and disclosure of comprehensive
income and its components (revenues, expenses, gains and losses) in
a full set of general-purpose financial statements. SFAS No. 130,
which is effective for fiscal years beginning after December 15,
1997, requires reclassification of financial statements for earlier
periods to be provided for comparative purposes. The Company has not
determined the manner in which it will present the information
required by SFAS No. 130.
In June 1997, the FASB issued SFAS No. 131, Disclosure About
Segments of an Enterprise and Related Information ("SFAS No. 131").
SFAS No. 131 establishes standards for the way public business
enterprises report information about operating segments. It also
establishes standards for related disclosures about products and
services, geographic areas and major customers. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997. In the
initial year of application, comparative information for earlier
years must be restated. The Company has not determined the manner in
which it will present the information required by SFAS No. 131.
(2) PROPERTY AND EQUIPMENT
Major classes of property and equipment as of June 30 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Leasehold improvements $1,502,722 $1,501,349
Furniture and fixtures 1,082,467 1,044,088
Computer equipment 3,475,017 2,919,194
Office equipment 373,811 372,264
========== ==========
$6,434,017 $5,836,895
========== ==========
</TABLE>
(3) ACQUISITION
On June 30, 1998, the Company entered into a purchase and sale agreement
to acquire Logical Software Solutions Corporation. LSS is an Enterprise
Application Integration developer and service provider. The purchase price
consisted of 233,334 shares of common stock valued at $1,416,338, cash of
$3,600,000, and direct acquisition costs of $378,930. The 233,334 shares
of common stock issued in the acquisition were placed in escrow and will
vest with time over a six year period (subject to certain accelerated
vesting provisions). On June 30, 1998, the Company paid $1,000,000 in cash
and recorded the remaining balance of the cash purchase price as purchase
consideration payable. Direct acquisition costs which were unpaid at June
30, 1998, are recorded as accounts payable.
The acquisition was accounted for using the purchase method of accounting.
Accordingly, the results of operations of the acquired business and the
fair market values of the acquired assets and
39
<PAGE> 40
assumed liabilities were included in the Company's financial statements as
of the date of acquisition. The purchase price was allocated to the
acquired assets and assumed liabilities based on fair values as follows:
<TABLE>
<S> <C>
Accounts receivable $ 292,158
Property and equipment 50,733
Goodwill 932,333
Capitalized software 777,110
In-process research and development 3,615,304
Accounts payable and accrued liabilities (272,370)
===========
$ 5,395,268
===========
</TABLE>
A portion of the purchase price represents purchased in-process research
and development that has not yet reached technological feasibility and has
no alternative future use. The value assigned to purchased in-process
research and development was determined by identifying research projects
in areas for which technological feasibility has not been established;
estimating the costs to develop the purchased in-process research and
development into commercially viable products; estimating the resulting
net cash flows from such projects; and discounting the net cash flows back
to the time of acquisition.
The following table presents pro forma results of operations as if the
acquisition had occurred at the beginning of the 1998 and 1997 fiscal
year, excluding all nonrecurring acquisition-related charges. The table
includes the impact of certain adjustments such as goodwill amortization
and related tax effects. The pro forma information is not necessarily
indicative of the combined results that would have occurred had the
acquisition been in effect for the entire periods presented, nor is it
necessarily indicative of results that may occur in the future.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Total net revenues $ 19,477,617 $ 16,234,949
Net income 1,398,087 1,278,783
Net income per share-- basic .26 .22
Net income per share-- diluted .25 .21
</TABLE>
(4) COMMITMENTS
(a) LEASES
In March 1994, the Company moved into its current premises, which it
leases under a noncancelable operating lease expiring in November
1998. In April 1998, the Company signed a noncancelable operating
lease for new premises to commence in November 1998. This lease will
expire in October 2005. The Company charges the total of the
scheduled lease payments to rent expense using the straight-line
method over the life of the lease.
The Company also holds a lease for previous premises which remains
in effect until October 1998. The Company negotiated a sublease to
another tenant for the remaining lease term beginning in March 1994.
Included in deferred rent payable and other lease obligations is $0
and $142,568, which represents the Company's remaining obligation
under this lease, net of amounts to be received under the sublease
at June 30, 1998 and 1997, respectively. Accrued liabilities at June
30, 1998 and 1997, include $160,443 and $223,307, respectively,
representing the current portion of deferred rent payable.
40
<PAGE> 41
Future minimum lease payments under noncancelable operating leases
are as follows:
<TABLE>
<CAPTION>
Minimum lease payments
----------------------
<S> <C>
Year ending June 30:
1999 $ 757,377
2000 670,113
2001 691,873
2002 711,993
2003 730,473
Thereafter 1,771,153
===========
$ 5,332,982
===========
</TABLE>
Total rent expense amounted to $384,481, $379,994, and $381,447 for
the years ended June 30, 1998, 1997, and 1996, respectively.
(b) 401(K) PLAN
The Company sponsors a 401(k) plan that covers substantially all
employees. At its own discretion, the Company may make contributions
to the plan based on a percentage of participants' contributions.
The Company made contributions of $114,552 for the year ended June
30, 1998. No contributions were made for the years ended June 30,
1997 or 1996. The Company has no other postemployment or
postretirement benefit plans.
(5) INCOME TAXES
Components of income taxes are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal $ 854,489 $ 580,601 $ 291,906
State 77,661 37,549 18,568
--------- --------- ---------
Total current 932,150 618,150 310,474
--------- --------- ---------
Deferred:
Federal (33,374) (2,032) (151,137)
State (5,916) (185) (5,590)
--------- --------- ---------
Total deferred (39,290) (2,217) (156,727)
--------- --------- ---------
Charge in lieu of taxes from employee stock
options 13,793 10,967 96,651
--------- --------- ---------
$ 906,653 $ 626,900 $ 250,398
========= ========= =========
</TABLE>
Income tax expense (benefit) differs from "expected" income tax expense
(benefit) (computed by applying the U.S. Federal income tax rate of 34%)
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit) $( 219,008) $ 590,504 $ 232,279
Increase in valuation allowance on deferred tax ____ ____
assets 1,103,913
State income taxes, net of federal benefit
47,352 24,660 8,565
Other (25,604) 11,736 9,554
----------- ----------- -----------
$ 906,653 $ 626,900 $ 250,398
=========== =========== ===========
</TABLE>
41
<PAGE> 42
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts receivable $ 94,683 $ 62,112
Deferred software support fees 120,201 59,254
Deferred rent 48,894 110,646
Accrued expenses 87,272 78,775
Property and equipment 638,866 461,183
Purchased in-process R&D 1,337,662 ____
----------- -----------
Total deferred tax assets 2,327,578 771,970
Valuation allowance on deferred tax assets (1,103,913) ____
----------- -----------
Net deferred tax assets 1,223,665 771,970
Deferred tax liabilities - capitalized software (1,223,665) (811,260)
----------- -----------
Net deferred tax liability $ ____ $ (39,290)
=========== ===========
</TABLE>
(6) SHAREHOLDERS' EQUITY
(a) PREFERRED STOCK
Preferred stock authorized consists of 5,000,000 shares of Series A
preferred stock. The Series A preferred stock is convertible at any
time into two times the number of shares of common stock and has the
same voting rights as its common stock equivalent. However, Series A
preferred stock has preferential treatment with respect to any
payment of dividends and any distributions of assets upon
liquidation.
(b) STOCK OPTION PLANS
The Company has three stock option plans: the 1985 Restated Stock
Option Plan ("1985 Plan"), the 1993 Stock Option Plan ("1993 Plan")
and the 1993 Stock Option Plan for Nonemployee Directors ("Directors
Plan"). The Company accounts for its option plans in accordance with
the provisions of Accounting Principles Board Opinion No. 25 and no
compensation cost has been recognized related to its stock options.
Had the Company determined compensation cost based on the fair value
at the grant date for its stock options under SFAS No. 123,
Accounting for Stock-Based Compensation ("SFAS No. 123"), the
Company's net income (loss) would have changed to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net income (loss):
As reported $ (1,550,793) $ 1,109,877 $ 432,776
Pro forma (1,974,214) 821,572 265,341
Basic and Diluted per share as reported $ (.30) $ .19 $ .07
Basic and Diluted per share $ (.38) $ .14 $ .04
pro forma
</TABLE>
Pro forma net income (loss) and net income (loss) per share reflect
only options granted in the years ended June 30, 1998, 1997, and
1996. Therefore, the full impact of calculating compensation cost
for stock options under SFAS No. 123 is not reflected in the pro
forma net income (loss) and net income (loss) per share amounts
presented above because compensation cost is reflected over the
options' vesting period and compensation cost for options granted
prior to July 1, 1995, is not considered.
The per share weighted-average fair value of stock options granted
during the years ended June 30, 1998, 1997 and 1996 was $2.71, $3.28
and $2.05, respectively, on the date of grant using the Black
Scholes option-pricing model with the following weighted-average
42
<PAGE> 43
assumptions: 1998 -- expected dividend yield of 0.0%, risk-free
interest rate of 5.36%, expected volatility of 65%, and an expected
life of 5 years; 1997 - expected dividend yield of 0.0%, risk-free
interest rate of 6.02%, expected volatility of 65%, and an expected
life of 5 years; 1996 - expected dividend yield of 0.0%, risk-free
interest rate of 5.11%, expected volatility of 65%, and an expected
life of 5 years.
The 1985 and 1993 Plans provide for both incentive stock options and
other stock options that may be issued to attract and retain the
services of employees. The incentive stock options vest over a
four-year period and may be exercised during continued employment or
within one month of terminating employment for the 1985 Plan and
within three months for the 1993 Plan. All options expire ten years
from the date of grant. The 1985 Plan has been suspended in regard
to future grants, and stock options are currently granted pursuant
to the 1993 Plan. The Company has authorized 900,000 shares of
common stock to be reserved for grants pursuant to the 1993 Plan.
The Directors Plan provides for stock options that may be issued to
attract and retain services of the members of the Board of Directors
who are not otherwise employees of the Company. The stock options
vest six months from the date of grant and may be exercised during
the director's term or within three months of the date the option
holder ceases to be a director. All options expire five years from
the date of grant. The Company has authorized 215,000 shares of
common stock to be reserved for grants pursuant to the Directors
Plan.
A summary of stock option activity under the stock option plan
follows:
<TABLE>
<CAPTION>
Outstanding options
------------------------------------------------------
Number of shares Weighted
Options ---------------------------------------- average
Available 1985 1993 Directors Exercise
For grant Plan Plan Plan Price
------- -------- -------- -------- -----
<S> <C> <C> <C> <C> <C>
Balances at June 30, 1995 136,039 330,268 164,961 74,000 $2.52
Increase in shares reserved under
1993 Plan 600,000 __ __ __ __
Options granted (472,275) __ 417,275 55,000 3.45
Options exercised __ (164,050) (6,500) __ 1.27
Options canceled 118,774 (3,800) (68,774) (50,000) 3.84
------- -------- -------- -------- -----
Balances at June 30, 1996 382,538 162,418 506,962 79,000 3.17
Increase in shares reserved under
Directors Plan 140,000 __ __ __ __
Options granted (228,180) __ 219,180 9,000 5.46
Options exercised __ (19,650) (312) __ .88
Options canceled 59,476 (19,150) (37,476) (22,000) 4.11
------- -------- -------- -------- -----
Balances at June 30, 1997 353,834 123,618 688,354 66,000 3.73
Options granted (220,100) __ 197,600 22,500 4.57
Options exercised __ (13,300) (4,813) __ 1.71
Options canceled 48,118 (800) (45,118) (3,000) 5.42
------- -------- -------- -------- -----
Balances at June 30, 1998 181,852 109,518 836,023 85,500 $3.87
======= ======== ======== ======== =====
</TABLE>
43
<PAGE> 44
Additional information regarding options outstanding as of June 30,
1998 is as follows:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
---------------------------------------- -------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise prices Outstanding Life (years) Price Exercisable Price
--------------- ----------- ------------ ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$.100- .500 90,018 2.81 $ .39 90,018 $ .39
2.500-3.875 513,235 7.27 3.41 265,526 3.36
3.969-5.844 398,205 8.90 5.01 95,680 4.92
6.938-8.375 29,583 6.82 7.09 20,333 7.15
------------- --------- ---- -------- ------- --------
$ .100-8.375 1,031,041 7.50 $ 3.87 471,557 $ 3.27
============= ========= ==== ======== ======= ========
</TABLE>
(7) NET INTEREST AND OTHER INCOME (EXPENSE)
Net interest and other income (expense) consist of:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Interest income $ 765,792 $ 746,712 $ 801,434
Interest expense (21,623) (27,713) (27,579)
Other, net 696 276 37,417
--------- --------- ---------
$ 744,865 $ 719,275 $ 811,272
========= ========= =========
</TABLE>
(8) FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of investments,
accounts receivable, accounts payable and accrued liabilities. The
financial instruments have a short term until maturity or settlement in
cash and, therefore, the carrying value approximates fair value. Credit is
extended to customers based on an evaluation of their financial condition
and no collateral is required. The Company performs ongoing credit
evaluations of its customers and maintains allowances for possible credit
losses.
(9) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the unaudited statements of operations for
each quarter of fiscal 1998 and 1997 (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
First Second Third Fourth
------- ------- ------- -------
<S> <C> <C> <C> <C>
1998
Net revenues $ 3,642 $ 4,369 $ 4,787 $ 5,549
Gross profit 2,459 3,158 3,455 4,192
Operating income (loss) 165 382 648 (2,584)
Net income (loss) 209 357 520 (2,637)
Net income (loss) per share-- basic
and diluted $ .04 $ .07 $ .10 $( .52)
1997
Net revenues $ 3,579 $ 3,516 $ 3,534 $ 3,738
Gross profit 2,620 2,530 2,509 2,669
Operating income 318 246 86 368
Net income 326 271 161 352
Net income per share-- basic
and diluted $ .05 $ .05 $ .03 $ .06
</TABLE>
In the fourth quarter of 1998 the Company recorded a one-time charge of
$3,615,304 related to its acquisition of LSS (in-process research and
development).
44
<PAGE> 45
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to the information under the captions "Election
of Directors," "Continuing Class II Directors, Terms Expiring in 1999,"
"Nominees for Election as Class I Directors, Terms Expiring in 2000,"
"Directors' Fees," and "Filing of Forms Pursuant to Section 16 of the Securities
Exchange Act of 1934" in the Company's Proxy Statement relating to its 1998
Annual Meeting of Shareholders (the "Proxy Statement"). Certain information
regarding the executive officers of the Company is set forth in Part I.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the information under the captions "Directors
Fees," "Compensation of Officers," and "Employment Contracts, Termination of
Employment and Change of Control Arrangements" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the information under the caption "Voting
Securities and Principal Holders Thereof" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT:
1. FINANCIAL STATEMENTS
The Financial Statements, Notes thereto, and Independent Auditor's
Report are included in Part II, Item 8 of this Report.
2. FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report and should be
read in conjunction with the Financial Statements of INTERLINQ Software
Corporation.
Schedule II - Valuation and Qualifying Accounts for the years ended
June 30, 1998, 1997, and 1996
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the Financial Statements or Notes thereto.
45
<PAGE> 46
3. EXHIBITS.
The Exhibits listed on the accompanying Index to Exhibits immediately
following the financial statement schedules are filed as part of, or
incorporated by reference into, this report.
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
2.1(6) Asset Purchase Agreement, dated June 30, 1998, between INTERLINQ
Software Corporation, Logical Software Solutions Corporation and
Mary Collier, Michael Bennett and Keith Bluford
3.1(1) Restated Articles of Incorporation of INTERLINQ Software
Corporation
3.2(1) Restated Bylaws of INTERLINQ Software Corporation
10.1(1)(2) 1985 Restated Stock Option Plan
10.2(1)(2) 1993 Stock Option Plan
10.3(1)(2) Stock Option Plan for Non-Employee Directors, as amended
10.4(1) Amended and Restated Registration Rights Agreement between
INTERLINQ Software Corporation and the partners listed on
Schedule A thereto dated as of March 12, 1993
10.6(1) Office Lease between Yarrow Bay Office III Limited Partnership
and INTERLINQ Software Corporation dated as of July 31, 1992
10.8(1) Form of Indemnification Agreement for Directors and Officers
10.10(3) Co-Marketing Agreement between INTERLINQ Software Corporation and
CMCI Corporation dated as of July 1, 1993
10.12(4) Office sublease between Halliburton Company and INTERLINQ
Software Corporation dated January 21, 1994
10.15(2)(5) Letter dated August 25, 1995 regarding Jiri Nechleba Compensatory
Arrangement
10.16(5) Appointment of Licensing Agent and Compliance Delegate Agreement
between VMP's Electronic Laser Forms, Inc. A division of CBF
Systems, Inc. And INTERLINQ Software Corporation dated October 2,
1995
10.17(5) Amendment of Co-marketing Agreement between INTERLINQ Software
Corporation and CMCI Corporation dated October 1, 1995
10.18 Office Lease between Pine Forest Co. and INTERLINQ Software
Corporation dated as of April 23, 1998
23.1 Consent of KPMG Peat Marwick LLP
27.1 Financial data schedule
</TABLE>
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1, as amended (Registration No. 33-59502) filed with the
Securities and Exchange Commission on March 15, 1993, as same exhibit
number.
(2) Management contract or compensatory plan or arrangement.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1993, as same exhibit number.
Confidential treatment has been requested as to portions of this
document.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1994, as same exhibit number.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1996, as same exhibit number.
(6) Incorporated by reference to the Company's Current Report on Form 8-K,
dated June 30, 1998, as same exhibit number.
(b) REPORTS ON FORM 8-K DURING THE FOURTH QUARTER ENDED JUNE 30, 1998
The Company filed a Current Report on Form 8-K, dated June 30, 1998, to
report the acquisition of Logical Software Solutions Corporation ("LSS"). The
Company filed a Current Report on Form 8-K/A, dated June 30, 1998, to report
financial statements and pro forma financial information relating to the
acquisition of LSS.
46
<PAGE> 47
Schedule II
INTERLINQ SOFTWARE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Years ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Additions
------------------------
Balance at Charged to Charged to
beginning of costs and other Balance at end
Description year expenses accounts Deductions of year
- ----------- ---- -------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
Allowances for doubtful
accounts:
Year ended June 30, 1998:
Accounts receivable $ 176,000 $ 451,000 ____ $(371,100) $ 255,900
Year ended June 30, 1997:
Accounts receivable 187,007 396,986 ____ (407,993) 176,000
Year ended June 30, 1996:
Accounts receivable 152,287 331,224 ____ (296,504) 187,007
</TABLE>
47
<PAGE> 48
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, in the City of Seattle,
State of Washington, on the 24th day of September, 1998.
INTERLINQ SOFTWARE CORPORATION
By: /s/ JIRI M. NECHLEBA
---------------------------------
Jiri Nechleba
President and Chief Executive
Officer
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ JIRI M. NECHLEBA Chairman of the Board, President and Chief Executive Officer
- ---------------------------------- (Principal Executive Officer)
Jiri M. Nechleba
/s/ STEPHEN A. YOUNT Executive Vice President, Chief Financial Officer and Secretary
- ---------------------------------- (Principal Accounting Officer)
Stephen A. Yount
/s/ ROBERT W. O'REAR Director
- ----------------------------------
Robert W. O'Rear
/s/ THEODORE M. WIGHT Director
- ----------------------------------
Theodore M. Wight
/s/ ROBERT J. GALLAGHER Director
- ----------------------------------
Robert J. Gallagher
</TABLE>
48
<PAGE> 49
INTERLINQ SOFTWARE CORPORATION
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit # Description
- --------- -----------
<S> <C>
2.1(6) Asset Purchase Agreement, dated June 30, 1998, between INTERLINQ
Software Corporation, Logical Software Solutions Corporation and
Mary Collier, Michael Bennett and Keith Bluford
3.1(1) Restated Articles of Incorporation of INTERLINQ Software Corporation
3.2(1) Restated Bylaws of INTERLINQ Software Corporation
10.1(1)(2) 1985 Restated Stock Option Plan
10.2(1)(2) 1993 Stock Option Plan
10.3(1)(2) Stock Option Plan for Non-Employee Directors, as amended
10.4(1) Amended and Restated Registration Rights Agreement between INTERLINQ
Software Corporation and the partners listed on Schedule A thereto
dated as of March 12, 1993
10.6(1) Office Lease between Yarrow Bay Office III Limited Partnership and
INTERLINQ Software Corporation dated as of July 31, 1992
10.8(1) Form of Indemnification Agreement for Directors and Officers
10.10(3) Co-Marketing Agreement between INTERLINQ Software Corporation and
CMCI Corporation dated as of July 1, 1993
10.12(4) Office sublease between Halliburton Company and INTERLINQ Software
Corporation dated January 21, 1994
10.15(2)(5) Letter dated August 25, 1995 regarding Jiri Nechleba Compensatory
Arrangement
10.16(5) Appointment of Licensing Agent and Compliance Delegate Agreement
between VMP's Electronic Laser Forms, Inc. A division of CBF
Systems, Inc. And INTERLINQ Software Corporation dated October 2,
1995
10.17(5) Amendment of Co-marketing Agreement between INTERLINQ Software
Corporation and CMCI Corporation dated October 1, 1995
10.18 Office Lease between Pine Forest Co. and INTERLINQ Software
Corporation dated as of April 23, 1998
23.1 Consent of KPMG Peat Marwick LLP
27.1 Financial data schedule
</TABLE>
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended (Registration No. 33-59502) filed with the Securities and
Exchange Commission on March 15, 1993, as same exhibit number.
(2) Management contract or compensatory plan or arrangement.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1993, as same exhibit number. Confidential
treatment has been requested as to portions of this document.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1994, as same exhibit number.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1996, as same exhibit number.
(6) Incorporated by reference to the Company's Current Report on Form 8-K,
dated June 30, 1998, as same exhibit number.
49
<PAGE> 1
INTERLINQ OFFICE LEASE
<PAGE> 2
TABLE OF CONTENTS
Basic Lease Information 1
<TABLE>
<S> <C>
1. PREMISES.......................................................... 4
2. TERM AND POSSESSION............................................... 4
3. RENT.............................................................. 5
4. RESTRICTIONS ON USE............................................... 6
5. COMPLIANCE WITH LAWS.............................................. 6
6. ALTERATIONS....................................................... 9
7. REPAIRS........................................................... 10
8. LIENS............................................................. 11
9. ASSIGNMENT OR SUBLETTING.......................................... 12
10. INSURANCE AND INDEMNIFICATION.................................... 15
11. WAIVER OF SUBROGATION............................................ 18
12. SERVICES TO LANDLORD............................................. 18
13. ESTOPPEL CERTIFICATE............................................. 18
14. HOLDING OVER..................................................... 19
15. SUBORDINATION.................................................... 19
16. RULES AND REGULATIONS............................................ 20
17. RE-ENTRY BY LANDLORD............................................. 20
18. INSOLVENCY OR BANKRUPTCY......................................... 21
19. DEFAULT.......................................................... 22
20. DAMAGE BY FIRE, ETC.............................................. 25
21. EMINENT DOMAIN................................................... 26
22. SALE BY LANDLORD................................................. 28
23. RIGHT OF LANDLORD TO PERFORM..................................... 28
24. SURRENDER OF PREMISES............................................ 29
25. WAIVER........................................................... 29
26. NOTICES.......................................................... 30
27. OPERATING COSTS.................................................. 30
28. TAXES PAYABLE BY TENANT.......................................... 35
29. SUCCESSORS AND ASSIGNS........................................... 35
30. ATTORNEY'S FEES.................................................. 36
32. SIGNAGE.......................................................... 36
33. CORPORATE AUTHORITY.............................................. 37
34. LEASE EFFECTIVE DATE............................................. 37
35. BROKERAGE FEES................................................... 37
36. FORCE MAJEURE.................................................... 38
37. CHANGE IN BUILDING NAME.......................................... 38
38. CERTAIN RIGHTS RESERVED BY LANDLORD.............................. 38
39. PERSONAL LIABILITY............................................... 39
40. QUIET ENJOYMENT.................................................. 39
41. MISCELLANEOUS.................................................... 39
42. OPTION TO RENEW.................................................. 40
43. USE OF ROOF AND BUILDING STORAGE................................. 41
44. DEFINITION OF LANDLORD'S NEGLIGENCE.............................. 41
</TABLE>
Exhibit A Legal Description
Exhibit B Tenant Improvement Agreement
Exhibit C Tenant Estoppel Certificate
Exhibit D Rules and Regulations
<PAGE> 3
OFFICE LEASE -- BASIC LEASE INFORMATION
Lease Date: April 23, 1998
Commencement Date: The later of November 1, 1998, or the date
possession of the Premises is tendered to Tenant
following Substantial Completion of the Premises
Landlord: Pine Forest Co.
