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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-26772
VISIO CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WASHINGTON 91-1448389
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
520 PIKE STREET, SUITE 1800, SEATTLE, WASHINGTON 98101-4001
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(206) 521-4500
(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, $0.01 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy of information
statements incorporated by reference in Part III of this 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 sales price of the Common Stock on November
30, 1998 as reported on the Nasdaq National Market, was approximately
$785,380,610. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive
determination for other purposes.
As of November 30, 1998, there were 30,313,816 shares outstanding of the
registrant's Common Stock.
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DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the registrant's definitive Proxy Statement for the 1999 Annual
Meeting of Shareholders to be held on February 24, 1999 are incorporated by
reference in Part III of this Form 10-K.
Visio, SmartShapes, IntelliCAD, Visio Solutions Library, AutoDiscovery,
Drawing Explorer and ArchT are either registered trademarks or trademarks of
Visio Corporation in the United States and/or other countries. All other
trademarks, trade names or company names referenced herein are used for
identification only and are the property of their respective owners.
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VISIO CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998*
TABLE OF CONTENTS
PART I
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PAGE
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Item 1.Business.......................................................... 4
Item 2.Properties........................................................ 12
Item 3.Legal Proceedings................................................. 12
Item 4.Submission of Matters to a Vote of Security Holders............... 12
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters.......................................................... 13
Item 6. Selected Financial Data.......................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 14
Item 7A.Quantitative and Qualitative Disclosures about Market Risk....... 28
Item 8. Financial Statements and Supplementary Data...................... 29
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................. 50
PART III
Item 10. Directors and Executive Officers of the Registrant.............. 50
Item 11. Executive Compensation.......................................... 50
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 50
Item 13. Certain Relationships and Related Transactions.................. 50
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K............................................................. 51
Signatures............................................................... 54
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* Visio Corporation's fiscal year is the 52/53-week period that ends on the
Friday nearest September 30. For convenience of presentation, all fiscal
periods in this Form 10-K are treated as ending on a calendar month end.
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PART I
ITEM 1. BUSINESS
FORWARD LOOKING STATEMENTS
Except for the historical information contained in this Annual Report on
Form 10K, the matters discussed herein, particularly those identified with the
words "expects," "believes," "anticipates" and similar expressions, are
forward-looking statements. These statements reflect management's best
judgment based on factors known to them at the time of such statements. Such
forward-looking statements are subject to certain risks and uncertainties,
including without limitation those set forth under "Certain Risk Factors That
May Impact Future Results of Operations" contained in Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of
this Annual Report on Form 10-K, which risks and uncertainties could cause
actual results to differ materially from those anticipated. Such factors, many
of which are beyond the Company's control, should be carefully considered when
evaluating the Company's business and prospects and the forward-looking
information provided by Visio pursuant to the safe harbor provisions
established by recent securities legislation. Readers should also carefully
review the risk factors described in other documents the Company files from
time to time with the Securities