Address of Landlord: 1215 120th Ave. N.E., Suite 201
Bellevue, WA 98005-2155
Contact Person at Landlord: Scott Hall
Tenant: INTERLINQ Software Corporation, a Washington
corporation
Contact Person at Tenant: Steve Yount
Address of Tenant Prior to
Commencement Date: 11255 Kirkland Way
Kirkland, WA 98033
Address of the Premises: 12000 N.E. 24th Street
Bellevue, WA 98005
Rentable Square Feet: Approximately 35,320 Rentable Square Feet
located on two floors
Base Rent: First Year: $54,451.67/month
Second Year: $55,923.34/month
Third Year: $57,395.00/month
Fourth Year: $58,866.67/month
Fifth Year: $60,338.34/month
Sixth Year: $61,810.00/month
Seventh Year: $63,281.67/month
Estim. of Basic Operating
Costs on Commencement Date: $16,188.34/month
Estim. of Base Rent plus
Additional Rent on
Commencement: $70,640.01/month
1
<PAGE> 4
Fiscal Year for Operating
Costs: Calendar Year
Tenant's Proportionate
Share of Basic Operating
Costs: 100%
Security Deposit: $63,282 due upon execution of the Lease
Term: Eighty-four (84) months, commencing approximately
November 1, 1998, and ending approximately
October 31, 2005, or such date which is the
monthly anniversary date in the 84th month after
the Commencement Date (unless sooner terminated
as provided hereunder), including any extensions
as provided hereunder.
Options to Extend the Term: Two (2) consecutive options to extend the Term for
an additional five (5) years each at 95% of the
current market rates. Notice to be given no more
than one (1) year or less than nine (9) months
prior to the expiration of the then existing Term,
which exercise is made by Tenant providing written
notice to Landlord of the exercise of each option
Rate for Covered Parking
Stalls: Year 1: Free
Year 2: $615/month ($15.00 per stall per month)
Year 3: $820/month ($20.00 per stall per month)
Year 4-7: $1025/month ($25.00 per stall per month)
Note: All uncovered parking at the Premises is
free of charge
The foregoing Basic Lease Information is hereby incorporated into and made a
part of this Lease. Each reference in this Lease to any of the Basic Lease
Information shall mean the respective information herein above set forth and
shall be construed to incorporate all of the terms provided under the
particular Lease paragraph pertaining to such information. In the event of any
conflict between any Basic Lease Information and the Lease, the latter shall
control.
2
<PAGE> 5
Landlord: Tenant:
Pine Forest Co., INTERLINQ Software Corporation,
a Washington corporation a Washington corporation
By: /s/ FRED BURNSTEAD By: [SIG]
-------------------------------- -----------------------------------
Fred Burnstead Its: VP Finance/CFO
Its: President
3
<PAGE> 6
LEASE AGREEMENT
THIS LEASE is made as of this 23rd day of April, 1998, between Pine Forest Co.,
a Washington corporation (hereinafter called "Landlord") and INTERLINQ Software
Corporation, a Washington corporation (hereinafter called "Tenant").
1. PREMISES.
Landlord hereby leases to Tenant and Tenant hereby leases from Landlord
the entire two story office building and all related improvements and
appurtenances (including without limitation pavement, curbs and gutters,
sidewalks and landscaping located on real property at 12000 N.E. 24th
Street, Bellevue, Washington 98005, and legally described in Exhibit "A"
attached hereto and incorporated by this reference (hereinafter
collectively called "Premises"). Tenant shall use and occupy the Premises
for general office purposes, with a computer server room, lunch room with
food preparation for employees, athletic facilities for employees, and
other uses customary for a software development company, and for no other
use or purpose without the prior written consent of Landlord.
2. TERM AND POSSESSION.
(a) The Term of this Lease shall be for the period specified in the
Basic Lease Information, as that Term may be extended or terminated as
provided herein. Landlord shall use its best reasonable efforts to
deliver the Premises to Tenant on November 1, 1998. All permits required
to construct the structural portions of the building shell and core have
been obtained. The applications for tenant improvement permits have not
yet been submitted. If Landlord cannot deliver possession by November 1,
1998, and such failure is not attributable to Landlord's gross negligence
or willful misconduct, this Lease shall not be void or voidable, nor shall
Landlord or its agent be liable to Tenant for any loss or damage
resulting therefrom. Tenant shall not be liable for any rent until the
Commencement Date (defined below) unless Tenant is responsible for a delay
as provided in Exhibit B, Paragraph 14, in which case Tenant shall begin
paying Rent as of the date that would have been the Commencement Date but
for the Tenant Delay. If Landlord tenders possession of the Premises to
Tenant prior to November 1, 1998, and the requirements for the
Commencement Date have been met then the Term of this Lease and Tenant's
obligations hereunder shall commence on the date that Landlord delivers
such possession, if Tenant takes possession. Any failure to deliver
possession by November 1, 1998 or delivery of possession prior to the
Commencement Date shall not in any way affect the obligations of Tenant
hereunder to lease the Premises.
(b) The Commencement Date shall be the later of November 1, 1998, or
the date on which one of the following sets of events has occurred: (i)
the Premises have been Substantially Completed in accordance with the
plans and specifications approved by Tenant and, the City of Bellevue has
completed its inspection, approved the
4
<PAGE> 7
Premises for occupancy by Tenant for its business operations as evidenced
by issuance of a temporary certificate of occupancy, and the Premises have
been tendered to Tenant, or (ii) the tenant takes possession of any or all
of the Premises (except to the extent Tenant is entitled to early access
pursuant to Paragraph 11, Exhibit B). Tenant's duty to pay Rent under this
Lease shall commence on the Commencement Date. This Lease shall terminate
on the day before the anniversary of the Commencement Date in the
eighty-fourth (84th) month after the Commencement Date, unless sooner
terminated (the "Termination Date") or extended under the terms of the
Lease or by agreement of the parties. For example, if the Commencement Date
were November 1, 1998, then the Termination Date would be October 31, 2005,
if the Tenant does not exercise its option to extend the term.
(c) Landlord agrees to complete construction of the Premises and to
provide the Tenant Improvements as required in a separate Work Letter
Agreement attached hereto as Exhibit "B" and made a part hereof. The term
Substantial Completion as used in this Lease shall have the same meaning as
that term is used in the Work Letter Agreement.
(d) At either party's request both Landlord and Tenant will execute
and deliver to each other a written statement specifying the Commencement
Date and Termination Date.
(e) If the Commencement Date has not occurred by March 1, 1999, and
said delay is not caused by tenant's Delay or force majeure as described in
paragraph 36 of this Lease, then tenant may terminate this Lease by written
notice to Landlord; provided however that if the delay in the Commencement
Date is caused by Tenant Delay or by force majeure as described in
Paragraph 36 of this Lease, then Tenant's termination right in this
sentence does not arise until June 1, 1999.
3. RENT.
(a) Tenant shall pay Base Rent to Landlord throughout the term of
this Lease as specified in the Basic Lease Information, without notice.
Base Rent shall be payable in monthly installments in advance on the first
day of each month during every year of the term in lawful money of the
United States, without deduction or offset. It shall be paid to Landlord at
the address specified in the Basic Lease Information, or to such other firm
or to such other place as Landlord may from time to time designate in
writing by notice to Tenant. If this Lease commences on a day other than
the first day of a calendar month or ends on a day other than the last day
of a calendar month, the monthly rental for the fractional month shall be
appropriately prorated based on a thirty (30) day month. "Rent" means Base
Rent, Tenant's Proportionate Share of Basic Operating Costs and all other
amounts due pursuant to this Lease.
(b) Tenant recognizes that late payment of any Rent or other sum due
hereunder from Tenant to Landlord will result in administrative expense to
Landlord, the extent of which additional expense is extremely difficult and
economically impractical to ascertain. Tenant therefore
5
<PAGE> 8
agrees that if Rent due hereunder from Tenant to Landlord remains unpaid
ten (10) days after said amount is due, or any other payment due hereunder
remains unpaid ten (10) days after written notice from Landlord, then the
amount of such unpaid Rent or other payment shall be increased by a late
charge to be paid to Landlord by Tenant in an amount equal to five percent
(5%) of the amount of delinquent Rent or other payment. The amount of the
late charge to be paid to Landlord by Tenant on any unpaid Rent or other
payment shall be reassessed and added to Tenant's obligation for each
successive monthly period accruing after the date on which the late charge
is initially imposed. Tenant agrees that such amount is a reasonable
estimate of the loss and expense to be suffered by Landlord as a result of
such late payment by Tenant and may be charged by Landlord to defray such
loss and expense. The provisions of this paragraph in no way relieve Tenant
of the obligations to pay Rent or other payments on or before the date on
which they are due, nor do the terms of this paragraph in any way affect
Landlord's remedies pursuant to paragraph 19 of this Lease in the event
said Rent or other payment is unpaid after the date due.
4. RESTRICTIONS ON USE.
Tenant shall not use or allow the Premises to be used for any unlawful
purpose. Tenant shall not cause or maintain or permit any nuisance in, on,
or about the Premises. Tenant shall not commit or suffer the commission of
any waste in, on or about the Premises, nor permit any use of the Premises
which may be hazardous to persons or property. Tenant shall not do or
permit anything to be done on or about the Premises or bring or keep
anything therein which will cause an increase in the rate of any insurance
of the Premises or cause a cancellation of the property and casualty
insurance or any other insurance on the Premises or otherwise restrict the
availability of said insurance in any manner.
5. COMPLIANCE WITH LAWS.
(a) Except to the extent any non-compliance is a result of the Tenant
Improvement Construction Documents (as defined in Exhibit B), Landlord
warrants that upon delivery to Tenant the Premises shall be in compliance
with all applicable rules, regulations and codes in effect at the time of
delivery. Tenant shall not use the Premises or permit anything to be done
in or about the Premises which would conflict with any law, statute,
ordinance or governmental rule or regulation now in force or which may
hereafter be enacted or promulgated. Tenant shall, at its sole cost and
expense, promptly comply with all laws, statutes, ordinances, and
governmental rules, regulations, or requirements now in force or which may
hereafter be in force and with the requirements of any board of fire
underwriters or other similar body now or hereafter constituted relating to
its conditions, use or occupancy of the Premises, excluding structural
changes and other improvements not specifically related to or affected by
alterations or improvements made by or for Tenant or Tenant's acts. The
judgment of any court of competent jurisdiction or the admission of Tenant
in an action against Tenant, whether Landlord be a party thereto or not,
that Tenant has so
6
<PAGE> 9
violated any such law, statute, ordinance, rule, regulation, or
requirement, shall be conclusive of such violation as between Landlord and
Tenant.
(b) "Accessibility Law" means any local, state or federal law, regulation,
ordinance, order or directive relating to access, use or enjoyment of the
Premises by, or employment there of disabled persons, or to the removal of
any tangible or intangible barrier or impediment to access, use or
enjoyment of the Premises by disabled persons, including, but not limited
to, the Americans With Disabilities Act and similar state legislation.
(c) Notwithstanding anything in this Lease to the contrary, Tenant shall
make no Tenant alterations after the Commencement Date that violates any
provision of any applicable rules, regulations and codes, including any
Accessibility Laws, and all Tenant Improvements shall be in full compliance
with all such rules, regulations and codes. Tenant shall not adopt or
otherwise allow to exist any policy or practice related to its use or
occupancy of the Premises or the conduct of its activities thereon that
violates any rule, regulation or code. Tenant shall adopt any economically
feasible policy or practice relating to the conduct of its business at the
Premises that would cure any existing or future violation of any
Accessibility Law relating to the Premises. Tenant shall bear all cost and
expense of performing its duties under this paragraph. Tenant shall
reimburse Landlord on demand for any cost or expense required to alter any
portion of the Premises to comply with any Accessibility Law as a result of
any Tenant alteration.
(d) Notwithstanding any contrary provision of this Lease, Landlord shall
have no obligation to approve any Tenant alterations if Landlord, in its
sole discretion, determines that the Tenant alterations would obligate
Landlord to make alterations of or additions to any part of the Premises in
order to comply with any Accessibility Law or any other law, ordinance,
code or regulation, unless Tenant agrees to make such alterations or
additions at its own cost in the manner provided for other Tenant
alterations, and Tenant deposits with Landlord, before undertaking the
design or construction of such alternations, a sum equal to Landlord's
estimate of the total cost of design and construction of such alterations.
Notwithstanding the foregoing, 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 and/or location of entrances, passageways, doors and doorways,
corridors, elevators, stairs, toilets, or other public parts of the
building to the extent such change does not materially affect Tenant's
business operations if said change is necessary for Landlord to bring the
Premises into compliance with any rule, regulation or code, including any
Accessibility Law.
7
<PAGE> 10
(e) If any claim is asserted against one or both parties to this Lease
under any Accessibility Law relating directly or indirectly to any
violation by either of any of the provisions of this paragraph, such
alleged violator shall defend, indemnify and hold the other party harmless
from and against any claims, charges, liabilities, obligations, penalties,
damages, judgments, costs and expenses (including reasonable attorneys'
fees and costs) arising directly or indirectly from such violation upon
determination of a court of competent jurisdiction that such a violation
did occur and the extent to which the alleged violator is responsible for
the violation. No approval by either party of any plans or specifications
for any construction or alterations of the Premises, or failure to
disapprove any such plans or specifications for construction or alterations
of the Premises, shall constitute a representation or warranty by either
party, whether express or implied, that such plans will comply with any
Accessibility Law.
(f) Landlord represents and warrants to Tenant that to the best of
Landlord's knowledge there are no Hazardous Materials (as defined below) on
the Premises as of the Commencement Date. Landlord agrees that Tenant is
not responsible for Hazardous Materials on the Premises prior to the date
Tenant commences Tenant's Work (as defined in Exhibit B) on the Premises.
Tenant shall not cause or permit any Hazardous Materials to be brought
upon, kept or used in or about the Premises, except in compliance with the
labels on the products, and consistent with the intended use of the
products for cleaning or other janitorial or maintenance purposes. If
Tenant breaches its obligations in this paragraph, or if the presence of
Hazardous Materials caused or permitted by Tenant results in contamination
of the Premises or any part of any other property or if contamination of
the Premises or other property otherwise occurs for which Tenant may be
legally liable to Landlord, unless the contamination is caused solely by
Landlord or its agents, employees, contractors or invitees, Tenant shall
defend, indemnify and hold Landlord harmless from any and all claims,
judgments, damages, penalties, fines, liabilities or losses (including,
without limitation diminution in value of the Premises, damages for the
loss or restriction on use of the Premises, damage arising from any adverse
impact on marketing or leasing of the Premises, damages to any other
property and amounts paid in settlement of claims, attorney fees and costs,
consultant fees and expert fees) which arise during or within five (5)
years after the end of the Term or extended Term as a result of such
contamination. If Landlord breaches its warranty above, or if the presence
of Hazardous Materials which is caused solely by Landlord results in
contamination of the Premises or any part of any other property. Landlord
shall defend, indemnify and hold Tenant harmless from any and all claims,
judgments, damages, penalties, fines, liabilities or losses (including,
without limitation diminution in value of the leasehold estate in the
Premises, damages for the loss or restriction on use of the Premises,
damages to any other property and amounts paid in settlement of claims,
attorney fees and costs, consultant fees and expert fees) which arise
during or within five years after the end of the Term or extended Term as a
result of such
8
<PAGE> 11
contamination. Without limiting the foregoing, the indemnification stated
above includes, without limitation, reasonable costs incurred in connection
with any investigation of site condition or any clean up, remedial, removal
or restorative work required by any federal, state or local government
agency or political subdivision because of Hazardous Materials present at
the Premises due to acts of the indemnifying party. If the presence of any
Hazardous Material caused or permitted by either party results in any
contamination of the Premises or any other part of the property, then that
party shall promptly take all actions, at its sole expense, as are
necessary to return the Premises and any other property to the condition
existing prior to the introduction of such Hazardous Material. Prior to
commencing such action, the acting party shall obtain the other party's
approval, which approval shall not be unreasonably withheld, or delayed so
long as such actions would not potentially have any material adverse
long- or short-term effect on the Premises or other property. As used
herein, the term "Hazardous Materials" means any hazardous, dangerous,
toxic or harmful substance material or waste which is or becomes regulated
by any local or federal governmental authority, including the State of
Washington or the United States government.
6. ALTERATIONS.
(a) Tenant shall not make or suffer to be made any alterations, additions,
or improvements in, on, or to the Premises or any part thereof after the
Commencement Date ("Tenant Alterations") without the prior written consent
of Landlord, which shall not be unreasonably withheld or delayed. All
contractors, laborers, materialmen and professionals who perform work on
the Premises shall agree to provide to Landlord a conditional lien release
prior to release of any payment to them for work they performed as required
in paragraph 8 herein.
(b) At the time Tenant requests Landlord's permission to make Tenant
Alterations, Tenant may request Landlord to designate in writing whether
said proposed Tenant Alteration shall become part of the leasehold or
whether Landlord wishes Tenant to remove said Tenant Alteration upon
termination the Lease. Landlord and Tenant shall be bound by any such
written agreement. If Tenant does not request Landlord to designate in
writing whether said Tenant Alteration will become part of the leasehold,
Landlord may make that determination when the Lease is terminated. Said
determination by Landlord shall be at Landlord's sole option and shall be
binding on Tenant.
Notwithstanding the foregoing, Tenant's movable furniture, equipment and
trade fixtures are Tenant's personal property. Upon the expiration or
sooner termination of the Term, Tenant shall, at Tenant's sole cost and
expense, forthwith and with all due diligence remove all Tenant's personal
property and any or all Tenant Alterations which were designated by
Landlord to be removed either at the time installed or, if not determined
at that time as provided above, then prior to or when the Lease is
terminated. Tenant shall forthwith and with all due diligence, at its sole
cost and expense, repair any damage to the Premises resulting from removal
of Tenant's personal property and
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Tenant Alterations at the end of the Term, so as to restore the Premises to
the condition that existed on the Commencement Date subject to ordinary
wear and tear, damage by casualty or by the negligence or willful
misconduct of Landlord or the gross negligence or willful misconduct of
Landlord's agents or employees.
(c) If, after the Commencement Date, Landlord makes any changes,
alterations or additions to the Premises, landlord will use its best
efforts to make such changes, alterations or additions without unreasonably
interfering with the public access to the Premises, including Tenant's
parking, and without interfering with Tenant's utility services, including
without limitation all electricity, gas, water, sewer, HVAC and
telecommunications services to the Premises. If such interference to
utility services should occur, Landlord shall make reasonable efforts to
restore such accessibility or services in coordination and cooperation with
Tenant. If such interference with electricity, gas, water, sewer or
telecommunication services occurs due to the acts or omissions of Landlord,
its agents or employees and such interference is not cured within five (5)
days of Tenant's written notice to Landlord, on the sixth day all Rent due
under the lease shall abate until such interference is cured, and Tenant
may engage in such measures as it sees fit to cure the interference at
Tenant's sole cost so long as Tenant gives Landlord twenty four (24) hours
prior actual notice of its intended actions hereunder and Landlord
expresses no reasonable objection to such actions within twenty four (24)
hours of receiving the notice. If the flow of electricity to the Premises
is interrupted, Tenant may install a generator on the Premises at Tenant's
sole expense and risk so long as such installation is in full compliance
with all applicable rules, regulations and codes. Tenant hereby agrees to
defend, indemnify and hold Landlord harmless from any loss, injury to
persons or property, death of any person or any other damage or loss
related to Tenant's installation or use of the generator and/or replacement
of Tenant's uninterruptible power supply with said generator.
7. REPAIRS.
(a) By taking possession of the Premises, Tenant accepts the Premises as
being in the condition in which Landlord is obligated to deliver them and
otherwise in good order, condition and repair. Landlord shall provide
janitorial service and keep the Premises in clean condition and good
repair, maintain all plumbing fixtures, HVAC systems, window and door
glass, landscaping and all other systems so they remain in good condition
and shall otherwise maintain the cleanliness and condition of the Premises,
ordinary wear and tear, damage by Tenant's negligence or that of its
agents, employees, invitees and licensees and damage from condemnation or
casualty excepted. Tenant shall, at all times during the Term, reimburse
the Landlord for the cost of keeping the Premises and every part thereof in
good order, condition and repair, ordinary wear and tear and damage by
casualty or Landlord's negligence or the gross negligence of Landlord's
agents and employees excepted. Tenant shall pay said costs as part of Basic
Operating Costs pursuant to paragraph 27. Tenant shall upon the expiration
or sooner termination of
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the Term, surrender to Landlord the Premises, neat and clean and in the
same condition as when received, ordinary wear and tear and damage caused
by Landlord's negligence and the gross negligence of Landlord's agents or
employees, casualty or condemnation excepted. Tenant agrees that Landlord
has no obligation to alter, remodel, improve, or decorate, or paint the
interior of the Premises or any part thereof after the Commencement Date
and that no representations respecting the condition of the Premises have
been made by Landlord to Tenant, except as specifically set forth in this
Lease.
(b) Landlord shall at its cost without pass-through to Tenant keep the
roof, gutters, power service to the Premises, exterior walls, foundations
and building structure of the Premises in a good state of repair, and shall
accomplish such repairs as may be needed within a reasonable time after
receipt of written notice from Tenant. Except as expressly provided for
herein, there shall be no abatement of Rent and no liability of Landlord by
reason of any injury to or interference with Tenant's business arising from
the making of any repairs, alterations or improvements in or to any portion
of the Premises, building or in or to any fixtures, appurtenances and
equipment therein except to the extent caused by the Landlord's negligence
or the gross negligence or willful misconduct of Landlord's agents or
employees.
(c) If the Landlord fails to make any repairs or perform any work required
herein or otherwise fails to maintain the Premises in the condition
provided herein, Tenant shall so notify Landlord in writing. If after
thirty (30) days prior written notice from Tenant (except in emergency or
cases of urgent necessity, or for anything that cannot be done in such time
period, or after such longer period as may reasonably be required to
accomplish the required tasks), Landlord fails to keep and preserve the
Premises as set forth in this paragraph, Tenant may, put or cause the same
to be put in the appropriate condition and state of repair, at its option.
Tenant must first give twenty (20) days written notice to Landlord of
Tenant's intention of making the repair and the cost to be incurred. In
such case, upon receipt of written statements and evidence of payment from
Tenant, Landlord shall promptly reimburse the entire cost thereof to
Tenant. If Landlord fails to reimburse Tenant within thirty (30) days of
demand and receipt of the written statements and evidence of payment from
Tenant, Tenant may offset the unreimbursed portion of the cost from the
Rent, so long as Tenant is in complete compliance with this paragraph and
there is no dispute as to Tenant's right to reimbursement. Notwithstanding
the foregoing, if such work was required because of Tenant's negligent acts
or failure to abide by this Lease, Tenant shall promptly pay Landlord for
the total cost of all such work as Additional Rent.
8. LIENS.
Tenant shall keep the Premises free from any liens arising out of any work
performed, material furnished, or obligations incurred by Tenant subject
to Tenant having the right to contest any lien in good faith and by
taking the steps necessary to protect Landlord and its interest from any
negative consequence of such contest. Tenant shall not permit
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any person or entity to commence work on the Premises unless said person
has agreed to provide Tenant and Landlord with conditional lien releases
upon payment of each draw request. Tenant shall deliver to Landlord a duly
executed conditional lien release in which said person or entity agrees to
waive and release all his/her/its right to claim a lien on the Premises
for work performed and paid for and shall deliver a final lien release at
completion of the work. In the event that Tenant has not, within ten (10)
days following the imposition of any lien, caused the same to be released
of record by payment or posting of a proper bond or otherwise satisfying
Landlord's concern, Landlord shall, in addition to all other remedies
provided herein and at law, have the right, but not the obligation, to
cause the same to be released by such means as it shall deem proper,
including payment of the claim giving rise to such lien. All such sums
paid by Landlord and all reasonable expenses incurred by it in connection
therewith shall be considered Additional Rent and shall be payable to it
by Tenant on demand with interest at the rate payable of twelve percent
(12%) per annum or four percent (4%) above the prime rate of US Bank,
whichever is greater. Landlord shall have the right at all times to post
and keep posted on the Premises any notices permitted or required by law,
or which Landlord shall deem proper, for the protection of Landlord, the
Premises, and any other party having an interest therein, from mechanics'
and materialmen's liens. Tenant shall give to Landlord at least five (5)
business days prior notice of commencement of any construction on the
Premises. Tenant shall not permit any lien to be placed on the Tenant's
interest in the Premises by operation of law.
9. ASSIGNMENT OR SUBLETTING.
Tenant shall not sell, assign, encumber or otherwise transfer by operation
of law or otherwise this Lease or any interest herein, sublet the Premises
or any part thereof, or suffer a person to occupy or use the Premises or
any portion thereof, without the prior written consent of Landlord, which
shall not be unreasonably withheld or delayed. A transfer by the present
majority shareholders of ownership and control of the voting stock of a
corporate tenant, or a transfer of a controlling interest in a partnership,
limited liability company, or proprietorship, as applicable, shall be
deemed an assignment for the purposes of this paragraph except as follows
in paragraph 9a:
(a) Any change in ownership of Tenant resulting from (i) a public offering
of the stock of Tenant or any parent of Tenant or (ii) any transfer of
stock or assets from Tenant to an affiliate or subsidiary corporation or
other entity that controls or is controlled by Tenant or (iii) as a result
of any merger, consolidation or other reorganization of Tenant or parent of
Tenant shall not be deemed an assignment if all of the following conditions
are met: Said assignee is an entity organized in the United States with its
principal office in the United States and is as financially sound as
Tenant. If the assignee is not organized in the United States and/or does
not have its principal business office located in the United States, Tenant
may assign the Lease to said entity if the assignee provides a guarantor
whose assets are located in the United States that is as financially sound
as the
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Tenant. The assignee or guarantor shall be deemed to be as financially
sound as Tenant if (i) the assignee or guarantor has unencumbered liquid
assets located in the United States which are equal to or greater in value
than 125 percent of the value of the unencumbered liquid assets of Tenant
on the Commencement Date, and (ii) the assignee's or guarantor's net assets
located in the United States as determined using Generally Accepted
Accounting Principles consistently applied, are equal to or greater in
value than 125 percent of the value of Tenant's net assets on the
Commencement Date, and (iii) the assignee or guarantor has not been the
subject of any bankruptcy proceeding or action by a prior Landlord within
the seven years prior to the date of the assignment, (iv) the assignee has
been in continuous operation of its business for the five years prior to
the date of the assignment, and (v) no prior Landlord has commenced
proceedings or refused to renew or extend a lease because of untimely
payment of rent or damage to the Premises, as evidenced in writing by such
prior landlord, within ten (10) years prior to the proposed assignment. In
addition, the Landlord may agree with Tenant that a proposed assignee or
guarantor is as financially sound as Tenant without regard to the foregoing
objective standard.
(b) Any other transfer, assignment or subletting shall be deemed a
prohibited transfer pursuant to this paragraph and shall be subject to
prior written permission of the Landlord, which shall not be unreasonably
withheld or delayed.
(c) Tenant shall, by written notice, advise Landlord of its desire from
and after a stated date (which shall not be less than thirty (30) days or
more than ninety (90) days after the date of Tenant's notice), to assign
the Lease or sublet the premises or any portion thereof. Said notice by
Tenant shall state the name and address of the proposed assignee or
subtenant. Requests shall include audited or reviewed financial statements
of assignee or sublessee and such other financial information as Landlord
reasonably requests. Tenant shall include a true and complete copy of the
proposed terms of the assignment or sublease. Such notice shall specify an
effective date which shall be the first day of a calendar month and shall
be not less than 30 days after the date of such notice. Landlord agrees to
respond to Tenant's request for consent within ten (10) business days of
receipt of the request and all required information. Failure to respond to
Tenant within the ten-day period is deemed to be Landlord's denial of the
proposal.
If Landlord's consent to the transfer, sublease or assignment is required
pursuant to this paragraph 9, Landlord shall have the right, by giving
written notice to tenant ten (10) business days after receipt of Tenant's
notice, to terminate this Lease as to the portion of the Premises described
in Tenant's notice. Such notice shall, if given, terminate this Lease with
respect to the portion of the premises described in Tenant's notice as of
the date stated in Tenant's notice.
If this Lease terminates pursuant to the foregoing with respect to less
than all of the Premises, the rent shall be prorated to that date. If
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Tenant proposes to sublet only a portion of the Premises, and Landlord
exercises its right to recapture that portion, the effective date of
recapture by Landlord shall be the effective date of the proposed
subletting. On such date:
(i) that portion shall not be part of the Premises;
(ii) the Base Rent payable under this Lease shall be reduced by the
rate per rentable square foot payable for such portion
multiplied by the number of rentable square feet in such
portion; the rental rate per rentable square foot is as follows:
1st year $18.50 per Rentable Square Foot
2nd year $19.00 per Rentable Square Foot
3rd year $19.50 per Rentable Square Foot
4th year $20.00 per Rentable Square Foot
5th year $20.50 per Rentable Square Foot
6th year $21.00 per Rentable Square Foot
7th year $21.50 per Rentable Square Foot
The rate per rentable square foot shall be calculated according
to BOMA Standards for a single tenant building as that phrase
is defined in the Standard Method for Measuring Floor Area in
Office Buildings (an American National Standard ANSI/BOMA 265.1
1996 (Revised and readapted June 7, 1996) published by Building
Owners & Managers Association International;
(iii) Tenant's share of operating costs and real estate taxes shall
be reduced proportionately; and
(iv) Landlord shall, at its sole cost and expense, do all that is
necessary to separate the remainder of the Premises from the
portion recaptured by Landlord.
If Tenant requests the right to sublet a portion of the Premises and the
proposed sublease is for less than the remaining Term of the Lease and if
the Landlord elects to exercise its rights of recapture, as described
above, then at the end of the sublessee's term, the Tenant shall take back
possession of the subleased portion of the Premises for the remainder of
the then current Term of this Lease, as renewed, if applicable. When Tenant
regains possession of the sublessee's portion of the Premises, Tenant shall
be subject to all the terms of this Lease and shall pay rent at the rate
provided in this Lease, even if the rent paid by the sublessee was greater
than the Rent required by this Lease. Landlord and Tenant shall execute an
amendment to this Lease to revive the Lease for the sublet portion of the
Premises being returned for the balance of the then current Term. The
rights to renewal shall be as provided in paragraph 42.
(d) As a condition to Landlord's written consent and to any subleasing,
or assignment, assignees or the subtenants shall agree in writing to
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comply with and be bound by all of the terms, covenants, conditions,
provisions, and agreements of this Lease. Tenant shall deliver to Landlord,
an executed copy of each assignment and sublease and an agreement to comply
with the terms of the Lease signed by each assignee or sublessee.
(e) Landlord's consent to any sale, assignment, encumbrance, subletting,
occupation, lien or other transfer shall not release Tenant from any of
Tenant's obligations hereunder, except as agreed in writing by Landlord, or
be deemed to be a consent to any subsequent occurrence. Any sale,
assignment, encumbrance, subletting, occupation, lien or other transfer of
this Lease which does not substantially comply with the provision of this
Paragraph shall be void.
(f) The liability of the Tenant named in this Lease and any immediate or
remote successor in interest of Tenant (by assignment or sublease), and the
due performance of the obligations of this Lease on Tenant's part to be
performed or observed, shall not in any way be discharged, released, or
impaired by any (i) agreement which modifies any of the rights or
obligations of the parties under the Lease, (ii) stipulation that extends
the time with which an obligation under the Lease is to be performed, (iii)
waiver of the performance of an obligation required under this Lease, or
(iv) failure to enforce any of the obligations set forth in the Lease.
Landlord shall use its best efforts to notify Tenant if any of the above
enumerated actions would substantially increase Tenant's liability.
(g) If Landlord elects to allow Tenant to assign or sublet all or any
portion of the Premises, and the sublease rent paid by the assignee or
sublessee for the Premises or the portion thereof being assigned or sublet
exceeds one hundred percent (100%) of the Rent provided by this Lease, (the
"Excess Subrent"), if the Landlord does not exercise his right to recapture
the space as provided herein, then such Excess Subrent shall be shared
equally between Tenant and Landlord. Such party's pro rata share of the
Excess Subrent shall be paid to the party within fifteen (15) business days
of receipt by the other party.
(h) Without limiting any of the provisions of this paragraph, if Tenant
has entered into any sublease of any portion of the Premises, the voluntary
or other surrender of this Lease by Tenant, or a mutual cancellation by
Landlord and Tenant, shall not work a merger (unless Landlord at its option
by notice to the subtenant elects a merger to occur) and shall not
terminate all or any subleases or subtenancies, but shall, at the option of
the Landlord, operate as an assignment to Landlord of any or all such
subleases or subtenancies.
10. INSURANCE AND INDEMNIFICATION.
(a) Tenant shall purchase at its own expense and keep in force during the
term of this Lease a policy or policies of workman's compensation and
commercial general liability insurance, including personal injury and
property damage, in the amount of no less than Two Million Dollars
($2,000,000) for property damage and Two Million Dollars ($2,000,000)
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per claim for personal injuries or death of persons occurring in or about
the Premises, or such other amount as Landlord shall reasonably deem
necessary, based on periodic insurance reviews in respect to injury or
damage to persons or property. Said policies shall: (i) name Landlord as an
additional insured and insure Landlord's contingent liability under the
Lease, (ii) be issued by an insurance company which is acceptable to
Landlord and licensed to do business in the State of Washington, and, (iii)
provide that such insurance shall not be canceled unless thirty (30) days
prior written notice shall have been given to Landlord. Certificates of
said policies shall be delivered to Landlord by Tenant on the Commencement
Date and upon each renewal of said insurance.
(b) If Tenant serves, distributes or sells any alcoholic beverages, the
insurance carried by Tenant shall not exclude violation of any governmental
statute, ordinance, regulation or rule pertaining to the sale, gift,
distribution or use of any alcoholic beverages and shall extend coverage
for any damages occurring at locations other than the Premises and
resulting from risks insurable by Host liquor license liability insurance.
(c) In addition to the insurance required above, Tenant shall, at its own
cost and expenses, keep and maintain in full force and effect during the
term, property insurance covering Tenant's supplies, inventory and other
personal property as well as all improvements, additions and modifications
to the Premises in an amount equal to one hundred percent of the
replacement cost. The insurance policy shall bear an endorsement that the
policy shall not be cancelled or the policy limits reduced below the
coverage required by this Lease for any reason other than non-payment of
premiums, except upon thirty (30) days prior written notice to Landlord.
Tenant shall deliver certificates of said policies to Landlord upon the
Commencement Date and upon each renewal of said insurance.
(d) If Tenant fails or refuses to maintain any insurance required herein,
Landlord may at its discretion, obtain and maintain insurance for such
items of interest to protect Landlord in such amounts as Landlord
determines to be appropriate and all premiums paid or payable by Landlord
shall be deemed to be Additional Rent and payable by Tenant as provided in
Paragraph 3 of this Lease for the payment of Rent. Failure to obtain and
maintain insurance required by this paragraph after twenty (20) days'
written notice by Landlord to Tenant of such failure shall constitute a
material breach of this Lease.
(e) Landlord shall not be liable to Tenant and Tenant hereby waives all
claims against Landlord for any injury or damage to any person or property
in or about the Premises by or from any cause whatsoever, other than
Landlord's negligence or willful acts or omissions or the gross negligence
or willful acts or omissions of Landlord's agents or employees. Landlord
shall during the term maintain such insurance as Landlord deems necessary
including replacement cost standard form property insurance and liability
insurance and shall make Tenant an
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additional insured under the liability insurance and provide Tenant
certificates of insurance, upon request.
(f) Tenant shall indemnify, defend and hold Landlord harmless from and
against any and all claims and liability, including any claims brought by
employees under any workman's compensation statute, for any injury or
damage to any person or property whatsoever occurring in, on, or about the
Premises, or any part thereof when such injury or damage is caused in part
or in whole by the act, neglect, fault, or omission of Tenant or Tenant's
officers, contractors, licensees, agents, servants, employees, guests,
invitees, or visitors on or about the Premises. Tenant further agrees to
indemnify and hold Landlord harmless against and from any and all claims
by or on behalf of any person, firm or corporation arising from the
conduct or management of any work or thing whatsoever done by the Tenant
in or about the Premises or from the transactions of the Tenant concerning
the Premises, and will further indemnify and hold Landlord harmless
against and from any and all claims arising from any breach or default on
the part of the Tenant in the performance of any covenant or agreement of
this Lease on the part of Tenant, or any of its officers, contractors,
licensees, agents, servants, employees, guests, invitees, or visitors on
or about the Premises together with all costs, reasonable attorneys' fees,
expenses, and liabilities incurred in connection with any such claim or
action or proceeding brought thereon. If any action or proceeding is
brought against Landlord by reason of any claim or liability, Tenant
agrees to defend such action or proceeding at Tenant's sole expense by
counsel selected by Tenant and reasonably satisfactory to Landlord. The
provisions of this Paragraph shall survive the expiration or termination
of the Lease with respect to any claims or liability occurring prior to
such expiration or termination for a period ending five years after the
Termination Date of this Lease.
(g) Landlord shall indemnify, defend and hold Tenant harmless from and
against any and all claims and liability for any injury or damage to any
person or property whatsoever occurring in, on or about the Premises or
any part thereof when such injury or damage is caused by the negligence or
willful misconduct of Landlord or the gross negligence or willful
misconduct of Landlord's employees or agents on or about the Premises.
Landlord further agrees to indemnify and hold Tenant harmless against and
from any and all claims by or on behalf of any person, firm or corporation
arising solely from the conduct of any work done by the Landlord in or
about the Premises, and will further indemnify and hold Tenant harmless
against and from any and all claims arising from any breach or fault on
the part of the Landlord in the performance of any covenant or agreement
of this Lease on the part of Landlord, and all costs, reasonable
attorneys' fees, expenses, and liabilities incurred in connection with any
such claim or action or proceeding brought thereon. If any action or
proceeding is brought against Tenant by reason of any claim or liability,
Landlord agrees to defend such action or proceeding at Landlord's sole
expense by counsel selected by Landlord and reasonably satisfactory to
Tenant. The provisions of this paragraph shall survive the expiration or
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termination of the Lease with respect to any claims or liability occurring
prior to such expiration or termination for a period ending five years
after the Termination Date of this Lease.
11. WAIVER OF SUBROGATION.
Landlord and Tenant hereby waive any right that each may have against the
other on account of any loss or damage arising in any manner which is
covered by policies of insurance for fire and extended coverage, theft,
public liability, workmen's compensation or other insurance now or
hereafter existing during the term hereof, provided, however, the parties
hereby covenant with each other that no insurer shall hold any right of
subrogation against either Landlord or Tenant, as the case may be.
Nothing in this paragraph shall be interpreted to have the effect of
relieving or modifying any obligation of any insurance company, and shall
be void to the extent it would have such effect.
12. SERVICES TO LANDLORD.
Landlord shall pay as part of Basic Operating Costs, all charges for
water, gas, heat, electricity, power, telephone service, sewer service and
sewer rentals charged or attributable to the Premises, and all other
services or utilities used in, upon or about the Premises during the Term
and the cost of installing meters or check meters. Such amounts shall be
billed by Landlord to Tenant at the time and in the manner Basic Operating
Costs are billed and Tenant shall pay to Landlord as Additional Rent all
such costs, expenses and charges so billed. Tenant shall not at any time
overburden or exceed the capacity of the mains, feeders, ducts, conduits
or other facilities by which utilities are supplied, distributed or
serving the Premises. In no event shall Landlord be liable for an
interruption or failure in the supply of any such utilities to the
Premises and the same shall not constitute a termination of this Lease or
eviction of Tenant except Tenant shall have the right to abatement
described in paragraph 6(c) herein.
13. ESTOPPEL CERTIFICATE.
(a) Within ten (10) days following any written request which Landlord may
make from time to time, Tenant shall execute and deliver to Landlord a
certificate substantially in the form attached hereto as Exhibit "C" and
made a part hereof, indicating thereon any exceptions thereto which may
exist at that time. Failure of the Tenant to execute and deliver such
certificate within ten (10) days of notice that such certificate is
overdue shall constitute a material default under the terms of this Lease
and an acknowledgment by Tenant that the statements included in Exhibit
"C" are true and correct without exception. Landlord and Tenant intend
that any statement delivered pursuant to this Paragraph may be relied
upon by any mortgagee, beneficiary, purchaser or prospective purchaser of
the Premises or any interest therein.
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(b) Within ten (10) days following any written request from Landlord,
Tenant shall furnish its most recently publicly published financial
statements to Landlord.
14. HOLDING OVER.
(a) Any holding over after the expiration of the Term with the written
consent of the Landlord of this Lease shall be a tenancy from month to
month. The terms, covenants and conditions of such tenancy shall be the
same as provided herein and the monthly Base Rent shall be one hundred
fifty percent (150%) of the Base Rent paid monthly for the last month prior
to the expiration, plus the monthly portion of Tenant's Proportionate Share
of Basic Operating Costs. Acceptance by Landlord of Rent after such
expiration shall not result in any other tenancy or any renewal of the
Term, and the provisions of this paragraph are in addition to and do not
affect Landlord's right of re-entry or other rights provided under this
Lease or by applicable law.
(b) If Tenant shall retain possession of the Premises or any part
therefore without Landlord's consent following the expiration or sooner
termination of this Lease for any reason, then Tenant shall pay to Landlord
for each day of such retention as Base Rent two hundred percent (200%) of
the amount of the daily Base Rent for the last month prior to the date of
such expiration or termination plus a monthly portion of Tenant's
Proportionate Share of Basic Operating Expenses. Tenant shall also
indemnify and hold Landlord harmless from any loss or liability resulting
from delay by Tenant in surrendering the Premises, including, without
limitation, any claims made by any succeeding tenant founded on such delay.
Acceptance of rent by Landlord following expiration or termination shall
not constitute a renewal of this Lease, and nothing contained in this
paragraph shall waive Landlord's right of re-entry or any other right.
Tenant shall be only a Tenant at sufferance, whether or not Landlord
accepts any rent from Tenant while Tenant is holding over without
Landlord's written consent.
15. SUBORDINATION.
Without the necessity of any additional document being executed by Tenant
for the purpose of effecting a subordination, this Lease shall be subject
and subordinate at all times to the lien of any mortgage or deed of trust
which may now exist or hereafter be executed in any amount for which said
building, land, or Landlord's interest or estate in any of said items, is
specified as security; provided however that Tenant's subordination to any
lien arising after the date of this Lease (except only a subsequent lien
which represents the conversion of the existing construction loan secured
by the Premises to a permanent financing loan of approximately the same
principal amount) is subject to receipt by Tenant of an executed
nondisturbance agreement (in the form attached as Exhibit C or other form
acceptable to Tenant) between Tenant and the person or entity seeking
subordination of Tenant's interest. Such nondisturbance agreement is not
effective unless and until Tenant signs the Estoppel Certificate required
under paragraph 13. Landlord will use its best efforts to obtain a
nondisturbance
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agreement in favor of Tenant from the holder of the permanent loan secured
by the Premises. Landlord shall also have the right to subordinate or
cause to be subordinated such liens to this Lease. In the event that any
mortgage or deed of trust is foreclosed or a conveyance in lieu of
foreclosure is made for any reason, Tenant shall, notwithstanding any
subordination, attorn to and become the Tenant of the successor in
interest to Landlord at the option of such successor in interest and
subject to the terms of a non-disturbance agreement, and thus the
successor in interest to Landlord shall respect Tenant's possession of the
Premises under the Lease. Tenant covenants and agrees to execute and
deliver, upon demand by Landlord and in the form reasonably requested by
Landlord, any additional documents evidencing the priority or
subordination of this Lease with respect to the lien of any such mortgage
or deed of trust.
16. RULES AND REGULATIONS.
Tenant shall faithfully observe and comply with the rules and regulations
printed on or annexed to this Lease as Exhibit "D" and all reasonable
modifications thereof and additions thereto from time to time put into
effect by Landlord to the extent such rules and regulations are not
inconsistent with the terms of this Lease or contrary to Laws, do not
interfere with Tenant's operations, are not discriminatory, and do not
substantially increase the costs of Tenant to comply.
17. RE-ENTRY BY LANDLORD.
Landlord reserves and shall at all times have the right to re-enter the
Premises to inspect the same, after reasonable prior notice to Tenant, to
supply janitor service and any other service to be provided by Landlord to
Tenant hereunder, to show said Premises to prospective purchasers or
mortgagees or to show said Premises to prospective tenants during the last
six (6) months of the term, to post notice of non-responsibility, and to
alter, improve, or repair the Premises and any portion of the Premises,
without abatement of Rent, (except as provided in paragraph 6(c)) and may
for that purpose erect, use, and maintain scaffolding, pipes, conduit, and
other necessary structures in and through the Premises where reasonably
required by the character of the work to be performed, provided that
entrance to the Premises shall not be blocked thereby, and further provided
that the business of Tenant shall not be interfered with unreasonably or
for prolonged periods of time. For each of the aforesaid purposes, Landlord
shall at all times have and retain a key with which to unlock all of the
doors in, upon, and about the Premises, excluding Tenant's vaults and
safes, or special security areas (designated in advance by written notice
to Landlord), and Landlord shall have the right to use any and all means
which Landlord may deem necessary or proper to open said doors in an
emergency, in order to obtain entry to any portion of the Premises. Any
such emergency entry to the Premises, or portions thereof obtained by
Landlord by any of said means, or otherwise, shall not under any
circumstances be construed or deemed to be a forcible or unlawful entry
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into, or a detainer of, the Premises, or an eviction, actual or
constructive, of Tenant from the Premises or any portions thereof.
18. INSOLVENCY OR BANKRUPTCY.
(a) If Tenant becomes a debtor under Chapter 7 of the Bankruptcy Code
("Code"), or if a petition for reorganization or adjustment of debts is
filed concerning Tenant under Chapters 11 or 13 of the Code, or a
proceeding is filed under Chapter 7 of the Code and is transferred to
Chapters 11 or 13 of the Code, the Trustee or Tenant, and as
debtor-in-possession, may not elect to assume this Lease unless, at the
time of such assumption, the Trustee or Tenant has:
(i) cured all defaults under the Lease and paid all sums due and
owing under the Lease, or provided Landlord with "adequate
assurance" (as defined below) that (1) within ten (10) days from
the date of such assumption, the Trustee or Tenant will
completely pay all sums due and owing under this Lease and
compensate Landlord for any actual pecuniary loss resulting from
any existing defaults or breach of this Lease, including,
without limitation, Landlord's reasonable costs, expenses,
accrued interest, and attorney fees and costs incurred as a
result of the default or breach and/or as a result of the filing
of the petition in bankruptcy;
(ii) within twenty (20) days from the date of such assumption, the
Trustee or Tenant will cure all non-monetary defaults and
breaches under the Lease, or if the nature of such non-monetary
defaults is such that more than twenty (20) days are reasonably
required for such cure that the Trustee or Tenant will commence
to cure such non-monetary defaults within twenty (20) days and
thereafter diligently prosecute such cure to completion; and
(iii) the assumption will be subject to all of the provisions of the
Lease.
(b) For purposes of this paragraph, Landlord and Tenant acknowledge that in
the context of a bankruptcy proceeding involving Tenant, at a minimum,
"adequate assurance" shall mean (i) that Trustee or Tenant has and will
continue to have sufficient funds to fulfill the obligations of Tenant
under this Lease; (ii) the Bankruptcy Court shall have entered an order
segregating sufficient cash payable to Landlord and/or the Trustee or
Tenant shall have granted a valid and perfected first lien and security
interest and/or mortgage in or on the property of Trustee or Tenant
acceptable as to value and kind to Landlord to secure to Landlord the
obligation of the Trustee or Tenant to cure the monetary and/or
non-monetary defaults and breaches under this Lease within the time period
set forth above; and (iii) the Trustee or Tenant, at the very minimum,
shall deposit a sum equal to two (2) months Base Rent to be held by
Landlord (without any
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allowance for interest thereon) to secure Tenant's future performance
under the Lease.
(c) If the Trustee or Tenant has assumed the Lease pursuant to the
provisions of this paragraph for the purpose of assigning Tenant's
interests hereunder to any other person or entity, such interest may be
assigned only after the Trustee, Tenant, or the proposed assignee has
complied with all the terms, covenants, and conditions of this Lease,
including without limitation those with respect to additional rent.
Landlord and Tenant acknowledge that such terms, covenants and conditions
are commercially reasonable in the context of a bankruptcy proceeding by
Tenant. Any person or entity to which the Lease is assigned pursuant to
the provisions of the Code shall be deemed without further act or deed to
have assumed all of the obligations arising under this Lease on and after
the date of such assignment. Any such assignee shall, upon request,
execute and deliver to Landlord an instrument confirming such assignment.
(d) Upon the filing of a petition by or against Tenant under the Code,
Tenant, as debtor and debtor-in-possession, and any Trustee who may be
appointed, agree to adequately protect Landlord as follows: (i) to perform
each and every obligation of Tenant under this Lease until such time as
this Lease is either rejected or assumed by order of the Bankruptcy Court;
(ii) to pay all monetary obligations required under this Lease, including
without limitation the payment of Base Rent, Tenant's share of the
increase in Operating Costs, and any other sums payable by Tenant to
Landlord under this Lease which is considered reasonable compensation for
the use and occupancy of the Premises; (iii) provide Landlord a minimum of
thirty (30) days prior written notice, unless a shorter period is agreed
to by the parties, of any proceeding relating to any assumption of the
Lease or any intent to abandon the Premises, which abandonment shall be
deemed a rejection of the Lease; and (iv) to perform for the benefit of
the Landlord as required otherwise under the Code.
Failure of Tenant to comply with the above shall result in automatic
rejection of the Lease.
19. DEFAULT.
A party's failure to perform or honor any covenant, condition or
representation made under this Lease shall constitute a default hereunder
by the party acting or failing to act upon the expiration of the
applicable cure period set forth in this Paragraph following written
notice of the default. If the default is failure to pay Rent, Additional
Rent, or other monetary sum, then the defaulting party shall have a
period of ten (10) days from the date of the notice to cure as provided by
statute. Except as otherwise provided in this Lease, a party shall have a
period of thirty (30) days from the date of the notice to cure any default
under this Lease that is not a default in payment of Rent or Additional
Rent; provided, however, that with respect to any default which cannot
reasonably be cured within thirty (30) days, the party in default shall
have additional time necessary to
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cure the default so long as that party commences to cure within thirty
(30) days from the other party's notice, and continues to prosecute
diligently the curing thereof. Upon a default under this Lease by either
party following failure to cure by the defaulting party within the
permissible time period, the non-defaulting party, as specified below
and after due process of law, shall have any or all of the following
rights and remedies in addition to, or as an alternative to, at the
non-defaulting party's option, any other rights or remedies available to
the non-defaulting party at law or in equity. All such rights and remedies
are cumulative:
(a) If Tenant is the defaulting party, the unpaid balance of any amounts
advanced by Landlord to Tenant for Tenant Improvements shall be
immediately due and payable without notice of acceleration. Landlord may
avail itself of all remedies available to collect said amounts, which are
deemed to be Additional Rent, including commencing action for eviction
and/or exercising any and all other remedies available under this Lease or
in law and equity.
(b) If the Tenant is the defaulting party, the Lease may be terminated at
the option of Landlord by notice in writing to Tenant. If the Landlord
gives notice of termination, the Lease will be deemed terminated as of the
date specified in the notice and the Tenant shall have no further rights
or obligations under the Lease except as provided in this Paragraph 19,
which shall survive termination of the Lease.
(c) Unless the Lease is terminated as provided in subparagraph (b), the
Lease will continue in full force and effect, except Tenant's right to
possession of the Premises may be terminated at any time, at the option
of Landlord, by notice in writing to Tenant. If Landlord gives notice to
Tenant as herein provided, Tenant's right to possession of the Premises
will be deemed terminated as of the date specified in Landlord's notice,
and Landlord may from time to time, but shall not be obligated to, sublet
the Premises or any part thereof for such term or terms and at such rent
and such other terms as is commercially reasonable, with the right to make
alterations and repairs to the Premises. Upon each subletting, at the
option of Landlord: (i) either Tenant shall be immediately liable to pay
to Landlord, in addition to indebtedness other than rent due hereunder,
the cost of such subletting and such alterations and repairs incurred by
Landlord and the amount, if any, by which the rent received for the period
of such subletting is less than the amount to be paid as rent for the
Premises for such period, or (ii) Landlord shall apply rents received from
such subletting first, to payment of any indebtedness other than rent due
hereunder from Tenant to Landlord; second, to the payment of any costs of
subletting and of any alterations and repairs; third, to payment of rent
due and unpaid hereunder; and the residue, if any, shall be held by
Landlord and applied in payment of future rent as the same becomes due
hereunder. If, under option (i), the rent shall not be promptly paid to
Landlord by the subtenant(s), or if, under option (ii), the rentals
received from the subletting during any month are less than all amounts
owed for that month by Tenant hereunder, Tenant shall pay any
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such deficiency to Landlord. Such deficiency shall be calculated and paid
monthly.
Unless and until the Lease is terminated as provided in subparagraph (b),
Tenant shall continue to be liable to Landlord for rent and all other
amounts owing under the Lease when and as they become due, whether or not
Tenant's possession of the Premises has been terminated, and whether or not
the Premises are sublet by Landlord. No act or omission by Landlord shall
be construed as an election on its part to terminate this Lease unless a
written notice of such intention is given to Tenant as provided in
subparagraph (b). Notwithstanding any action taken by Landlord under this
subparagraph, Landlord may at any time thereafter elect to terminate this
Lease for such previous uncured or continuing breach.
(d) Upon termination of the Lease as provided in subparagraph (b) and/or
upon termination of Tenant's right to possession of the Premises, as
provided in subparagraph (c), Landlord may re-enter and take possession of
the Premises, and may remove any persons or property by legal action or any
other lawful means and without liability for damages. Any of Tenant's
property remaining on the Premises, including, without limitation,
equipment, inventory, furnishings and trade fixtures, shall be deemed to
have been abandoned by Tenant, upon five (5) days written notice to Tenant,
and shall be and become the property of Landlord; provided, however, that
Landlord may, in its sole discretion, reject the property and elect instead
to store such property in a public warehouse or elsewhere at the cost of
and for the account of Tenant, and further may, but shall not be obligated
to, upon five (5) days written notice to Tenant, sell such property and
apply the proceeds therefrom in accordance with applicable law.
(e) In the event the Lease is terminated as provided in subparagraph (b)
above, Landlord shall be entitled to recover immediately, without waiting
until the due date of any future Rent or until the date fixed for
expiration of the Term provided in the Lease, all of the following amounts
as damages:
(1) All past due Rent and other amounts owing by Tenant to Landlord
pursuant to the terms of this Lease as of the date of termination of the
Lease; and
(2) All costs associated with Tenant's default, whether or not suit
was commenced, including, without limitation, costs of re-entry and
re-letting, costs of clean-up, refurbishing, removal of Tenant's property
and fixtures, other expenses occasioned by Tenant's failure to quit the
Premises upon termination and to leave them in the required condition, any
remodeling costs, reasonable attorneys fees, court costs, broker
commissions, and advertising costs; and
(3) The loss of the reasonable rental value of the Premises from the
date of termination of the Lease until a new Tenant has been, or with the
exercise of reasonable efforts, could have been secured; and
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(4) Any excess of the value of the rent and all of Tenant's other
obligations under this Lease, as if the Lease had not been terminated, over
the reasonable expected return from the Premises for the period commencing
on the earlier of the date of trial or the date of the Premises are relet
and continuing through the end of the term. The present value of future
amounts will be computed using a discount rate equal to the lowest prime
interest rate announced by a major Washington bank on short-term commercial
loans for its most credit-worthy customers, in effect on the date of trial
or the date the Premises are relet. Landlord is entitled to all said
amounts to the extent they are required to make Landlord whole together
with double damages as provided by law.
(f) Landlord may, in its sole discretion, sue periodically to recover
damages during the period corresponding with the remainder of the Term, if
the Lease has not been terminated. No action for damages shall bar a later
action for damages subsequently accruing or, in the alternative, Landlord
may elect to call the entire amount of rental for the balance of the term,
or what would have been the balance of the term if the Lease had not been
terminated as provided in subparagraph (b), immediately due and payable,
which rent shall be paid by Tenant to Landlord as liquidated damages.
(g) To the extent required by law, both Landlord and Tenant have the
obligation to take reasonable steps to mitigate their damages caused by any
default under this Lease.
20. DAMAGE BY FIRE, ETC.
(a) If the Premises are damaged or destroyed by fire or other casualty such
that the repairs can be made within one hundred fifty (150) days from the
date of such damage, then Landlord shall forthwith repair the same to the
condition that existed on the date of the damage, under the laws and
regulations of the federal, state, and local governmental authorities
having jurisdiction thereof. In such event, this Lease shall remain in full
force and effect except that Tenant shall be entitled to a proportionate
abatement of rent while such repairs to be made hereunder by Landlord are
being made. Said proportionate abatement shall be based on the rental rates
per rentable square foot in Paragraph 9(c) above, and the extent to which
the making of such repairs to be made hereunder by Landlord shall interfere
with the business carried on by Tenant on the Premises. If such damages or
destruction resulted from the act, fault or neglect of Tenant, then rent
shall abate only to the extent Landlord receives proceeds from Landlord's
rental income insurance policy to compensate Landlord for the loss of such
rent.
Within thirty (30) days from the date of such damage, Landlord shall notify
Tenant whether or not such repairs can be made within one hundred fifty
(150) days from the date of such damage. If and to the extent such damage
or destruction is not fully covered by Landlord's insurance policy,
Landlord shall have the right to terminate this Lease upon written notice
of such election to terminate within thirty (30)
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days from the date of such damage or destruction. If the Landlord
determines that such repairs cannot be made within one hundred fifty (150)
days from the date of such damage or destruction, then Landlord shall have
the option within thirty (30) days of the date of such damage or
destruction either to: (a) notify Tenant of Landlord's intention to repair
the damage, in which event this Lease shall continue in full force and
effect and the Rent shall be reduced as provided herein; or (b) notify
Tenant of Landlord's intention to terminate this Lease as of the date
specified in such notice which date shall be not less than thirty (30) days
nor more than sixty (60) days after such notice is given. In case of
termination of the Lease by Landlord, (i) the rent shall be partially
abated by a proportionate amount based upon the rental rates per rentable
square foot in Paragraph 9(c) above, and the extent to which said damage
interfered with the business carried on by Tenant in the Premises, and the
Tenant shall pay such reduced rent up to the date of termination specified
in Landlord's notice; and (ii) the unused Security Deposit and unearned
rent paid by the Tenant under this Lease shall be returned to Tenant
immediately upon such termination. The repairs to be made hereunder by
Landlord shall not include, and Landlord shall not be required to repair,
any damage by fire or other cause to Tenant's Personal Property or any
repairs or replacements of any paneling, decorations, railings, floor
coverings, or any alterations, additions, fixtures or improvements
installed on the Premises by or at the expense of Tenant.
If Landlord determines that the repairs cannot be made within one hundred
fifty (150) days and elects to terminate the Lease, Tenant may request that
Landlord's determination be reviewed by a Repair Architect. If the parties
cannot agree on a selection of a Repair Architect within ten (10) days
following Tenant's written notice to Landlord that it wishes a Repair
Architect to settle the matter, both Tenant and Landlord shall appoint a
Repair Architect within five (5) days who shall in turn select a third
Repair Architect. The decision of the third Repair Architect shall be
rendered within thirty (30) days from the date he is appointed and shall be
binding upon the parties. The matter shall not be submitted to a Repair
Architect if Landlord's insurance would not cover the required repairs. If
the Repair Architect determines that the repairs cannot be made within one
hundred fifty (150) days, then the Lease shall be terminated as of the date
the decision of the Repair Architect is rendered. The parties shall share
equally the cost of the Repair Architect.
(b) If at the time of any such damage, less than one (1) year remains in
the Term and Tenant has not exercised its option to extend the Term then
either Landlord or Tenant, at either's sole option, shall have the right to
terminate this Lease.
21. EMINENT DOMAIN.
(a) If any part of the Premises shall be taken or appropriated under the
power of eminent domain or conveyed in lieu thereof and said taking
materially interferes with Tenant's business or Landlord's ability to Lease
the Premises, Landlord shall have the right to terminate this
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Lease. In such event, Landlord shall receive, and Tenant shall assign to
Landlord upon demand from Landlord, any and all income, rent, award or any
interest thereon which may be paid or owed in connection with the exercise
of such power of eminent domain or conveyance in lieu thereof. Tenant shall
have no claim against Landlord or against the agency exercising such power
or receiving such conveyance, for any part of such sum paid by virtue of
such proceedings. Notwithstanding the foregoing, Tenant may pursue its
remedies against the condemning agency for the value of the unexpired Term,
and for reimbursement for the value of its personal property, moving and
relocation expenses and value of improvements made to the Premises at
Tenant's expense after the Commencement Date so long as said action does
not act to diminish Landlord's recovery of its loss.
If a part of the Premises shall be so taken or appropriated or conveyed and
Landlord shall elect not to terminate this Lease, Landlord shall
nonetheless receive (and Tenant shall assign to Landlord upon demand from
Landlord) any and all income, rent, award or any interest thereon paid or
owed in connection with such taking, appropriation or conveyance. If the
Premises have been damaged as a consequence of such partial taking or
appropriation or conveyance, Landlord shall restore the Premises continuing
under this Lease at Landlord's cost and expense provided that such
restoration can be made within one hundred fifty (150) days of the time the
property so taken is appropriated or conveyed. If restoration cannot be
made within one hundred fifty (150) days from the time of taking, Landlord
shall notify Tenant within sixty (60) days of such taking and Landlord or
Tenant shall have the right to cancel this Lease by giving the other
written notice of its intention to cancel within thirty (30) days of the
date of Landlord's notice.
If Landlord determines that the repairs cannot be made within one hundred
fifty (150) days and elects to terminate the Lease, Tenant may request that
Landlord's determination be reviewed by a Repair Architect. If the parties
cannot agree on the selection of a Repair Architect within ten (10) days
following Tenant's written notice to Landlord that it wishes a Repair
Architect to settle the matter, both Tenant and Landlord shall appoint a
Repair Architect within five (5) days who shall in turn select a third
party Architect. The decision of the third Repair Architect shall be
rendered within thirty (30) days from the date he is appointed and shall be
binding upon the parties. The matter shall not be submitted to a Repair
Architect if Landlord's insurance would not cover the required repairs. If
the Repair Architect determines that the Lease can be terminated as decided
by the Landlord, the Lease shall be terminated as of the date the decision
of the Repair Architect is rendered. The parties shall share equally the
cost of the Repair Architect.
(b) If Landlord and/or Tenant elect not to cancel this Lease, it shall
remain in full force and effect except that Tenant shall be entitled to a
proportionate abatement in Rent while restoration is being made by
Landlord. Such proportionate abatement shall be based upon the rental rates
per rentable square foot in Paragraph 9(c) above, and the extent to which
the taking, appropriation or conveyance and the restoration
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being made by Landlord interferes with the business operations carried on
by Tenant in the Premises. Landlord will not be required to repair or
restore any injury or damage to Tenant's Personal Property or make any
repairs or restoration to any alterations, additions, fixtures or
improvements installed in the Premises by or at the expense of Tenant.
(c) Notwithstanding anything to the contrary contained in this paragraph,
if the temporary use or occupancy of any part of the Premises is taken or
appropriated under power of eminent domain during the Term and such
temporary use or occupancy continues for one hundred fifty (150) days or
less and does not materially interfere with Tenant's ability to continue
to operate its business at the Premises, this Lease shall be and remain
unaffected by the taking or appropriation and Tenant shall continue to pay
in full all Rent payable hereunder by Tenant during the Term. In the event
of any temporary appropriation or taking, Tenant shall be entitled to
receive that portion of any award which represents compensation for the
use or occupancy of the Premises during the term of this Lease, and
Landlord shall be entitled to receive that portion of any award which
represents the cost of restoration of the Premises and the use and
occupancy of the Premises after the end of the term of this Lease.
22. SALE BY LANDLORD.
In the event of a sale or conveyance by Landlord of the Premises, the same
shall operate to release Landlord from any future liability upon any of
the covenants or conditions, express or implied, herein contained in favor
of Tenant and becoming due or arising thereafter, and in such event Tenant
agrees to look solely to the responsibility of the successor in interest
of Landlord in and to this Lease as to any liability becoming due or
arising thereafter. If Landlord transfers the Security Deposit and other
deposits held to its successor, Tenant hereby releases Landlord from
liability for all deposits paid by Tenant and released by Landlord to
Landlord's successor. This Lease shall not be affected by any such sale,
and Tenant agrees to attorn to the purchaser or assignee. As a material
consideration for entering into this Lease, Landlord agrees not to sell or
convey the Premises or assign Landlord's interest in this Lease before
Tenant takes possession of the Premises.
23. RIGHT OF LANDLORD TO PERFORM.
All covenants and agreements to be performed by Tenant under any of the
terms of this Lease shall be performed by Tenant at Tenant's sole cost and
expense and, without any abatement of rent, except as otherwise provided
in this Lease. If Tenant shall fail to pay any sum of money, other than
Rent or Additional Rent, required to be paid by it hereunder or shall fail
to perform any other act on its part to be performed hereunder, and such
failure shall continue after expiration of the notice period required by
the Lease, if any, Landlord may, but shall not be obligated to do, and
without waiving or releasing Tenant from any obligations of Tenant, to
make any such payment or perform any such act on Tenant's part to be made
or performed as in this Lease provided.
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All sums so paid by Landlord and all necessary incidental costs (together
with interest thereon at the rate of twelve percent (12%) per annum or
four percent (4%) above the prime rate of US Bank per annum, whichever is
more, from the date of such payment by Landlord, and shall be payable as
Additional Rent to Landlord on demand, and Tenant covenants to pay any
such sums. Landlord shall have, in addition to any other right or remedy
of Landlord, the same rights and remedies in the event of nonpayment
thereof by Tenant as in the case of default by Tenant in the payment of
the Rent.
24. SURRENDER OF PREMISES.
(a) At the end of the Term (as it may be extended) or other sooner
termination of this Lease, or upon termination of Tenant's right to
possession, Tenant will peaceably deliver up to Landlord possession of the
Premises, together with all improvements or additions upon or belonging to
same, by whomsoever made, in the same condition as received or first
installed, ordinary wear and tear, damage by fire, earthquake, Act of God,
the elements, other casualty condemnation, or the negligence or willful
misconduct of Landlord, or the gross negligence or willful misconduct of
Landlord's agents or employees excepted. Tenant may, prior to or upon the
termination of this Lease or termination of Tenant's right to possession,
remove any property or items which Tenant is entitled to remove under this
Lease, at Tenant's sole cost, repairing any material damage caused by such
removal. Property not so removed upon the termination of this Lease or
upon termination of Tenant's right to possession shall be deemed abandoned
by Tenant, and title to the same shall thereupon pass to Landlord. Upon
request by Landlord, unless otherwise agreed to in writing by Landlord,
Tenant shall remove, at Tenant's sole cost, any or all permanent
improvements or additions to the Premises installed by or at the expense
of Tenant after Tenant took possession of the Premises or which were
designated by Landlord at the time of construction to be removed by Tenant
upon termination and all movable furniture and equipment belonging to
Tenant which are not Tenant Alterations. Tenant shall repair any material
damage resulting from such removal.
(b) At Landlord's option, the voluntary or other surrender of this Lease
by Tenant, or mutual cancellation thereof, shall not work a merger, and
shall operate as an assignment of any and all subleases or subtenancies.
25. WAIVER.
If either Landlord or Tenant waives the performance of any term, covenant
or condition contained in this Lease, such waiver shall not be deemed to
be a waiver of any subsequent breach of the same or any other term,
covenant or condition contained herein. Furthermore, the acceptance of
Rent by Landlord shall not constitute a waiver of any preceding breach by
Tenant of any term, covenant or condition of this Lease, regardless of
Landlord's knowledge of such preceding breach at the time Landlord
accepted such Rent. Failure by either party to enforce any of the terms,
covenants or conditions of this Lease for any
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length of time shall not be deemed to waive or to decrease the right of
either party to insist thereafter upon strict performance by the other
party. Waiver by either party or any term, covenant or condition
contained in this Lease may only be made by a written document signed by
the party waiving such term, covenant or condition.
26. NOTICES.
All notices, requests and demands which may be or are required to be
given by either party to the other hereunder shall be in writing. All
notices and demands by Landlord to Tenant shall be sent by United States
certified or registered mail, postage prepaid, or by overnight courier
service, addressed to Tenant at the Premises address, or to such other
place as Tenant may from time to time designate in a notice to Landlord,
with a copy to Gorden Tanner, Stoel Rives LLP, 600 University Street,
#3600, Seattle, WA 98101. All notices and demands by Tenant to Landlord
shall be sent by United States certified or registered mail, postage
prepaid, addressed to Landlord at the address specified in the Basic
Lease Information, or to such other firm or to such other place as
Landlord may from time to time designate in a notice to Tenant. All
notices and demands shall be deemed given on the date personally
delivered to the address designated above or on the date mailed as
provided above.
27. OPERATING COSTS.
In addition to Base Rent provided to be paid hereunder, Tenant shall pay,
as Rent, Tenant's Proportionate Share of Basic Operating Costs in the
manner set forth below; provided, however, that if Tenant occupies less
than the entire building, then Tenant's Proportional Shares of Basic
Operating Costs shall be reduced by the percentage of the space in the
building occupied by other tenants calculated using BOMA Standard
measurements of the other tenant's spaces divided by 35,320 square feet.
(a) Definition: For purposes hereof, the terms used in this paragraph
shall have the following meanings:
(1) "Basic Operating Costs" shall mean, all expenses and costs of
every kind and nature to the extent attributable to the Term which
Landlord shall pay or become obligated to pay during the Term because of
or in connection with the ownership and operation of the Premises
(excluding the items in Paragraph 7(b) above) including, but not limited
to, the following:
(i) All wages, salaries and related expenses and benefits of all
on-site and off-site employees of Landlord (excluding officers) engaged
directly in the operation, management, maintenance, engineering and
security of the Premises to the extent attributable to the Premises;
provided, however, that Basic Operating Cost shall not include leasing
commissions paid to any real estate broker, salesperson or agent.
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(ii) Supplies, materials, tools and rental of equipment to the
extent used in the operation, management and maintenance of the Premises.
(iii) Utilities, including water and power, gas, sewer, heating,
lighting, air conditioning and ventilating of the Premises.
(iv) All parking lot maintenance, janitorial and service
agreements for the Premises and the equipment therein, including without
limitation, alarm services, garbage and waste disposal, security service,
water treatment, vermin extermination, landscaping, window cleaning and
elevator maintenance, subject to the obligations of Landlord under
paragraph 9 of this Lease.
(iv) A management fee not to exceed three and one-half percent
(3 1/2%) of the Base Rent derived from the Premises.
(v) Reasonable legal expenses, accounting expenses and the cost
of audits by certified public accountants attributable to operation of
the Premises; provided, however, that legal expenses chargeable as Basic
Operating Cost shall not include the cost of negotiating leases,
collecting rents or evicting other tenants nor shall it include costs
incurred in legal proceedings with or against any other tenant or to
enforce the provisions of any Lease.
(vi) All insurance premiums and costs for insurance on the
Premises obtained by Landlord, including but not limited to, the premiums
and cost of fire, casualty and liability coverage, and rental abatement
and earthquake insurance (if Landlord elects to provide such coverage)
applicable to the Premises and Landlord's personal property used in
connection therewith and any deductible payments incurred by reason of the
insured loss.
(vii) Repairs, replacement and general maintenance of the Premises
due to ordinary wear and tear or to maintain Landlord's building standard
(excluding repairs and general maintenance paid by proceeds of insurance
or by Tenant or other third parties, and the alterations attributable
solely to tenants of the Premises other than Tenant).
(viii) All maintenance costs relating to public and service areas
of the Premises, including (but without limitation) sidewalks,
landscaping, service areas and mechanical rooms.
(ix) All installments of taxes and assessments and governmental
charges, whether federal, state, country or municipal, and whether by
taxing districts or authorities presently taxing the Premises or by
others, whether subsequently created or otherwise, and whether foreseen
or unforeseen, and any other installments of taxes and assessments
attributable to the Premises, whether or not directly paid by Landlord,
including rent taxes, gross receipt taxes, business license taxes and
fees for permits for the Premises, and any other tax or charge levied
wholly or partly in lieu thereof, excepting only
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inheritance or estate taxes and state or federal income taxes computed on
the basis of the net income of the owners of the Premises; provided that
all installments payable by Tenant under this paragraph shall be limited
to those installments attributable to the Term.
(x) Depreciation or amortization (together with reasonable financing
charges) of capital improvements made to the Premises subsequent to the
Commencement Date which will improve the operating efficiency of the
Premises or which may be required to comply with laws, ordinances, rules
or regulations promulgated, adopted or enforced after Commencement Date to
the extent said capital improvements reduce the operating costs or enhance
the life safety systems of the building.
(xi) All reasonable costs of contesting any law applicable to the
Premises or the amount of any taxes affecting the Premises.
Notwithstanding anything to the contrary in this Lease, Basic Operating
Costs shall not include (aa) the initial construction cost of the Premises;
(bb) depreciation on the initial construction of the Premises; (cc) the
cost of providing Tenant Improvements to Tenant or any other tenant; (dd)
debt service or amortization (including, but without limitation, interest,
principal and any impound payments) required to be made on any mortgage or
deed of trust recorded with respect to the Premises; (ee) the cost of
special services, goods or materials provided to any tenant; (ff) any bad
debt, rent loss, or reserves for bad debt or rent loss; (gg) any expense
for which Landlord is compensated through proceeds of insurance except
deductible amounts paid by Landlord; (hh) any fine, interest or penalty
levied against Landlord; (ii) costs of a capital nature including, without
limitation, capital improvements, capital repairs, capital equipment, and
capital tools, as determined under generally accepted accounting principles
consistently applied; (jj) advertising or promotional expenses; (kk)
expense for replacement of any items to the extent covered by a warranty;
(ll) costs attributable to activities Landlord is responsible to pay for
under this Lease; (mm) costs attributable to repair or replacement arising
from construction or design defects, or refinancing or sale of the Premises
or negligence or willful misconduct of Landlord or gross negligence or
willful misconduct of Landlord's agents and invitees; (nn) costs paid to
subsidiaries or affiliates of Landlord that exceed the costs of similar
services from third parties; (oo) other expenses that under generally
accepted accounting principles consistently applied would not be considered
normal maintenance, repair, replacement due to ordinary wear and tear or to
maintain Landlord's building standard, management or operating expenses.
All costs and expenses shall be determined in accordance with generally
accepted accounting principles which shall be consistently applied (with
accruals appropriate to Landlord's business). Basic Operating Costs shall
not include specific costs incurred for the account of, separately billed
to and paid by specific tenants. Landlord shall not recover any item of
cost more than once. Any costs that may be Basic Operating Costs shall be
capitalized and allocated over their useful life in accordance with
generally accepted accounting principles.
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(2) "Estimated Basic Operating Costs" for any particular Fiscal Year
shall mean Landlord's estimate of the Basic Operating Costs for such
Fiscal Year as hereinafter provided. Landlord shall have the right from
time to time to revise its Fiscal Year and interim accounting periods so
long as the periods as so revised are reconciled with prior periods in
accordance with generally accepted accounting principles consistently
applied.
(3) "Basic Operating Cost Adjustment" shall mean the difference
between Basic Operating Costs and Estimated Basic Operating Costs for any
Fiscal Year determined as hereinafter provided.
(b) Payment of Estimated Basic Operating Costs. During the last month of
each Fiscal Year during the Term, or as soon thereafter as practicable,
Landlord shall give Tenant written notice of the Estimated Basic Operating
Costs for such Fiscal Year. The Fiscal Year is as specified in the Basic
Lease Information. The Estimated Basic Operating Costs for the Fiscal Year
in which the Commencement Date falls is set forth in the Basic Lease
Information sheet. Tenant shall pay in advance one twelfth (1/12th) of one
hundred percent (100%) of the Estimated Basic Operating Costs with each
monthly installment of Basic Rent required to be paid pursuant to paragraph
3 above for the Fiscal Year to which the estimate applies on the first day
of each calendar month during such Fiscal Year. Such payment shall be
construed to be Rent for all purposes hereof. If at any time during the
course of a Fiscal Year, Landlord determines that Basic Operating Costs
will materially vary from the then Estimated Basic Operating Costs,
Landlord may, by written notice to Tenant, revise the Estimated Basic
Operating Costs for the balance of such Fiscal Year and Tenant shall pay
Tenant's Proportionate Share of Estimated Basic Operating Costs as so
revised for the balance of the then current Fiscal Year on the first day
of each calendar month thereafter. Such revised installment amounts are
Rent for all purposes hereof. Failure to revise the amount paid shall not
diminish Landlord's right to collect all Basic Operating Costs from Tenant
as Additional Rent.
(c) Computation of Basic Operating Costs Adjustment. Within ninety (90)
days after the end of each Fiscal Year, or as soon after the end of the
Fiscal Year as practicable, Landlord shall deliver to Tenant a statement
of Basic Operating Costs for the Fiscal Year just ended, accompanied by a
computation of the Basic Operating Costs Adjustment. If such statement
shows that Tenant's payments of Estimated Basic Operating Costs is less
than Tenant's Proportionate Share of Basic Operating Costs, then Tenant
shall pay the difference within thirty (30) days after receipt of such
statement, such payment to constitute Additional Rent hereunder. If such
statement shows that Tenant's payments of Estimated Basic Operating Costs
exceed Tenant's Proportional Share of Basic Operating Costs, then
(provided that Tenant is not in default under this Lease) Landlord shall
so notify Tenant and reimburse Tenant for the overpayment within thirty
(30) days of notification to Tenant of the overpayment. If this Lease has
been terminated or the Term hereof has expired prior to the date of such
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statement, then the Basic Operating Costs Adjustment shall be paid by the
appropriate party within twenty (20) days after the date of delivery of the
statement.
(d) Net Lease. This shall be a net Lease and Base Rent shall be paid to
Landlord net of all costs and expenses of repairing, operating and
maintaining the Premises. The provisions for payment of Basic Operating
Costs by means of periodic payments of Tenant's Proportionate Share of
Estimated Basic Operating Costs and the Basic Operating Costs Adjustment
are intended to pass on to Tenant and reimburse Landlord for the costs and
expenses of the nature described in Paragraph 27(a)(1) above incurred in
connection with ownership and operation of the Premises now and in
subsequent years as may reasonably be determined by Landlord to be
necessary to the Premises.
(e) Tenant Audit. Tenant shall have the right, at Tenant's expense and upon
not less than seven (7) days prior written notice to Landlord, to review at
reasonable times Landlord's books and records for any Fiscal Year, or
portion of which that falls within the Term for the purposes of verifying
Landlord's determination and calculation of Basic Operating Costs and Basic
Operating Costs Adjustment. In the event that Tenant shall dispute the
amount set forth in any statement provided by Landlord under paragraph
27(c) above, Tenant shall have the right, not later than sixty (60) days
following the receipt of such statement to cause Landlord's books and
records with respect to such Fiscal Year to be audited by certified public
accountants selected by Tenant subject to Landlord's reasonable right of
approval as to selection of the accountants and upon condition that Tenant
shall first deposit with Landlord the full amount in dispute. The Basic
Operating Costs Adjustment shall be appropriately adjusted on the basis of
such audit. If such audit discloses a liability for a refund or credit by
Landlord to Tenant in excess of ten percent (10%) of Tenant's Proportionate
Share of Basic Operating Costs Adjustment previously reported, the cost of
such audit shall be borne by Landlord. Otherwise the cost of such audit
shall be paid by Tenant. If Tenant shall not request an audit in accordance
with the provisions of this subparagraph 27(e) within sixty (60) days of
receipt of Landlord's statement provided pursuant to paragraph 27(c), such
statement shall be final and binding for all purposes hereof. Any
discrepancy revealed by an audit under this subparagraph shall be promptly
paid by the party owing the money based on the results. Amounts not paid
upon demand shall bear interest at the rate of twelve percent (12%) per
annum or four percent (4%) above the prime rate of US Bank per annum,
whichever is more, from five (5) days after the date of the demand until
paid in full.
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28. TAXES PAYABLE BY TENANT.
Landlord shall pay and Tenant shall reimburse Landlord for any and all
installments of taxes levied or assessed and which become payable by
Landlord (or Tenant) during the term of this Lease (excluding, however,
state and federal personal or corporate income taxes measured by the income
of Landlord from all sources, capital stock taxes, and estate and
inheritance taxes and taxes levied on Tenant's personal property), whether
or not now customary or within the contemplation of the parties hereto,
which are based upon, measured by or otherwise calculated with respect to:
(a) the gross or net payable under this Lease, including, without
limitation, any gross receipts tax levied by any taxing authority, or any
other gross income tax or excise tax levied by any taxing authority with
respect to the receipt of the rental hereunder, (b) the value of Tenant's
equipment, furniture, fixtures or other personal property located in the
Premises; (c) the possession, lease, operation, management, maintenance,
alteration, repair, use or occupancy by Tenant of the Premises or any
portion thereof; (d) the value of any leasehold improvements, alterations
or additions made in or to the Premises, regardless of whether title to
such improvements, alterations or additions shall be in Tenant or Landlord;
or (e) this transaction or any document to which Tenant is a party creating
or transferring an interest or an estate in the Premises. All such taxes
shall be estimated, collected and paid in the same manner as Basic
Operating Costs.
In the event that it shall not be lawful for Tenant to so reimburse
Landlord, the Rent payable to Landlord under this Lease shall be revised to
provide Landlord with the same net Rent after imposition of any such tax
upon Landlord as would have been payable to Landlord prior to the
imposition of any such tax. All taxes payable by Tenant under this
paragraph shall be deemed to be and shall be paid as Additional Rent.
Tenant shall pay directly to the taxing authority before any such taxes
become delinquent all taxes levied on Tenant's income or personal property
and all other taxes directly related to Tenant's assets and business
operations; provided Tenant may contest any such tax in good faith without
violating this provision.
29. SUCCESSORS AND ASSIGNS.
Subject to the provisions of Paragraph 9 hereof, the terms, covenants and
conditions contained herein shall be binding upon and inure to the benefit
of the heirs, successors, executors, administrators and assigns of the
parties hereto.
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30. ATTORNEY'S FEES.
In the event that it is necessary for either party to retain an attorney to
enforce or interpret the terms of the Lease, the prevailing party shall be
entitled to recover, in addition to damages proven, all reasonable attorney
fees and costs incurred in enforcing this Lease, whether said fees and
costs are incurred in negotiation, mediation, arbitration, litigation,
appeal, bankruptcy, pre- or post-judgment collection, declaratory action,
or otherwise. In the event of litigation, the prevailing party shall be
determined by a court of competent jurisdiction.
31. SECURITY DEPOSIT.
(a) Upon execution of this Lease, Tenant will pay Landlord a Security
Deposit for the faithful performance of all terms, covenants and conditions
of this Lease. The sum of said deposit is specified in the Basic Lease
Information. Tenant agrees that Landlord may apply said Security Deposit to
remedy any failure by Tenant to repair or maintain the Premises or to
perform any other terms, covenants or conditions contained herein. If
Tenant has kept and performed all terms, covenants and conditions of this
Lease during the term hereof, Landlord will, on the termination hereof
promptly return said sum to Tenant or the last permitted assignee of
Tenant's interest hereunder at the expiration of the Lease Term or any
extended Lease Term. Should Landlord use any portion of said sum to cure
any default by Tenant hereunder, Tenant shall forthwith replenish said sum
to such original amount. Landlord shall not be required to keep any
Security Deposit separate from its general funds, and Tenant shall not be
entitled to interest on any such deposit. Upon the occurrence of any events
of default described in Paragraph 19 of this Lease. After the expiration of
any applicable cure period without cure having been accomplished, said
Security Deposit shall become the property of Landlord. Landlord may
increase the amount of the deposit each time Tenant exercises its option to
renew so that Landlord always has an amount equal to the last month's Base
Rent as a Security Deposit.
(b) Tenant hereby agrees not to look to the mortgagee, as mortgagee,
mortgagee in possession, or successor in title to the property, for
accountability for any Security Deposit required by the Landlord hereunder,
unless said sums have actually been received by such mortgagee as security
for the Tenant's performance of this Lease.
32. SIGNAGE.
Subject to Landlord's prior approval, which shall not be unreasonably
withheld or delayed, Tenant shall have the right to install signage on or
in the Premises at its own cost. The right to install signage on or in the
Premises shall be exclusive to the Tenant at all times during which Tenant
leases more than ninety percent (90%) of the Premises except for
identification and location signs for the other Tenants on the building
directory and office doors or walls. Such signage shall be in accordance
with all applicable codes, rules and regulations.
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Tenant shall provide to Landlord detailed plans for the exterior signage,
including colors, scale, placement, and all other elements related to the
signage, prior to submitting the same to the municipality for approval.
Tenant shall be responsible for acquiring and paying for all municipal
approvals and permits. Tenant shall pay all costs incurred to obtain
Landlord's approval including review and/or redesign by Landlord's
architect or other agents. At the termination of the Lease, Tenant shall
pay all costs for removing all signs and restoring the Premises to their
condition at the time the sign was installed, reasonable wear and tear,
damage from casualty or condemnation or Landlord's negligence or Landlord's
employees and agents' gross negligence excepted.
33. CORPORATE AUTHORITY.
Each of the persons executing this Lease on behalf of Landlord or Tenant
does hereby covenant and warrant pertaining to the entity for whom they
sign that it is a duly authorized and existing corporation, that the
corporation has and is qualified to do business in Washington, that the
corporation has full right and authority to enter into this Lease, and that
each and all of the persons signing on behalf of the corporation are
authorized to do so. Upon a party's request, the other party shall provide
evidence reasonably satisfactory to the requesting party confirming the
foregoing covenants and warranties.
34. LEASE EFFECTIVE DATE.
Submission of this instrument for examination or signature by Tenant does
not constitute a reservation of or option for Lease, and it is not
effective as a Lease or otherwise until execution and delivery by both
Landlord and Tenant.
35. BROKERAGE FEES.
Tenant hereby represents and warrants that it has not used or dealt with
any other broker, agent or other person in connection with this
transaction, except Colliers MacAuley Nichols International, and that
Tenant owes no brokerage fees or commission related to this Lease. Tenant
agrees to defend, indemnify and hold Landlord harmless from and against any
claims or liens filed by any other broker, agent, or other person claiming
a commission or other form of compensation by virtue of having dealt with
Tenant with regard to this leasing transaction. Landlord shall pay
commissions due to Colliers MacAuley Nichols International and Leibsohn and
Company for this Lease pursuant to the Listing Agreement with Leibsohn and
Company. Landlord shall have no obligation to pay commissions to any agent
upon Tenant's exercise of any of its options to extend the term pursuant to
this Lease or if Tenant should enter into a Lease for subsequent terms.
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36. FORCE MAJEURE.
Whenever a period of time is herein prescribed for action to be taken by
either party, the party required to act 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 strikes, riots, Acts of God, shortages of labor
or materials, war, governmental laws, regulations or restrictions or any
other causes of any kind whatsoever which are beyond the reasonable
control of the party required to act. The Tenant's rights of self-help in
this Lease are available during periods of force majeure delay or
interruption so long as required notice is given.
37. CHANGE IN BUILDING NAME.
The name of the Building will be INTERLINQ PLAZA upon the execution of
this Lease for as long as Tenant leases the building, subject to Paragraph
38(b)(i) below.
38. CERTAIN RIGHTS RESERVED BY LANDLORD
Landlord shall have the following rights, exercisable without notice and
without liability to Tenant, for damage or injury to property, persons or
business and without effecting an eviction, constructive or actual, or
disturbance of Tenant's use or possession or giving rise to any claim for
setoff or abatement of rent if any other tenant occupies the building:
(a) Landlord may, at its option, decorate and make repairs, alterations,
additions, changes or improvements, whether structural or otherwise, in
and about the public areas and any subleased or assigned portions of the
Premises not occupied by Tenant or subject to repossession by Tenant under
paragraph 9(c), ("Unoccupied Areas"), or any part thereof, and for such
purposes, upon reasonable notice to Tenant, may enter upon the public
areas or Unoccupied Areas of the Premises. During the continuance of any
such work, Landlord may temporarily close doors or entryways in the public
or unoccupied areas of the building, interrupt or temporarily suspend
non-essential building services and facilities all without abatement of
rent, except as otherwise provided herein, and without affecting any of
Tenant's obligations hereunder, so long as the public areas of the
Premises are reasonably accessible and reasonably tenantable.
(b) If Tenant subleases or assigns any portion of the Premises or if
another tenant enters into occupancy of the Premises, Landlord may, upon
reasonable notice to Tenant, (i) change the name by which the Premises is
designated if Tenant occupies less than fifty one percent (51%) of the
Premises; (ii) grant to anyone the exclusive right to conduct any business
or render any service in or to the Unoccupied Areas of the Premises,
provided such exclusive right shall not operate to exclude Tenant from the
use expressly permitted herein; (iii) have access for Landlord and other
tenants of the Premises to any mail chutes located on the Premises
according to the rules of the United
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States Postal Service; (iv) take all such reasonable measures as Landlord
may deem advisable for the security of the Project and its occupants. Said
actions may be taken under such reasonable regulations as Landlord may
prescribe from time to time generally applied to all Tenants.
39. PERSONAL LIABILITY.
The liability of Landlord to Tenant for any default by Landlord under the
terms of this Lease shall be limited to the interest of Landlord in the
Premises, and Landlord shall not be personally liable for any deficiency.
This clause shall not be deemed to limit or deny any remedies which Tenant
may have in the event of default by Landlord hereunder which do not involve
the personal liability of Landlord. No personal liability is assumed by,
nor shall at any time be asserted or enforceable against Landlord or its
principals on account of the Lease or on account of any covenant or
agreement of Landlord contained herein. Tenant's sole and exclusive remedy
shall be against Landlord's interest in the Premises and the land on which
it is located. No principal of Landlord shall be served or named as a party
in any suit or shall be required to answer or otherwise plead to any
service of or process, and no judgment shall be entered against any
principal of Landlord. Any judgment entered against any principal of
Landlord may be vacated and set aside at any time nunc pro tunc.
40. QUIET ENJOYMENT.
Provided Tenant observes its obligations under this Lease, Tenant shall
have peaceable and quiet enjoyment of the Premises throughout the Term,
and Landlord shall not act in any manner which would interfere with or
disrupt Tenant's business or frustrate Tenant's business purposes at the
Premises.
41. MISCELLANEOUS.
(a) The paragraph headings herein are for convenience of reference and
shall in no way define, increase, limit or describe the scope or intent of
any provision of this Lease. The term "Landlord" in these presents shall
include the Landlord, its successors, and assigns. The term "Tenant" or any
pronoun used in place thereof shall indicate and include the masculine or
feminine, the singular or plural number, individuals, firms or
corporations, and their and each of their respective successors, executors,
administrators, and permitted assigns, according to the context hereof.
(b) Time is of the essence of this Lease and all its provisions. This
Lease shall in all respects be governed by the laws of the State of
Washington. This Lease, together with its exhibits, contains all the
agreements of the parties hereto and supersedes any previous negotiations.
The terms of this Lease supersede any representations made by the Landlord
or understandings made between the parties other than those set forth in
this Lease and its exhibits. This Lease may not be modified except by a
written instrument by the parties hereto.
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(c) If for any reason whatsoever any of the provisions hereof shall be
unenforceable or ineffective, all of the other provisions shall be and
remain in full force and effect.
42. OPTION TO RENEW.
Tenant shall have two (2) consecutive options to extend the Term for an
additional five (5) years each. Tenant must give Notice of its intent to
exercise an option to Landlord not less than nine (9) months, nor more
than one (1) year, prior to expiration of the then existing Term. The
Lease shall continue in full force and effect during the Term (as so
extended), except the Base Rent will be adjusted for each five year
extension of the Term and Landlord may increase the amount of the Security
Deposit as provided in paragraph 31 so that the Security Deposit always
equals the last month's Base Rent for the Term.
Commencing no later than twenty (20) days after Tenant's Notice of intent
to exercise an option to extend, the parties shall attempt to agree upon
the amount of the Base Rent for the Premises for the applicable extension
of the Term. The Base Rent for the extension of the Term shall be equal to
ninety-five percent (95%) of the current market rental rates for
comparable space in comparable Class A buildings in comparable locations
in Bellevue, Redmond, Kirkland and Mercer Island. If the parties cannot
agree on the Base Rent for the extension of the Term within sixty (60)
days of the date Landlord receives Tenant's Notice of intent to exercise
the option to extend, then, at the election of either party, the Base Rent
for the extension of the Term shall be established by an MAI appraiser
jointly selected by the parties. The party who wishes to have the Base
Rent determined for the extended term must so notify the other in writing
and designate an MAI appraiser. Said designation must be received by the
other party within thirty (30) days of Tenant's notice of exercise of its
option to extend, or Tenant's option will automatically terminate. If the
parties are unable to agree upon the selection of such an appraiser, then
they shall each select an MAI appraiser and the two so designated shall
select a third. The Base Rent for the extension of the Term determined by
the selected MAI appraiser or any two of the three MAI appraisers so
chosen shall be binding on the parties and may not be appealed. If either
party fails to notify the other of its appraiser within thirty (30) days
after written request to do so, the MAI appraiser selected by the other
party shall make the determination of the Base Rent. Tenant's right to
exercise each option to extend the Term is contingent upon Tenant's then
being current in its payment of Rent and all other amounts due under this
Lease, and otherwise being in compliance with all terms of the Lease
(subject to any permitted cure periods), at the time Tenant gives its
Notice of intent to exercise an option and on the first date of the newly
extended Term. At the time that Landlord notifies Tenant of the proposed
Base Rent for each extension of the Term, Landlord shall also notify
Tenant of the cost of the covered parking stalls during the extension of
the Term, and any dispute regarding the proposed parking fees shall be
resolved in the same manner used to resolve a dispute over Base Rent for
the extension
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of the Term. The right to extend the Term shall not be affected by Tenant's
sublease or assignment of any party of the Premises if (1) Landlord's so
agreed in writing when it consented to such sublease or assignment, or
(2) the assignment was permitted without Landlord's consent under
Paragraph 9(a), or (3) the sublease ends and Tenant retakes the Premises
prior to the end of the then current Term and Tenant is not in default at
the end of the then current Term. Notwithstanding the foregoing, if Tenant
has elected to extend the Term, all the terms of such extension have been
agreed by Landlord and Tenant and set forth in a fully executed written
extension of the Lease, then Tenant may enter a sublease under the terms
of Paragraph 9 that commences prior to the end of the then current term
and expires before the end of the newly extended Term without the loss of
its rights to renew the Term as provided herein and in the written
extension.
43. USE OF ROOF AND BUILDING STORAGE.
Tenant may not use the roof and building storage areas without prior
written permission of Landlord which Landlord may refuse or condition.
Tenant shall be allowed to install a satellite dish on the roof. If Tenant
receives permission to use the roof, roof use shall be restricted to
non-commercial telecommunications and other similar uses. Landlord will
not install or allow others to install commercial telecommunications
equipment on the roof. Any alterations of the roof or building storage
areas shall be in accordance with the provisions of this Lease and
requires Landlord's prior written approval. Tenant shall not enter onto
the roof unless accompanied by an employee or agent of Landlord.
44. DEFINITION OF LANDLORD'S NEGLIGENCE.
"Landlord's negligence and willful misconduct" refers to the negligence of
Pine Forest Co.'s officers. The other employees of Pine Forest Co. and its
agents are held to the standard of gross negligence. Nothing herein shall
be construed to make any individuals personally liable.
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IN WITNESS WHEREOF, the parties hereto have executed this Lease the day and year
first above written.
LANDLORD: TENANT:
PINE FOREST CO., a INTERLINQ SOFTWARE CORPORATION,
Washington corporation a Washington corporation
By: /s/ F. H. BURNSTEAD By: /s/ STEVE YOUNT
------------------------------ ------------------------------
F. H. Burnstead, President Steve Yount, Vice President,
Finance
Date: 4-27-98 Date: 4-23-98
---------------------------- ----------------------------
AGENTS: We have read and acknowledge paragraph 35.
TRAMMEL CROW COLLIERS McAULEY NICHOLS INTERNATIONAL
By: /s/ JOSEPH A. BALDWIN By: /s/ GEOFF BOGRON
------------------------------ ------------------------------
Joseph A. Baldwin, Agent Geoff Bogron, Agent
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
THIS IS TO CERTIFY that on this 27 day of April, 1998, before me, a Notary
public in and for the State of Washington, duly commissioned and sworn, came
Frederick H. Burnstead, personally known or having presented satisfactory
evidence to be the President of Pine Forest Co., the corporation that executed
the foregoing instrument, and acknowledged the said instrument to be the free
and voluntary act and deed of said corporation for the uses and purposes
therein mentioned, and on oath stated that he is authorized to execute the said
instrument on behalf of said corporation.
WITNESS MY HAND and official seal the day and year in this certificate
first above written.
/s/ DIANNA GOINES
Print Name: Dianna Goines
Notary Public in and for the
[SEAL] State of Washington, residing at
Redmond
Expiration Date: 8-25-99
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STATE OF WA )
) ss.
COUNTY OF KING )
THIS IS TO CERTIFY that on this 23rd day of April, 1998, before me, a
Notary public in and for the State of Washington, duly commissioned and sworn,
came Steve Yount, personally known or having presented satisfactory evidence to
be the Vice President, Finance of INTERLINQ Software Corporation, the
corporation that executed the foregoing instrument, and acknowledged the said
instrument to be the free and voluntary act and deed of said corporation for
the uses and purposes therein mentioned, and on oath stated that he is
authorized to execute the said instrument on behalf of said corporation.
WITNESS MY HAND and official seal the day and year in this certificate
first above written.
/s/ LOUIS KOVITZ, JR.
Print Name: Louis Kovitz, Jr.
Notary Public in and for the
State of Washington, residing at
Bellevue
Expiration Date: 1-29-99
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EXHIBIT "A"
LEGAL DESCRIPTION
Lot 2, Short Plat Number 81-20, as recorded under King County Recording Number
8208239014, being a correction of King County Recording Number 8109169004,
being a portion of Lots 7 and 8, Block 70, Burke and Farrar's Kirkland Addition
to the City of Seattle, Division No. 23, according to the plat thereof recorded
in Volume 21 of Plats, page 46, in King County, Washington;
EXCEPT that portion thereof condemned in King County Superior Court Cause
Number 618532 for Northrup Interchange (SR 520);
ALSO EXCEPT that portion conveyed to the State of Washington by Deed recorded
under Recording Number 6595483.
Situated in the county of King, state of Washington.
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EXHIBIT "B"
WORK LETTER AGREEMENT
1. TENANT IMPROVEMENTS. Landlord shall construct Tenant Improvements on
the Premises pursuant to Tenant Improvements Construction Documents and in
accordance with the Tenant Improvements Construction Contract. The Tenant
Improvements Construction Documents shall be prepared by or at the direction of
Landlord based on the Tenant Improvements Schematic Plans in a form that is
mutually acceptable to Tenant and Landlord, and shall be completed and approved
in writing by both Landlord and Tenant no later than May 31, 1998. The Tenant
Improvements Schematic Plans shall be prepared by or at the direction of Tenant
in a form that is mutually acceptable to Tenant and Landlord and shall be
completed and approved in writing by both Landlord and Tenant no later than
April 30, 1998. Landlord shall obtain all necessary permits for construction of
the Tenant Improvements.
2. BUILDING SHELL. Landlord shall construct the Building Shell on the
Premises pursuant to the Building Shell Construction Documents and in accordance
with the Building Shell Construction Contract.
3. COSTS OF TENANT IMPROVEMENTS. Landlord's Maximum Contribution shall be
sued only to pay Tenant Improvements Costs which include the cost of preparing
the Tenant Improvement Documents and other design fees and costs, all permitting
and inspection fees and costs related to the Tenant Improvements, all costs of
construction, labor and materials, contractor's profit and overhead for the
Tenant Improvements, taxes, bonds and all other fees and costs incurred in
constructing the Tenant Improvements.
4. DETERMINATION OF THE COST OF CONSTRUCTION. Within thirty (30) days
after approval of the Tenant Improvements Schematic Plans by Landlord and
Tenant, Landlord shall notify Tenant of the Projected Tenant Improvements Costs
pursuant to the Tenant Improvements Schematic Plans under the Tenant
Improvements Construction Contract. If the Projected Tenant Improvements Costs
exceed the Landlord's Maximum Contribution, of Seven Hundred Thousand Dollars
($700,000) then Tenant may (1) request changes to the Tenant Improvements
Schematic Plans to bring the Projected Tenant Improvements Costs below the
Landlord's Maximum Contribution, (2) tender the difference between the Projected
Tenant Improvements Costs and the Landlord's Maximum Contribution to the
Landlord, or (3) request that the Landlord advance up to the maximum amount of
Two Hundred Thousand Dollars ($200,000) ("Landlord Advance") to Tenant to
complete the Tenant Improvements, or any combination of the three, at Tenant's
election. Tenant shall be responsible to pay Landlord any Excess Tenant
Improvements Costs as described in Paragraph 13 below.
5. REPAYMENT OF THE LANDLORD ADVANCE. If Tenant requests a Landlord
Advance to pay a portion of the Tenant Improvements Costs, then the amount
advanced shall bear interest at the rate of twelve percent (12%) per annum. It
shall be amortized over the Initial Term of the Lease and shall be paid as
Additional Rent in monthly installments in advance, without notice, commencing
with the first month Rent is due under the Lease. Landlord shall
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have the same rights to enforce the payment of the Landlord Advance as it does
to enforce payment of all Rent and Additional Rent due under the Lease. Tenant
shall sign such Notes, Guaranties, Amendment to the Lease, and other documents
Landlord deems reasonably necessary in connection with the Landlord Advance.
Landlord has no obligation to commence construction of the Tenant Improvements
until Landlord has received the difference between the Tenant Improvements Costs
and Landlord's Maximum Contribution or Tenant has executed those documents
Landlord required prior to making any Landlord Advance.
6. CONTRACTS. Landlord shall contract with the appropriate members of the
Project Team (other than Tenant's Representative) for services necessary to
construct the Building Shell and Tenant Improvements pursuant to the Tenant
Improvement Plans. The final Tenant Improvements Construction Contract (with
dollar amounts) shall be provided to Tenant and must be approved in writing by
Tenant within seven (7) days of receipt by Tenant and prior to commencement of
construction of the Tenant Improvements or effectiveness of such contract.
Landlord shall also provide Tenant with copies of Building Shell Construction
Documents with costs expunged so Tenant can review which items are allocated to
Tenant Improvement Costs and which items are allocated to the Building Shell.
7. DETERMINATION OF TENANT IMPROVEMENTS SUBCONTRACTORS. Landlord and
Tenant have agreed that General Contractor shall serve as contractor for the
Tenant Improvements pursuant to the Tenant Improvements Construction Contract
and have further agreed that the Mechanical Subcontractor and the Electrical
Subcontractor shall provide those services for the Tenant Improvements. For
every other subcontractor for the Tenant Improvements, General Contractor shall
obtain competitive bids which bids shall be available for Tenant's review and
comment if Tenant so requests. After receipt of such bids, Landlord and Tenant
shall each review and consult with each other regarding the bids whereupon the
subcontractors shall be selected by Landlord and General Contractor. Bids will
distinguish between Building Shell and Tenant Improvement Work. Approval of
Tenant's Improvement Construction Contract by Tenant shall be deemed approved of
the subcontractor competitive bids used in preparing the Tenant Improvements
Construction Contract.
8. RESPONSIBILITY FOR CONSTRUCTION. Landlord shall be responsible for
construction of the Building Shell and Tenant Improvements and shall employ the
Project Team as provided above. Landlord shall make all decisions regarding the
Building Shell. Landlord shall have control over the construction of the Tenant
Improvements in cooperation with the Tenant, and shall have the right to make
all final decisions regarding interpretation of the Tenant Improvements
Construction Documents, after making a good faith attempt to get Tenant's
approval of any element regarding the Tenant Improvement Construction Documents
which is subject to several interpretations, provided, if Tenant is not
available or does not provide an interpretation within twenty four (24) hours,
Landlord's decision is final. In the event Tenant or Landlord wishes to make a
material change in the Tenant Improvement Construction Documents, the party
needing or wishing to make the change shall notify the other in writing of the
change in the form a written change order. The change order shall describe the
change, the cost associated with making the change, and the delay associated
with making the
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change, if any. General Contractor, Landlord and Tenant shall sign all said
change orders. Failure to sign or object in writing to a change order within two
(2) business days of the date the change order is submitted for approval shall
be deemed approval of the change order. If construction will be delayed until
approval of the change order is received, the General Contractor, Landlord,
Tenant or TI Architect may impose a shorter time limit on approval. If the cost
of the change will increase the projected Tenant Improvements Costs, the Tenant
shall pay the cost as a Tenant Improvement Cost pursuant to paragraph 10.
Tenant's approval of the change order or failure to respond within two (2)
business days shall be conclusive evidence that Tenant has approved the change
and any delay or increased cost associated with the change as disclosed in the
change order. If Landlord or its agents determine that changes or modifications
should be made in the space plans, plans or specifications because of
permitting requirements, requests of governmental authorities, design or
construction efficiencies or other reasons, Landlord shall make such changes
which Landlord deems necessary; provided, that if such changes would result in
an increase in the Projected Tenant Improvements Costs, then Tenant or TI
Architect must have approve such change before Tenant is liable to pay such
increase.
9. CONSTRUCTION ADMINISTRATION. Landlord and Tenant shall each proceed
with all necessary due diligence and in good faith to complete such matters as
require their respective action or approval, and both parties agree to promptly
and diligently respond to all questions and concerns raised by architects,
engineers and other consultants. Landlord and Tenant shall each endeavor to
respond to submissions from General Contractor and TI Architect promptly, on
an on-going basis in order that revisions required by Landlord, Tenant or
applicable governmental agencies, can be promptly completed. When Tenant
approval or comment is requested, Tenant or TI Architect shall respond within
two (2) business days of request unless a different response period is provided
in this Agreement or unless both parties agree following a request by either.
If the TI Architect believes that a response to a request of either Landlord or
Tenant is required in less than two (2) business days, then the party requested
shall respond within such shorter time period as prescribed by the TI
Architect. During construction of the Building Shell and Tenant Improvements,
Landlord, Tenant, General Contractor and TI Architect together with other
applicable consultants shall meet every week (unless meeting is cancelled) in
order to review status and scheduling of Tenant Improvements construction and
determine possible changes required, delays anticipated, costs being incurred
and all related matters. At these meetings, change orders will be presented,
discussed and executed (subject to the two-day deadline).
10. TENANT IMPROVEMENT COSTS. Landlord's Maximum Contribution,
together with any Landlord Advance, shall be used only to pay Tenant
Improvements Costs. Landlord agrees that the Landlord's Maximum Contribution
and Landlord Advance, if any, shall not be applied against, nor shall Tenant be
liable for, costs associated wit the construction of the Building Shell,
landscaping, public area restrooms, electrical rooms, phone closets or other
public areas of the Premises except for modifications requested by Tenant such
as installation of cabinets, reception desk and other fixtures located in the
reception area. Tenant shall be responsible for paying any Excess Tenant
Improvements Costs if applicable and shall tender said amounts to
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Landlord within five (5) days of written demand as a condition to Landlord
commencing or continuing with construction of the Tenant Improvements.
11. EARLY ACCESS. Tenant shall be given access to the Premises prior to
installation of the ceiling grid in order to allow Tenant to install telephone
and other communications and media lines and systems, computer cabling, and
related similar matters. The date of Early Access to the Premises and the time
by which installation of Tenant's Work must be completed will be coordinated
with the General Contractor. Tenant and General Contractor shall work together
to ensure that Tenant's Work is completed in an efficient and timely manner and
will not unreasonably impede, interfere with or delay the progress of
construction of the Tenant Improvements. Tenant shall perform such installation
in accordance with all guidelines promulgated by General Contractor and shall
execute and require its contractors and subcontractors to execute such
releases, indemnifications and other documents that General Contractor requires
of its own subcontractors. Any and all costs of installation of such items
shall be at Tenant's sole cost and expense.
Tenant shall also be given Early Access to the Premises for purposes of
storing its furniture and personal property in portions of the Premises in
which Tenant Improvements are substantially complete. General Contractor shall
designate the areas in which such storage can occur to ensure that such storage
will not interfere with the construction of the Tenant Improvements. Tenant
hereby releases Landlord, General Contractor and all of their agents,
employees, licensees, invitees and subcontractors from all liability for loss
or damage to Tenant's personal property stored on the Premises prior to the
Commencement Date. Tenant agrees to maintain insurance on all said property and
hereby assumes full risk of loss or damage to said personal property and hereby
agrees to defend, indemnify and hold Landlord, General Contractor, their
agents, employees, licensees, invitees and subcontractors harmless from any
claims, loss or liability related to said stored personal property.
12. INSPECTION AND PUNCHLIST. During the construction of the Building
Shell and the Tenant Improvements, Tenant, Landlord and General Contractor
shall meet weekly and shall inspect the Premises regularly. In the event Tenant
notices any defects in construction or variations from the Building Shell
Construction Documents or Tenant Improvement Construction Documents, Tenant
shall bring such variations to General Contractor's and Landlord's attention,
and any such discrepancies or defects shall be remedied as soon as practicable.
Upon Substantial Completion of the Tenant Improvements, General Contractor
and/or Landlord shall notify Tenant. Tenant shall, within forty eight (48)
hours of such notification, conduct an inspection of the Premises and prepare
and submit to Landlord an itemized list ("Punchlist") of all matters which must
be installed, completed or corrected so as to bring the Tenant Improvements
into compliance with the Tenant Improvement Construction Documents; provided,
however, that no matter on the Punchlist shall exceed the scope, quality or
quantity of the Tenant Improvements as set forth in the Tenant Improvement
Construction Documents.
Once Tenant has taken occupancy of the Premises, Tenant shall notify
Landlord in writing within sixty (60) days of taking possession of the Premises
of any defects in construction or variations from the Tenant
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Improvement Construction Documents. Landlord shall undertake to repair said
deviations within sixty (60) days of receiving written notice of the need to
correct or repair said item. On the sixty first (61st) day after the Tenant has
taken possession of the Premises, Tenant shall be deemed to have accepted the
Premises "as is," in their then current condition subject only to corrections of
items already noted in writing to Landlord and not yet corrected or items
covered by warranty by third parties.
13. TENANT ADVANCES OF EXCESS TENANT IMPROVEMENTS COSTS. Landlord shall
advance all Tenant Improvements Costs up to the Landlord's Maximum Contribution
(and full Landlord's Advance, if applicable). Thereafter, Landlord's obligation
to continue with the construction is contingent upon Tenant paying 100% of all
Excess Tenant Improvements Costs upon five (5) business days of demand in
advance of construction. Unless Landlord agrees otherwise in writing, Tenant
shall be solely responsible for providing all Tenant's Personal Property for its
business at the Premises and Tenant shall not use any amounts provided by
Landlord for said property.
14. DELAYS. Landlord will use its best reasonable efforts to complete
construction of the Tenant Improvements by November 1, 1998. Landlord and
Tenant agree that the Commencement Date of the Lease, and the time periods for
Substantial Completion may be extended in accordance with change orders as
provided in paragraph 8 or by other causes not ascertainable at this time. If a
delay is caused by Tenant's failure to make required payments for Change
Orders, Excess Tenant Improvement Costs or failure to complete Tenant's Work on
time or other reasons attributable to Tenant and such delays cause an extension
of the Commencement Date beyond November 1, 1998 under this Agreement which has
not been agreed to in a change order, Landlord shall give Tenant written notice
of the expected delay and Commencement Date of the Lease shall be November 1,
1998. The Notice shall set forth the reasons for Landlord's conclusion that the
delay is caused by Tenant. In the event Tenant believes that it is not
responsible for the delay, it shall so notify Landlord of the reason for its
conclusion. If Landlord and Tenant cannot agree, then the matter shall be
submitted to binding arbitration. The Tenant may request arbitration only if
Tenant commences tendering the Rent to Landlord on November 1, 1998 and
continues to tender Rent each month until the dispute is resolved. If the
arbitrator concludes that the delay was not attributable to Tenant, the Tenant
shall be credited for Rent paid until the Premises are Substantially Complete.
Arbitration shall be conducted by an arbitrator mutually agreeable to the
parties. If the parties cannot agree upon an arbitrator, each shall submit the
name of an acceptable arbitrator and those two arbitrators shall select a third
arbitrator who shall conduct the arbitration. The prevailing party shall bear
the cost of the arbitration. The parties must designate an arbitrator who is
familiar and experienced with construction issues. The arbitration shall be
conducted in accordance with the rules and procedures set forth by the American
Arbitration Association for the Construction Industry and shall be
non-appealable and binding on the parties.
14.1. Delays From Force Majeure. In the event Substantial Completion is
delayed beyond November 1, 1998 by Force Majeure (as defined in paragraph 36 of
the Lease), then the Scheduled Substantial Completion Date shall be
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extended by the period of such delay, and the scheduled Commencement Date
of the Lease shall be likewise extended. The inability to obtain all required
permits and approvals for the construction of the Premises shall not be included
in Force Majeure, except to the extent such inability is caused by Tenant Delay.
Landlord nevertheless acknowledges that Substantial Completion prior to
November 1, 1998, is critical to Tenant's business and that Landlord shall, upon
consultation with Tenant, attempt to determine measures which could be taken to
minimize any delay which may occur in the event of delay occurring due to Force
Majeure; provided, however, that neither Landlord nor Tenant shall be obligated
to incur additional costs other than those anticipated hereunder in the event of
delay occurring due to Force Majeure. In the event of Force Majeure occurring,
Landlord shall give Tenant written notice of the same, together with the
estimated period of such Force Majeure. Either Tenant or Landlord may elect, by
written notice to the other, to augment the construction schedule, at such
party's sole cost and expense, in order to avoid the effects of any Force
Majeure. Estimates of such costs of augmentation of the Construction Schedule
shall be provided by General Contractor.
15. TENANT'S DEFAULT. If Tenant fails to make any payments required to be
made hereunder, or otherwise fails to meet its obligations hereunder or under
the Lease, Landlord may (1) discontinue construction of the Tenant Improvements,
(2) terminate the Lease on ten (10) days written notice and/or (3) pursue all
other remedies available in the Lease and in law and equity including recovering
damages for lost profit, lost rent, attorney fees and costs incurred in
enforcing the terms of this Agreement and any and all other remedies available.
16. COOPERATION. Tenant and Landlord shall cooperate in good faith with
each other at all times while Landlord is obtaining the necessary approvals,
permits, plans and specifications and throughout construction. Both parties
shall provide prompt response to any questions or concerns that may arise
relating to the Tenant Improvements and shall respond in a timely and
professional manner to all questions and requests from the other.
17. INCORPORATION. This Work Letter Agreement is a part of and is
incorporated into the Office Lease by and between the parties and is in addition
to those provisions provided in paragraph 2 of said Office Lease relating to
Tenant Improvements.
LANDLORD:
PINE FOREST CO., a Washington corporation
By: /s/ F.H. BURNSTEAD
-----------------------------
F.H. Burnstead, President
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TENANT:
INTERLINQ SOFTWARE CORPORATION, a
Washington corporation
By: /s/ STEVE YOUNT
------------------------------------
Steve Yount, Vice President, Finance
Schedule A - Definitions
Schedule B - Base Building Shell Description
Schedule C - Tenant Improvement Specifications Outline
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Schedule A to Exhibit B Work Letter Agreement
DEFINITIONS
As used in this Work Letter Agreement, the following capitalized terms shall
have the following meanings. All other capitalized terms shall have the
meanings ascribed to them in the Lease:
"Building Shell" means the structure Landlord is constructing which will
be completed by Landlord as set forth in the Building Shell Plans.
"Building Shell Construction Contract" means that certain Construction
Agreement by and between General Contractor and Landlord for actual
construction of the Building Shell.
"Building Shell Construction Documents" means the Building Shell
Construction Contract and the Building Shell Plans. Tenant shall be given only
those Building Shell Construction Documents listed on Schedule B to this
Exhibit B.
"Building Shell Plans" means the plans and specifications for the Building
Shell which have been approved by Landlord and Tenant which are attached as
Schedule B. The Building Shell Plans have been delivered to the TI Architect.
"Excess Tenant Improvement Costs" means Tenant Improvements Costs in
excess of Landlord's Maximum Contribution and Landlord's Advance (if Tenant
elects to take the Landlord's Advance).
"Final Completion" means the Building Shell and Tenant Improvements are
Substantially Complete, all Punch List Items have been completed, and the
Building Shell and Tenant Improvements have been approved by the City of
Bellevue for occupancy, as evidenced by issuance of a final certificate of
occupancy.
"Landlord's Advance" means the amount of up to $200,000 to be advanced by
Landlord to Tenant to pay part of the Tenant Improvements Costs to the extent
requested by Tenant. Landlord Advance is to be reimbursed by Tenant.
"Landlord's Maximum Contribution" means the amount of $700,000 to be paid
by Landlord, without reimbursement by Tenant, as described in paragraph 2.
"Project Team" means the following companies and individuals who will
provide the space planning, architectural, and construction services for the
Tenant Improvements; provided each is referred to individually in this
Agreement by the term opposite their name:
"General Contractor" RAFN Company, Bellevue, WA, subject to
execution of an acceptable contract.
"Representative" means the contact person at Tenant or Landlord named
in the Basic Lease Information, or their successor after notice of
such appointment is given to the other party.
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"TI Architect" Marvin Stein and Associates
"Substantial Completion" means the Tenant Improvements shall have been
completed in accordance with the Tenant Improvement Construction Documents,
which Substantial Completion shall be conclusively deemed to have occurred upon
(i) final inspection by the City of Bellevue and preliminary approval for
occupancy of the Premises as evidenced by issuance of either a temporary or
final certificate of occupancy, and (ii) issuance by TI Architect of a
Certificate of Substantial Completion for the Tenant Improvements, which
Certificate of Substantial Completion shall be in the form of AIA Document G704.
The existence of punch list Items or additional work required for issuance of a
final approval for occupancy by the City of Bellevue shall not be matters which
will delay Substantial Completion from having occurred; but Landlord shall
correct and/or complete such Punch List Items, complete the work necessary to
obtain issuance of a final approval for occupancy and obtain issuance of such
final certificate of occupancy within 90 days thereafter or as soon as
reasonably practical. That there are outstanding Punch List Items and/or work
required for City of Bellevue issuance of a final approval of occupancy shall
not delay the Commencement Date of the Lease under any circumstances provided
that Substantial Completion has occurred; and the Building Shell has been
completed in accordance with the Building Shell Construction Documents and
approved for occupancy by the City of Bellevue as evidenced by issuance of
either a temporary or a final certificate of occupancy.
"Tenant Improvements" means those certain interior improvements to the
Premises, to be constructed by Landlord, all of which are more specifically
defined in the Tenant Improvements Schematic Plans and, ultimately, the Tenant
Improvements Construction Documents.
"Tenant Improvements Construction Contract" means the Construction
Agreement entered into by Landlord and General Contractor for construction of
the Tenant Improvements, which Construction Agreement shall be in the form of
the Cost of the Work Plus a Fee with a Guaranteed Maximum Price (AIA Document
A111) and shall reflect a General Contractor Fee of no more than 6% of the Cost
of the Work (exclusive of applicable taxes).
"Tenant Improvements Construction Documents" means detailed drawings, and
final plans and specifications determined to be mutually acceptable to Landlord
and Tenant providing for the construction of the Tenant Improvements which
shall supersede the Tenant Improvements Schematic Plans. The Tenant
Improvements Construction Documents shall detail the Tenant Improvements, shall
conform to all applicable laws and building codes, and shall be complete in
form and content and contain sufficient information and detail to allow for
competitive bidding or negotiated pricing by contractors and subcontractors
selected and engaged by Landlord or General Contractor. Landlord and Tenant
shall approve the Tenant Improvement Construction Documents in writing.
"Tenant Improvements Costs" means costs of construction of the Tenant
Improvements which shall consist of (i) the Guaranteed Maximum Price set forth
in the Tenant Improvements Construction Contract as the same may be
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adjusted by changes in accordance with the terms of that Contract and this
Agreement plus certain other charges not covered as a part of the Guaranteed
Maximum Price, consisting of (ii) any and all applicable municipal fees and
charges relating to such Tenant Improvements, including without limitation,
building permit and other permit application and issuance fees and costs, all
inspection fees; and (iii) all applicable taxes, including without limitation
retail sales taxes and business and occupation taxes, and (iv) the cost of
preparing the Tenant Improvements Construction Documents and all other design
fees and costs related to the Tenant Improvements including fees and costs for
bonds related to the Tenant Improvements, if any, and all other fees and costs
relating to the design of and construction of the Tenant Improvements.
"Tenant Improvements Schematic Plans" means the preliminary floor plans
and outline specifications that have been prepared by TI Architect and approved
by Landlord and Tenant, as referenced in Schedule C.
"Tenant Inspection" means the inspection(s) undertaken by Tenant or its
Consultant from time to time during the course of construction of the Premises,
provided that inspections shall occur only following reasonable prior notice to
Landlord (which notice may be delivered telephonically or otherwise without
being in writing) and the inspection conducted after Substantial Completion and
prior to occupancy to prepare the written punch list. Landlord and Tenant will
each provide to the other in writing the name of their respective authorized
Representative(s).
"Tenant's Personal Property" means Tenant's office furniture, telephone
lines, computer cabling and movable property place in the Premises by Tenant,
including any trade fixtures and any property installed in or on the Premises
by Tenant for the purposes of conducting Tenant's business, ornament,
decoration or similar related use in the Premises.
"Tenant's Work" means installation of telephone and other communication
and media lines and systems, computer cabling and related matters for which
Tenant shall be given early access under paragraph 10 of Exhibit B.
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Schedule B to Exhibit B Work Letter Agreement
Building Shell Plans and Base Building Shell Description
1. Base Building Shell Description.
2. Changes made to Building Shell and Core up to 4/14/98 which are not shown
on the plans prepared by Lance Mueller and Associates.
3. Floor Plans and Elevations (pages A1 through A5) prepared by Lance Mueller
& Associates dated 5-17-89.
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BASE BUILDING SHELL DESCRIPTION
1. LANDLORD'S WORK:
Landlord shall construct the building in substantial accordance with the plans
of Landlord's architect and shall be completed substantial in accordance with
the architect's design and all requirements necessary to obtain a temporary
Certificate of Occupancy, or its equivalent, for the building shell and core.
Landlord's shall, at its sole cost and expense, complete the building shell and
core, including the following:
a. TYPICAL OFFICE FLOOR
i. Restrooms will be completed and finished by owner, shower
facilities N.I.C.
ii. Stairwells to be painted including walls, metal stair top and
bottom where exposed, handrails, stair supports, doors and jambs,
both sides. Concrete stair treads and landings to be sealed.
b. TYPICAL ELEVATOR CAB AND LOBBY
i. Elevator cab and lobby finishes will be completed by Landlord.
c. AIR CONDITIONING AND HEATING (HVAC):
i. Landlord shall install the vertical distribution of the HVAC and
the horizontal distribution to and including the Variable Air
Volume (VAV) control boxes to the premises including thermostats
and provide for removal of the return air from the plenum.
Permanent installation of thermostats will be a part of the tenant
improvement construction at 5'-0" AFF, unless noted otherwise. All
ductwork from VAV boxes to ceiling diffusers will be part of the
tenant improvement construction phase.
ii. Landlord shall provide 78.75 tons total cooling capacity from six
(6) Lennox rooftop units.
d. ELECTRICAL DISTRIBUTION SYSTEM:
i. Landlord shall provide the house panel and main breakers for the
building. There is a 1,200 amp metered service in the basement
which feeds a 400 amp panel for HVAC and 400 amp panels on each
floor.
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ii. Conduits in exterior walls will be provided for Tenants access.
Extending the wiring for lighting including the junction boxes and
general power from the appropriate panel in the building electrical
room to the point of use will be part of the tenant improvement
construction phase.
e. LIGHTING:
i. Landlord shall provide fluorescent stairway lighting.
ii. Landlord shall provide lighting at utility spaces (mechanical and
electrical rooms)
iii. Landlord shall provide lighting in parking garage.
iv. Landlord shall provide Lobby lighting
v. Landlord shall provide all deep cell parabolic 2x4 lighting fixtures
stacked in the building. Any additional specialized lighting and
hallway corridor lighting will be part of the tenant improvement
package.
f. TELEPHONE SYSTEM:
i. Landlord shall provide means of access to telephone service in the
building telephone room on the floor on which the premises are
located. All other communications or telephone equipment or services
shall be responsibility of the tenant.
g. FIRE AND LIFE SAFETY
i. Landlord shall install fire detection equipment in the building in
accordance with the Uniform Fire Prevention Code, as well as fire
prevention equipment, including sprinklers, in accordance with said
fire prevention code. The building's fire and safety equipment,
including the sprinkler system installed under the Landlord's Work
with the sprinkler heads turned up to protect the structure, shell be
consistent with that that required by code for building shell and core
construction.
ii. All modifications to this equipment or systems resulting from the
Tenant's occupancy and space design shall be considered Tenant
Improvements. The sprinkler heads are turned up to protect the
structure.
h. PLUMBING:
i. Landlord shall furnish all plumbing and fixtures to complete the
lavatory facilities on each floor. Any plumbing service for the
Tenant's premises, including shower facilities, shall be considered
Tenant Improvements.
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i. FINISHES:
The Landlord shall provide the following:
i. Concrete floor slab which shall be flat and level within recognized
industry standards and shall be left broom clean.
ii. Exterior perimeter surfaces which are to receive interior finishes
shall be insulated per code with drywalled screwed on.
iii. Interior partitions around vertical shafts shall be covered with
gypsum wall board and fire taped.
iv. Doors and hardware shall be installed at all vertical shafts used as
exits.
v. Ceiling grid installed.
vi. Ceiling tiles purchased and stacked on floor.
2. TENANT'S WORK
Except as set forth above, all work, improvements, finishes and/or
equipment required by Tenant and/or pursuant to the approved plans for the
Premises shall be considered Tenant Improvements.
All Tenant Improvements shall be completed using building standard
materials and construction methods.
<PAGE> 61
The following items will detail the changes made to the Building Shell and Core
to date that are not shown on the attached plans drawn by Lance Mueller and
Associates.
The foregoing and the attached plans represent the approximate delivered
building shell.
1. There will be only one set of entrance doors at the main entry. Located
per the Tenant Improvement Space Plan drawn by Marvin Stein Associates Inc.
2. Metal framing with a Dryvit exterior finish will be used in lieu of
pre-cast concrete walls.
3. Windows will be 5'6" tall rather than 5'.
4. Roofing material used will be an architectural asphalt composition rather
than concrete tile.
5. Restrooms will be located per the Tenant Improvement Space Plan drawn by
Marvin Stein Associates Inc.
6. Electrical and Fire Sprinkler rooms will be added in the parking garage
and Storage area. Parking will not be affected.
Owner reserves the right to make further modifications to the Building Shell
and Core if required by any regulatory agency.
<PAGE> 62
[MARVIN STEIN ASSOCIATES, INC. LETTERHEAD]
o Schedule C to Exhibit B Work Letter Agreement.
o Tenant Improvements Schematic Plans and Specifications.
o The following documents prepared by Marvin Stein & Associates, Inc. are
attached as Schedule C:
1. Space plan dated March 11, 1998.
2. Tenant Finish Specification for Burnstead Plaza dated revised April
22, 1998.
3. Tenant Improvement Work Letter for INTERLINQ dated revised April 22,
1998.
<PAGE> 63
[DIAGRAM OF SECOND FLOOR PLAN]
<PAGE> 64
[DIAGRAM OF FIRST FLOOR PLAN]
<PAGE> 65
[DIAGRAM OF PARKING LEVEL PLAN]
<PAGE> 66
BURNSTEAD PLAZA
Prepared By:
Marvin Stein & Associates
Job #98010
February 6, 1998
Revised: April 22, 1998
TENANT FINISH SPECIFICATIONS
TABLE OF CONTENTS
This section outlines the standard Tenant Finishes selected as the Building
Standard.
<TABLE>
<S> <C>
PARTITION TYPES 2
DOORS 2
DOOR FRAMES 3
RELITE GLAZING 3
HARDWARE 3
SUSPENDED CEILING SYSTEM 4
MECHANICAL 5
LIGHTING SYSTEM 6
ELECTRICAL AND TELEPHONE OUTLETS 6
SWITCHES 7
EMERGENCY EQUIPMENT 7
FIRE EXTINGUISHER AND CABINET 7
PAINTING 7
B/S WALLCOVERING 8
FLOOR COVERING 8
WINDOW TREATMENT 9
SCHEDULE OF LIMITS - SHELL and CORE 9-10
BUILDING STANDARD DETAILS
</TABLE>
<PAGE> 67
PARTITION TYPES
[] Partition type 1
o Partition terminates below the level of the suspended ceiling tile.
o 3 1/2" or 2 1/2", 25 gauge galvanized steel studs, 24" on center up to
10'-9" high walls. Use 5 1/2" studs for plumbing walls, if required.
3 1/2" or 5 1/2", 25 gauge studs, 16" on center for 10'-9" to 12'-6"
high walls.
o Metal angle trim taped and finished over gypsum wallboard at ceiling.
o Non combustible wood blocking under ceiling grid where runner and grid
intersect. Blocking to be painted flat black.
o 5/8" type "X" gypsum wallboard each side.
o Tape, mud and sand.
o 1/2" black reveal at top of wall.
o Details #1.
[] Partition type 2
o Same as Partition type 1 above.
o 2 1/2" sound insulation blanket is added in ceiling plenum extending
2'0" each side of partition.
o Building Standard Detail #2.
[] Partial Height Partition
o 3'-6" in height above finished floor.
o 3 1/2" or 2 1/2", 25 gauge galvanized steel studs, 24 inches on center
with steel tube bracing at 36" O.C.
o Building Standard Details #10.
[] Column Closures
o Per Shell and Core architectural plans.
[] Window Mullion and Perimeter Wall Partition Termination
o Building Standard Detail #6.
[] Perimeter Walls and Columns
o Per Shell and Core architectural plans and specifications.
o Detail #8.
DOORS
[] Construction
o Premium grade plain sliced oak.
o 5-ply construction with a "particle board" core.
o All doors are pre-machined for mortise lock or passagesets plus four
(4) butts each 4 1/2" x 4 1/2".
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[] Size
o 1-3/4" x 3'0" x 8'6" (nominal length) at all Tenant doors.
o 1'-6" x 8'-6" closet doors, same construction as above, can be
provided.
[] Oak Door Finish Application (or pre-finished)
o First coat: Benite sealer and sand.
o Second coat: sanding and sealer.
o Third coat: lacquer, semigloss.
[] Fire Doors at One-Hour Rated Fire Separations
o Fire doors may have magnetic hold-open devices or electric closures
which tie into adjacent smoke detector.
[] Hollow Metal or Approved Equal
o Flush design doors, 1-3/4" thick, seamless hollow construction.
o Single-acting swing doors, bevel both vertical edges 1/8" in 2".
o Approved manufacturers.
- Allied Steel Products Inc.
- American Steel Products Corp.
- Curries Manufacturing, Inc.
- Overly Manufacturing Company
- Pioneer Metals, Inc.
- Precision Metals, Inc.
- Security Metal Products, Inc.
- Stiles
- Superior Fireproof Door, Inc.
DOOR FRAMES
[] Wood Frames
o Construction
- Wood door frames - or equal.
- Size of frame will receive a 1-3/4" x 3'-0" x 8'6" solid core door
at all Tenant spaces.
- Nominal dimension of frame per B.S. detail.
- Building Standard Details #13, #14, and #15.
o Application
- For use on wall construction of 2-1/2" sheet metal studs with 5/8"
gypsum wall board on each side.
o Finished to match Building Standard sample.
RELITE GLAZING
[] Relite glass: Per Architectural detail 13. Relites shall be 1/4" tempered
glass.
HARDWARE
[] Finish: Locks/Latches US32D (Satin Stainless Steel) as listed, all other
hardware US26D (Dull Chrome).
3
<PAGE> 69
[] Levers
o Lockset: Sargent 8105 x LNA x 32D x Falcon cylinder C987 x 8790-2 (or
equal).
o Latchsets: Sargent 8115 x LNA x 32D (or equal).
o Electric Locksets: Sargent 8171 x LNA x 32D x Falcon cylinder C987 x
8790-2 (or equal).
[] Hinges - two pair per leaf.
o Three Knuckle: McKinney TA2714 x 26D x 4-1/2 x 4-1/2 at doors with
closers (or equal). T714 x 26D x 4-1/2 x 4-1/2 at all other doors (or
equal).
o Electric Hinges: McKinney TA714CC-4W x 26/D x 4-1/2 x 4-1/2 (or
equal).
[] Closers: Sargent EN350/351 or equal, arms as required.
[] Wire Pulls: Closet doors.
o Rockwood: 856 1/2" x 6" CTC x 26D x TB (or equal).
[] Miscellaneous. All hardware to be building standard as specified or equal.
o Wall Stops: H.B. Ives - 407 1/2S32D.
o Floor Stops: H.B. Ives - 436B26D.
o Flush Bolts: H.B. Ives - 458B26D (30" top rod, 12" bottom rod).
o Dust-proof Strikes: H.B. Ives - 489 x 487B26D.
o Silencers: H.B. Ives 21R wood frames, 20R HM frames.
o Overhead Stops: ABH 3300 series - surface, 3000 series concealed.
Type as required per condition.
o Roller Latches (closed doors): BBW 1193 x 26D.
SUSPENDED CEILING SYSTEM
[] Suspension Grid:
o Exposed double-web for heavy duty with 9/16" face and dull white
finish by Donn Corporation.
[] Acoustical Tile:
o Building Standard for tenant areas is 24" x 48" x 5/8".
- Armstrong "Cortega"; regular edge.
- Alternate: Suspension grid to be USG Interiors Centricitee 9/16"
grid in a white
- Finish with USG Interiors Eclipse fineline bevel tile: 24" x 48" x
3/4" thick or approved equal.
- Lobby is 2x2 #2195 (for 9/16" grid)
MECHANICAL
[] Supply Diffusers:
o Titus MCD modular core diffuser, Kreger, or approved equal.
[] Air Return/Exhaust Grills:
o Titus 50F eggcrate grille, Krueger, or approved equal.
o Installed as required by HVAC Engineer.
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<PAGE> 70
[] Sprinklers: The complete sprinkler system will be installed in accordance
with Shell and Core specifications. All modification costs to accommodate
specific Tenant layout will be a part of the Base cost for Tenant
Improvements. Approximate Spacing: One head per 165 square feet of
unimproved area.
o In areas with suspended ceilings; quick response heads semi-recessed
in ceiling with an attached cover plate flush to the ceiling. Central
model GB4-FR Royal Flush concealed; Reliable Model G40R; or approved
equal; cover plate shall be factory painted.
[] Dishwasher: (up-grade)
o High quality Kitchenaide or approved equal.
o Or approved equal.
[] Hot Water Heater:
o Six-gallon HWT for sinks.
- 2KW, 120V, single phase.
o Twenty-gallon HWT for showers.
- 5KW, 277V, single phase.
[] Sink and Faucet:
o Kitchen Sink
- Elkay #PSR-2219-3, stainless steel, 22" x 19-1/2" or equal.
o Provide fiberglass shower enclosures with doors at men's and women's
restrooms on the first floor; float floor per Washington State
Barrier Free Codes.
o Faucet and Basket (Kitchen).
- Delta 101 HDF
- Elkay #LK-35 Basket Strainer
- Or equal.
[] Toilet -- flush valve: (or equal).
o Kohler K-4430-ET: Wall hung, siphon-jet action, white vitreous china
elongated bowl, 1-1/2" top inlet spud.
o Flush valve: exposed chrome plated, diaphragm, escutcheon, integral
screwdriver stop and vacuum breaker; Sloan royal 110-3 YB (or equal).
o Seat: Solid white plastic, open front, without cover, Bemis 1955-Of
(or equal).
o Wall-mounted carrier: Surn ZR-1200 series (or equal).
[] Urinal: (or equal).
o Kohler K-5014-T: Wall hung, siphon jet action, white vitreous china,
integral trap, 1/4" top inlet spud, concealed hanger.
o Flush valve: exposed chrome plated, diaphragm type, escutcheon,
integral screwdriver stop and vacuum breaker; Sloan Royal 180-1-TB.
[] Lavatory: (or equal).
o Kohler 2005: Countertop, 20 x 18 white vitreous china, 4" faucet
centers (or equal).
o Trim: Chrome plated supply fitting, water economy aerator,
single-lever handle, chrome plated 17 gauge brass P-trap and arm
with escutcheon; Kohler K-15199-P faucet, Jameco 629 1-1/4" chrome
plated grid drain.
5
<PAGE> 71
LIGHTING SYSTEM
[] All lights will be installed during the Tenant Construction phase in
accordance with the Tenant Construction Documents, and as required by the
National Electrical Code and the Seattle Energy Code.
[] BS/A2 Recessed parabolic fluorescent lay-in troffer nominally 24" x 48", 2
Lamp Parabolic semi-specular louver with F032T8735 Lamps, electronic
ballast 277-Volt U5G-D24-23222OC-29S-(1)MOE/RS-S777-FO32/735K (or equal).
[] BS-A3 Recessed compact fluorescent downlight, horizontal lamp
configuration. Nominal 7" dia. clear Alzak aperture cone with color-Chek
process and self flange overlap trim. Integral HPF ballast. Unit shall
have a minimum efficiency of greater than 66% (or equal).
o Manufacturer: Prescolite NPR-106 Series; Staff PolyQuad Series or
Infinity PV600-132T-EB-MWT-BH-277.
o Lamp: 3 tube
o Watts: 32
[] BS/A4 Recessed compact fluorescent lensed wallwsh. Nominal 7" dia. clear
Alzak aperture cone with Color-Chek process, self flange overlap trim and
55 later spread lens. Internal two part reflector system. Integral HPF
ballast (or equal).
o Manufacturer: Prescolite NPR-116 Series; Staff PolyQuad Series or
Infinity (or equal).
o Lamp: 3 tube
o Watts: 32
ELECTRICAL & TELEPHONE OUTLETS
[] Building Standard Wall Receptacle:
o Ivory color at standard receptacle.
o Gray Color at designated computer circuit.
o Orange dot on ivory receptacle at dedicated, isolated ground outlet
or circuit.
o Red dot on ivory receptacle at dedicated outlet or circuit.
o Telephone/CRT outlet consist of mud ring with pull wire and conduit
in wall cavity (cabling by Tenant).
[] Building Standard Floor Receptacle -- Pedestal:
o Combination power and communication pedestal.
o Type: Walker tap 1400 Series Poke-Thru or approved equal.
[] Building Standard Timed Duplex Wall Receptacle:
o Required for every coffee service.
o Internatic Time clock #F14H with 14-hour timer or equal.
[] Copy Machine Wall Receptacle:
o 120V or 208V with junction box, dedicated circuit, and breaker.
6
<PAGE> 72
SWITCHES
Types of switches available are single-wall switches with occupancy sensors,
occupancy sensors for general office areas, dimmer switches, and fan switches.
Decora switches are standard.
EMERGENCY EQUIPMENT
[] Exit Signs: Any exit signs required beyond Shell and Core will be a part of
the Tenant Improvement Allowance.
o Double faced.
o Type: Emergi-lite LED edgelite with clear lens and green letters.
Brushed aluminum finish 277 volt (or equal).
[] Emergency Speakers: All emergency speakers will be permanently installed
during Tenant Improvement phase. Approximate Spacing: one per 1,200 square
foot of unimproved area. Designate layout per electrical engineer's design.
o Mounted flush with face of ceiling tile and painted white to match
ceiling tile.
o Minimum requirement: 55 decibels and 10 decibels above ambient noise
levels.
FIRE EXTINGUISHER & CABINET
[] Cabinet: One extinguisher and cabinet is required for every 3,000 square
feet of floor area to be a part of the Tenant Improvement Construction
phase.
o Color: white
o Semi-recessed of minimum projection. Cabinets are 6 1/4" deep.
o JL Industries Ambassador 1012 F10 with ADAC option, Full Glass with
tempered glass (or equal).
[] Fire Extinguisher:
o Multi-Purpose dry chemical type.
o UL rated 3A-40B:C.
o JL Industries cosmic 6E.
PAINTING
[] Drywall
o Flat latex.
- First coat: Precote 95-100 primer, wet film thickness of 3.6 mils.
Tint primer to approximate finish color.
- Second coat: Suede Coat Interior flat latex 27-1000, wet film
thickness of 3.6 mils with stipple roller finish.
o Latex semi-gloss enamel.
- First coat: Precote 95-100 primer, wet film thickness of 3.6 mils.
Tint primer to approximate finish color.
- Second coat: Stryocote Double-Hide 69-1000 latex semi-gloss enamel,
wet film thickness of 3.6 mils with stipple roller finish.
o Latex Enamel.
- First coat: Polyvinyl acetate primer/sealer.
- Second coat: Eggshell latex enamel with stipple roller finish.
7
<PAGE> 73
[] Miscellaneous Ferrous Metal, Hollow Metal and Aluminum:
- First coat: All Metal Gard Primer 28-62 MWF 1.5 mils.
- Second and third coat: Velvalex Alkyd Semi-gloss Enamel 2-series MWF
3 mils. If sprayed:
- Second and third coat: Luxite, Spraycraft Industrial Alkyd Enamel
43-series MWF 1.5 mils.
[] Painted Woodwork and Millwork:
- First coat: Alkyd Enamel Undercoat and Sealer 20-97 MWF 3 mils.
- Second and third coat: 2-series MWF 3 mils or Plati-namel Dri-Fast
Gloss enamel 10-series MWF 1.5 mils.
[] Doors and Woodwork, Stained and Finished: (or prefinished).
- First coat: Penetrating wood stain to match Architect's sample.
- Second coat: Sanding and sealer.
- Third coat: Lacquer, semigloss, or equal.
[] Manufacturer:
o Parker
o Miller
o Preservative
o Benjamin Moore
o Or approved equal
B/S WALL COVERING (up grade)
[] Type: Maharam, Tek-wall 1000,2000,3000,4000,5000 Class A rated wall
covering.
[] Or Equal
FLOOR COVERING
[] Carpet
o All carpet to be furnished by owner, installed by contractor. All
offices and open work areas otherwise specified to be 30 oz. Multi-level
textured loop, Bentley "Outerbanks" series in a color to be selected, or
approved equal. Carpet to be direct glue down (low VOC), application per
Manufacturers suggested installation methods, or approved equal unless
otherwise specified. Reference Workletter for carpet spec for base bid.
[] Ceramic Tile:
o Provide ceramic tile per shell and core specifications for building
restrooms.
[] Rubber Base
o "Roppe" or approved equal, colors to follow.
[] Wood Base (up-grade)
o Provide 4" x 3/4" hardwood base; finish to match doors, per finish plan.
8
<PAGE> 74
WINDOW TREATMENT
[] Provide 1" slat mini-blind, standard color as approved by Developer.
Manufacturer to be Levelor "Riviera Dustguard" 1" inside mounted or
approved equal.
SCHEDULE OF LIMITS - SHELL AND CORE
This schedule of limits will detail the level of finish the Building will
achieve during Shell and Core construction. This level of completion will be the
basis from which all Tenant work will start.
Typical Office Floor
[] Restrooms: Complete and finished by owner, shower facilities N.I.C.
[] Stairwells: All stairwells to be painted including walls, metal stair top
and bottom where exposed, handrails, stair supports, doors and jambs, both
sides. Concrete stair treads and landings to be sealed.
[] Typical Elevator Lobby:
o Core side lobby area GWB walls ready for finish coat and paint.
o Elevator doors and jambs, satin stainless steel.
o Life safety devices temporarily installed (speaker, smoke detectors).
o Smoke doors at elevator lobby installed complete.
[] Partitions: the partitions defining the core will be fire taped on the
Tenant side ready for finish coat and paint.
[] Interior Columns, Exterior Columns at Curtainwall, Sill Wall below
Exterior Windows: All furred GWB will be fire taped, ready for finish coat
and paint.
[] Ceiling System:
o Shell and Core Phase:
- Suspended ceiling tiles supplied by Owner and stacked on floor.
- Grid installed by Owner
[] Mechanical: The Mechanical System will be installed up to and including
the VAV boxes (perimeter and interior) in accordance with Shell and core
Plan which will be coordinated with Tenant Space Plans. Permanent
installation of thermostats will be a part of the Tenant Improvement
Construction at 5'-0" AFF, unless noted otherwise. All ductwork from VAV
boxes to ceiling diffusers will be a part of the Tenant Improvement
Construction phase.
[] Sprinklers: A complete sprinkler system will be installed. Sprinkler heads
will be located in accordance with Shell and Core specifications and
coordinated with Tenant Space Plans. Sprinkler additions and modifications
will be a part of the Tenant Work phase.
9
<PAGE> 75
[] Electrical: Electrical service will be available at one location on all
tower floors. Power and telephone conduits have been installed through the
core. All lighting, power and telephone conduit, conductors, and final
trim will be installed during Tenant work phase.
[] Lighting: The Shell and Core contract includes the following lighting:
o Fluorescent stairway lighting.
o Fluorescent lighting at utility spaces (mechanical and electrical
rooms).
o Fluorescent lighting in parking garage.
o Tenants 2x4 fixture supplied by Owner: Stacked on floor.
Tenant lighting will be installed as part of the Tenant Improvement
Construction phase.
[] Life Safety System:
o Exit signs - exits signs are provided at each fire stairwell typical
on all floors.
o Emergency Speakers - emergency speakers provided at elevator lobbies,
and stairwells. Additional speakers will be installed as part of
Tenant Improvement Construction.
o Smoke detectors - permanently installed in mechanical room,
stairwell, and electrical rooms. Elevator lobby smoke detector is
temporarily installed awaiting Tenant Improvement Construction.
[] Fire Extinguishers: Two per floor supplied at each exit stair.
[] Card Key System by Owner.
10
<PAGE> 76
[MARVIN STEIN ASSOCIATES, INC. LETTERHEAD]
March 2, 1998
Revised: March 11, 1998
Revised: March 16, 1998
Revised: April 22, 1998
TENANT IMPROVEMENT WORKLETTER FOR:
INTERLINQ SOFTWARE
JOB NO.: 98012
The following outline is intended to be used along with the building standard
details and specifications and tenants preliminary space plan dated 3-11-98 as a
guide to establishing the tenants required improvements for the Burnstead Plaza.
Interlinq Software needs opportunity to review and provide input of the design
and materials selection for the following base building areas.
o Main Building Entry Lobby
o Decorative Stair at Lobby
o Elevator Lobbies and Cab
o Restrooms
1. FLOOR COVERING:
1.1 Carpet
o General Carpet: All areas other than those specified core
areas and up-graded areas to receive the equivalent of Bently
"Outbanks" series 30 oz. multi-level textured loop or equal.
Follow manufacturers approved method of installation.
o Or approved equal.
o Inset and border carpets shall be installed in the
conference center (3 rooms) and team or conference rooms
indicated on plan.
1.2 Stone Flooring
o Per main building entry design.
1.3 Resilient Flooring:
o Provide VCT in the following areas. VCT to be Armstrong
Standard Excelon, 12" x 12" x 1/8" thick; color and layouts
with accent insets per final working drawings.
[ ] Lunch Room Approx. 700 sf
[ ] Coffee Bars Approx. 40 sf
1.4 Anti-Static Flooring
[ ] Server room Approx. 150 sf
2. BASE
2.1 Wood Base:
o Provide 4"H x 3/4" hardwood base in main reception
area, and conference center, finish to match doors.
<PAGE> 77
[MARVIN STEIN & ASSOCIATES, INC. LETTERHEAD]
TENANT IMPROVEMENT WORKLETTER FOR:
INTERLINQ SOFTWARE
JOB NO: 98012
Page 2 of 5
3. WALL FINISHES:
3.1 General Paint; Building standard eggshell finish over smooth
(non-textured) walls.
o Provide accent colors for 20 percent of the job in colors and locations
to be determined.
4. WALLS:
4.1 Building Standard per tenants space plan.
o Provide building standard sound partitions at all conference rooms,
lunch room, exercise room and private offices 160 sf or larger.
Partition Type 2.
5. RELITES:
5.1 Provide pricing for providing relites for the project in the following
schemes.
o Provide 3'-0" wide by full ht. adjacent private offices 160 sf and
larger. Frame finish to match door frames. Provide horizontal
mini-blind as part of package price. (Base Bid)
o Provide 3'-0" wide by full ht. adjacent private offices 160 sf and
larger. Glass panels to be "Etchmate" by Milguard in a horizontal
pattern. (Alternate Bid)
o Provide 2 2'-0" x 8'x6" at Server room in hollow metal frames wire
glass. (Base Bid)
o Provide alternate fire lite glass at Server room.
5. OPERABLE WALLS:
6.1 Provide operable folding walls as shown on plans. Manufacturer to be
Moderfold series acousti-seal model 932 series. Panel finish to be
vinyl wallcovering in manufacturers standard color line.
7. CEILINGS: Building Standard
o 2x4 Tegular in open office area.
o 2x2 in lobby area.
8. DOORS, FRAMES AND HARDWARE:
8.1 Doors
o Building standard, finish color to be reviewed and input provided by
Tenant.
8.2 Frames
o Building standard to match doors.
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[MARVIN STEIN & ASSOCIATES, INC. LETTERHEAD]
TENANT IMPROVEMENT WORKLETTER FOR:
INTERLINQ SOFTWARE
JOB NO: 98012
Page 3 of 5
8.3 Hardware
o Building standard.
o Landlord to provide tenant with secured entrance card key system or
approved equal.
o Locksets at the following rooms:
[] All offices 160 sf and larger
[] All storage rooms
[] Server room (upstairs & downstairs) touchpad or building access
system control
[] Entrance door to Human Resources
o Panic hardware at doors indicated on plans. Landlord to provide
sample for tenants review and approval.
o Provide magnetic hold open devices with automatic closers and remote
release buttons on doors indicated on plans.
9. LIGHTING:
9.1 General lighting to be building standard.
9.2 Specialty Lighting
o Building standard recessed incandescent light fixtures in reception
area. 6 each room of conference center.
o Building standard recessed incandescent wallwashers along corridor
wall. Allow for 30 in corridors connecting stairs both floors.
9.3 Switching
o Per code, location per final working drawings.
10. ELECTRICAL/TELEPHONE/DATA
10.1 Provide electrical outlets as required for functional use by tenant
and as indicated on final working drawings. General requirements are
as listed below:
o Private Offices: 80 sf
[] Provide two four-plex outlets on shared separate circuit for
computer use.
o Private Offices: 160 sf and larger
[] Same as 80 sf office above, add one duplex electrical outlet.
o Workstations:
[] Core drill for four-plex outlet on shared separate circuit for
computer use. Provide alternate price for power poles.
o General:
[] Provide general distribution of additional outlets as required
on tenants final plans.
o Special Electrical:
[] Provide special electrical needs as indicated on final working
drawings. Coordinate with tenants designated representative for
server room, UPS requirements before final pricing. Equipment
requiring special electrical needs includes but is not limited
to the following:
<PAGE> 79
[MARVIN STEIN & ASSOCIATES, INC. LETTERHEAD]
TENANT IMPROVEMENT WORKLETTER FOR:
INTERLINQ SOFTWARE
JOB NO: 98012
Page 4 of 5
- Vending machines
- Refrigerators
- Microwave ovens
- Range/Oven
- disposal
- Insta-hot
- Coffee Service
- Flush floor outlets in conference rooms
- Power and battery back-up security and card key
access systems
- Intercom
- AV and special training equipment needs
- Server rooms (upstairs & downstairs)
- Copy/printer/fax machines
o Data and communications schedule
[ ] Coordinate with tenants designated representative
11. MECHANICAL:
11.1 Landlord shall provide an easily accessible manually operated
HVAC bypass switch for access to 24 hour air conditioning within
the tenants space. Switch shall operate on 2 hour timer.
11.2 Special HVAC zones and needs -- Provide separate HVAC zones with
separate exhaust fans for the following areas:
- Conference center
- Lunch Room
- Server/computer room
- Order Processing Area
- Team rooms/Conference Rooms
12. EMERGENCY EQUIPMENT:
12.1 Provide all Exit signs, smoke detectors, emergency speakers,
lighting and strobes as required by code.
13. PLUMBING FIXTURES:
13.1 Building Standard, locations per final working drawings.
14. APPLIANCES:
14.1 Provide high-quality Kitchenaide dishwasher in lunch room.
14.2 Provide Insta-hot at lunch room and coffee bars.
14.3 Provide high-quality oven/range in lunch room.
14.4 Provide 2 each built-in microwave ovens in lunch room.
<PAGE> 80
[MARVIN STEIN ASSOCIATES, INC. LETTERHEAD]
TENANT IMPROVEMENT WORKLETTER FOR:
INTERLINQ SOFTWARE
JOB NO: 98012
Page 5 of 5
15. SPECIALTY ITEMS:
15.1 Provide recessed projection screen in 1 conference room. Manufacturer
to be "Da-Lite" boardroom electrol, 70"x70", #40723 or approved equal.
15.2 Provide custom casework outlined in millwork specifications.
16. WINDOW TREATMENT:
16.1 Landlord to provide 1" mini-blinds or 3 1/2" smooth PVC vertical
blinds at all exterior windows. Standard color as approved by tenant.
16.2 All interior relites to receive mini-blinds.
17. MILLWORK:
Provide all casework/millwork as indicated on final approved space plans.
This includes but is not limited to the following:
17.1 Main reception workstation: Provide a complete built-in reception
desk, lineal footage per plan. Transaction top in stone with
lightstrip at reception side.
Provide for 4 pedestals each with 2 box, 1 file drawer. Work area
counters and pedestals to be plastic laminate faced. Reception front
to be wood panels in a finish to match doors.
17.2 Mail Copy room: Provide lineal footage per plan. Provide plastic
counters; 50 percent of space above to be closed cabinets with the
rest to be open shelving; Provide for 150 built-in mail sots at a
location to be determined above the counter.
17.3 Lunch Room: Provide for 8 lin.ft. of island counter with sink and
dishwasher with closed cabinets below and transaction ledge above
facing conference in a plastic laminate finish. Provide 10 lin.ft. of
counter at wall with cabinets.
17.4 Order Processing: Provide +/- 100 lin.ft. of counter top at stand-up
height; Provide for 3-4-7 island counters with open shelving below.
Provide approximately 60 lin.ft. of 2 high adjustable shelving above
counters.
17.5 Copy Area: (2 required) Provide approximately 8 lin.ft. of counter
each. Closed cabinets below; 2 high open adjustable shelving above in
a plastic laminate finish.
17.6 Coffee Area: (Second floor) Provide approximately 14 lin.ft. of
counter with sink; Provide closed cabinets above and below in a
plastic laminate finish.
18. ADA GUIDELINES:
Entire layout shall conform to Washington State Barrier regulations.
19. DELIVERY STALL:
Owner to provide a delivery stall at owner's cost at the northwest corner
of the site plan.
<PAGE> 81
EXHIBIT "C"
FORM OF TENANT ESTOPPEL CERTIFICATE
Date:________________________, 1998
To: (Lender)
and
To: (Landlord)
Re: Property known as:
Except as set forth below, respecting that certain Lease date April ______,
1998, between PINE FOREST CO., a Washington corporation, as Landlord, and
INTERLINQ Software Corporation, a Washington corporation, as Tenant, Tenant
hereby certifies that it has unconditionally accepted possession of the
Premises described in said Lease, and that said Lease is in full force and
effect and has not been modified, supplemented or amended in any way, and that
the Commencement Date of the Lease is _______________________, 1998, and the
final date of the Initial Term is _______________________, 2005, subject to two
consecutive five year options to renew, unless sooner terminated as therein
provided.
Tenant further certifies that all terms and conditions to be performed by the
Landlord under said Lease have been satisfied to the best of Tenant's knowledge
at the date of this Certificate, and that on this date there are no existing
defenses or offsets of which the Tenant is aware it may have against the full
enforcement of said Lease by Landlord; and that no rent has been paid in
advance (except as provided in said Lease) and that rent has continued to be
paid in accordance with said Lease since the Commencement Date of the Lease.
Tenant is in occupancy of the Premises; and there is ongoing full operation of
Tenant's business at Premises, being conducted by named Tenant.
Tenant further agrees not to look to _____________ ("Lender") as mortgagee,
mortgagee in possession or successor in title to the property, for
accountability for any security deposit required by Landlord under said Lease
unless such sums have actually been received by ("Lender") as cash
security for Tenant's performance of this Lease.
Tenant understands that its Lease may be assigned as collateral security for a
mortgage loan to be granted to Landlord by (Lender) under a Collateral
Assignments of Lease form containing (among others) agreements by and
restrictions on Landlord. Tenant further understands that, without (Lender's)
prior written authorization as Assignee, Landlord will not thereafter modify,
terminate, or accept surrender of the Lease and will not reduce, abate, or
accept pre-payment of any Rent (except as the Lease may otherwise specify). By
accepting this Estoppel Certificate, Lender agrees
57
<PAGE> 82
that as long as Tenant is not in default under this Lease, it will not disturb
Tenant's quiet enjoyment of the Premises and will respect Tenant's rights under
the Lease after a foreclosure, trustee's sale or deed in lieu thereof. Tenant
acknowledges its Landlord's agreements and the restrictions on Landlord's
rights under said assignment and hereby agrees to be bound by said agreements
and restrictions, to the extent such agreements do not reduce Tenant's rights
or enlarge Tenant's obligations under the Lease or otherwise.
Tenant will not assign its leasehold without (Lender's) written consent, which
shall not be unreasonably withheld, conditioned or delayed.
List of Exceptions: _________________________________________
(Tenant:) INTERLINQ SOFTWARE CORPORATION
By: _______________________________________
58
<PAGE> 83
EXHIBIT "D"
RULES AND REGULATIONS
1. Sidewalks, halls, passages, exits, entrances, elevators, escalators and
stairways shall not be obstructed by Tenants or used by them for any
purpose other than for ingress to and egress from their respective
Premises. The halls, passages, exits, entrances, elevators and stairways
are not for the use of the general public and Landlord and Tenant shall in
all cases retain the right to control and prevent access thereto by all
persons whose presence, in the judgment of Landlord or Tenant, shall be
prejudicial to the safety, character, reputation and interests of the
building and its Tenant, provided that nothing herein contained shall be
construed to prevent such access to persons with whom any Tenant normally
deals in the ordinary course of such Tenant's business unless such persons
are engaged in illegal activities.
2. The bulletin board or directory of the building will be provided
exclusively for the display of the name and location of Tenant and any
approved subtenants or assignees only and Landlord reserves the right to
exclude any other names therefrom.
3. No curtains, draperies, shades, or decorations shall be attached to, hung
or placed in, or used in connection with any window or door on any Premises
without the prior written consent of Landlord, which shall not unreasonably
withheld or delayed. In any event with the prior written consent of
Landlord, all such items shall be installed inboard of the window frame at
Tenant's expense. Landlord shall provide installed Levelor mini-blinds
inside the window frames of all exterior windows in the Premises at
Landlord's expense as part of the Building Shell. No articles shall be
placed or kept on the window sills so as to be visible from the exterior of
the building. No articles shall be placed against glass partitions or doors
which might appear unsightly from outside Tenant's Premises.
4. Tenant shall not employ any person or persons for the purpose of cleaning
Premises unless otherwise agreed to by Landlord in writing.
5. Tenant shall see that all doors of its Building are closed and securely
locked and that all areas of the Building are secure. Tenant must observe
strict care and caution that all water faucets or water apparatus within
Tenant's control are entirely shut off before the Tenant or its employees
leave such Premises at the close of business each day, and that all
utilities within Tenant's control shall likewise be carefully shut off, so
as to prevent waste or damage. For any default of this rule, the Tenant
shall make good all injuries sustained by other Tenants of the Building or
Landlord, except to the extent such damage is covered by insurance. On
multiple-tenancy floors, all Tenants shall keep the door or doors to the
building corridors closed at all times except for ingress and egress.
59
<PAGE> 84
6. As more specifically provided in the Tenant's Lease of the Premises,
Tenant shall not waste electricity, water, or air-conditioning and agrees
to cooperate fully with Landlord to assure the most effective operation
of the building's heating and air-conditioning, and shall refrain from
attempting to adjust any controls other than room thermostats installed
for Tenant's use; so long as Landlord responds promptly to requests for
adjustments.
7. Except for the installation of security systems within the Premises by
Tenant providing cardkey access or other restricted access to the
Premises, Tenant shall to alter any lock or access device or install any
additional lock or access device or any bolt on any door of its Premises
except secured areas agreed to by Landlord, without the prior written
consent of Landlord, which shall not be unreasonably withheld or delayed.
Tenant shall in each case furnish Landlord with a key or cardkey for any
such lock said key to be used only in emergencies and then only upon
notice promptly after its use.
8. Tenant may make or have made additional copies of any keys or access
devices provided by Landlord for the use of its employees, provided that
Tenant shall bear the cost of replacing any locks if such replacement is
made necessary due to dissemination of keys by Tenant and misuse
thereof. Tenant, upon termination of the Tenancy, shall deliver to
Landlord all the keys or access devices for the building, offices, rooms,
and toilet rooms which shall have been furnished the Tenant or which the
Tenant shall have had made. In the event of the loss of any keys or
access devices so furnished by Landlord, Tenant shall pay Landlord for the
replacement therefor or for rekeying of the Premises.
9. The toilet rooms, toilets, urinal, wash bowls, and other apparatus shall
not be used for any purpose other than that for which they were
constructed and no foreign substance of any kind whatsoever shall be
thrown therein. The expense of any breakage, stoppage, or damage resulting
from the violation of this rule shall be borne by the Tenant.
10. Tenant shall not use or keep in its Premises or in the building any
kerosene, gasoline, or inflammable or combustible fluid or material other
than limited quantities necessary for the operation or maintenance of
office or office equipment.
11. Tenant shall not use, keep, or permit to be used or kept in its Premises
any foul or noxious gas or substance or permit or suffer such Premises to
be occupied or used in a manner offensive or objectionable to Landlord or
other occupants of the building by reason of noise, odors, and/or
vibrations or interfere in any way with other Tenants or those having
business therein.
12. No commercial cooking shall be done or permitted by any Tenant on its
Premises (except that use by the Tenant of Underwriters' Laboratory
approved equipment for the preparation of coffee, tea, hot chocolate,
similar beverages and microwave ovens and traditional ranges and ovens
for preparation and heating food for Tenants and their employees and
60
<PAGE> 85
invitees shall be permitted, provide that such equipment and its use is in
accordance with all applicable federal, state, and city laws, codes, and
ordinances, rules and regulations) and Landlord has approved its
installation, nor shall Premises be used for lodging. This rule does not
preclude use of Tenant's lunch room facility and the hosting of receptions
for or by the Tenant in the building.
13. No pets or animals of any kind are allowed on the Premises, nor in the
parking lots, nor in the parking garage at any time, with the only
exception being seeing-eye dogs or similar guide dogs used for the
exclusive purpose of guiding individuals for whom this assistance is
necessary.
14. Except with the prior written consent of Landlord, which shall not be
unreasonably withheld, no Tenant shall sell, or permit the sale, at
retail, of newspapers, magazines, periodicals, theater tickets or any
other goods or merchandise in or on any Premises except for limited sale
of girl scout cookies, tickets, etc. by employees.
15. If Tenant requires telegraphic, telephonic, burglar alarm or similar
services, it shall first obtain, and comply with, Landlord's reasonable
instructions in their installation.
16. Landlord, in consultation with Tenant, will direct electricians as to
where and how telephone, telegraph and electrical wires are to be
introduced or installed. No boring or cutting for wires will be allowed
without the prior consent of Landlord, which shall not be unreasonably
withheld or delayed. The location of burglar alarms, telephones, call
boxes and other office equipment affixed to the Premises shall be subject
to the written approval of Landlord, which shall not be unreasonably
withheld or delayed.
17. Tenant shall not install any radio or television antenna, loudspeaker or
any other device on the exterior walls or the roof of the building without
Landlord's consent, which shall not be unreasonably withheld or delayed.
Tenant shall not interfere with radio or television broadcasting or
reception from or in the building or elsewhere.
18. Tenant shall not lay linoleum, tile, carpet, or any other floor covering
so that the same shall be affixed to the floor of its Premises in any
manner except as approved in writing by Landlord, which shall not be
unreasonably withheld or delayed. The expense of repairing any damage
resulting from a violation of this rule or the removal of any floor
covering shall be borne by the Tenant.
19. Landlord shall have the right to prescribe the weight, size and position
of all safes and other heavy equipment brought into the building. Safes or
other heavy objects shall, if permitted by Landlord, stand on wood strips
or other weight distribution mechanism of such thickness as determined by
Landlord to be necessary to properly distribute the weight thereof.
Landlord will not be responsible for loss of or damage to any such safe,
equipment or property from any cause, and all damage done to the building
by moving or maintaining any
61
<PAGE> 86
such safe, equipment or other property shall be repaired at the expense of
Tenant.
20. Business machines, and mechanical equipment and exercise equipment
belonging to Tenant which cause noise or vibration that may be transmitted
to the structure of the building or to any space therein to such a degree
as to be objectionable to Landlord or to any tenants in the building shall
be placed and maintained by Tenant, at Tenant's expense, on vibration
eliminators or other devices sufficient to eliminate noise or vibration.
The persons employed to move such equipment in or out of the building must
be acceptable to Landlord. Tenant will not install or permit the use of
any exercise equipment, including free weights, unless Tenant has taken
appropriate steps to protect the Premises, including the floors and walls
from damage. Tenant will discuss with Landlord the installation of
exercise equipment and protection of the Premises to Landlord prior to
installation of such equipment. At the end of the Term, Tenant shall
remove all such equipment and repair all damage to the condition of the
Premises prior to installation of said equipment and machines.
21. Tenant shall not place a load upon any floor of the Premises which exceeds
the load per square foot which such floor was designed to carry and which
is allowed by law. Tenant shall not mark, or drive nails, screw or drill
into the partitions, woodwork or plaster or in any way deface such
Premises or any part thereof except that Tenant shall be permitted to hang
pictures, whiteboard and similar items customarily used in offices, which
holes shall be ordinary wear and tear.
22. There shall not be used in any space, or in the public areas of the
building, either by any Tenant or others, any hand trucks except those
equipped with rubber tires and side guards or such other material-handling
equipment as Landlord may approve. No other vehicles of any kind shall be
brought by any Tenant or kept in or about the Premises.
23. Tenant shall store all its trash and garbage within the interior of its
Premises. No material shall be placed in the trash boxes or receptacles if
such material is of such nature that it may not be disposed of in the city
without violation of any law or ordinance governing such disposal. All
trash, garbage and refuse disposal shall be made only through the
entryways and elevators provided for such purposes and at such times as
Landlord shall designate.
24. Canvassing, soliciting, distribution of handbills or any other written
material, and peddling in the building are prohibited and Tenant shall
cooperate to prevent the same.
25. Tenant shall comply with all safety, fire protection and evacuation
procedures and regulations established by the appropriate governmental
agency.
62
<PAGE> 87
26. Tenant assumes any and all responsibility for protecting its Premises
from theft, robbery and pilferage, which includes keeping doors to the
building locked and other means of entry to the building closed.
27. The requirements of Tenants will be attended to only upon application at
the office of the building by an authorized individual. Employees of
Landlord shall not perform any work or do anything outside of their
regular duties unless under special instructions from Landlord, and no
employees will admit any person (Tenant or otherwise) to any office
without specific instructions from Landlord.
28. Tenant shall not change the designation of parking spaces reserved for the
handicapped, compact cars or other such designations.
29. Tenant shall use its best efforts to see that none of Tenant's employees
or guests park between designated parking lines only, and shall not occupy
two parking spaces with one car. Vehicles in violation of above shall be
subject to being towed away, at vehicle owner's expense.
30. Vehicles parked at Premises for more than twenty-four (24) hours without
prior written consent of the Landlord shall be deemed abandoned and shall
be subject to being towed away at vehicle owner's expenses at the election
of Tenant or Landlord.
30. Tenant shall be responsible for the observance of all the foregoing Rules
and Regulations by Tenant's employees, agents, clients, customers,
invitees, and guests.
31. These Rules and Regulations shall not be construed to in any way modify,
alter, or amend, in whole or in part, the terms, covenants, agreements and
conditions of any lease of premises in the building.
32. Landlord may waive any one or more of these Rules and Regulations for the
benefit of any particular Tenant or Tenants, but no such waiver by
Landlord shall be construed as a waiver of such Rules and Regulations in
favor of any other Tenant or Tenants, nor prevent Landlord from thereafter
enforcing any such Rules and Regulations hereinabove stated and any
additional rules and regulations which are adopted, except such rules as
would modify Tenant's Lease.
33. Landlord reserves the right to make such other and reasonable rules and
regulations as in its judgment and following discussion with any Tenant
who occupies the entire building and consideration of said Tenant's views
may from time to time be needed for safety and security, for care and
cleanliness of the building and for the preservation of good order
therein. Tenant agrees to abide by all such Rules and Regulations
hereinabove stated and any additional rules and regulations which are
adopted if they apply to all tenants after having received a copy of the
same.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
The Board of Directors
INTERLINQ Software Corporation:
We consent to the incorporation by reference in the registration statements
(Nos. 33-63388, 333-4558 and 333-21099) on Form S-8 of INTERLINQ Software
Corporation of our report dated June 30, 1998, relating to the balance sheets of
INTERLINQ Software Corporation as of June 30, 1998 and 1997, and the related
statements of operations, shareholders' equity, and cash flows for each of the
years in the three-year period ended June 30, 1998, and the related schedule,
which report appears in the June 30, 1998, annual report on Form 10-K of
INTERLINQ Software Corporation.
/s/ KPMG Peat Marwick LLP
Seattle, Washington
September 25, 1998
51
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 7,234
<SECURITIES> 6,674
<RECEIVABLES> 3,400
<ALLOWANCES> 0
<INVENTORY> 40
<CURRENT-ASSETS> 17,689
<PP&E> 6,434
<DEPRECIATION> 5,434
<TOTAL-ASSETS> 24,153
<CURRENT-LIABILITIES> 9,540
<BONDS> 0
0
0
<COMMON> 54
<OTHER-SE> 14,545
<TOTAL-LIABILITY-AND-EQUITY> 14,599
<SALES> 9,647
<TOTAL-REVENUES> 18,346
<CGS> 1,778
<TOTAL-COSTS> 5,083
<OTHER-EXPENSES> 14,653
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (644)
<INCOME-TAX> 907
<INCOME-CONTINUING> (1,551)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,551)
<EPS-PRIMARY> (.30)
<EPS-DILUTED> (.30)
</TABLE>
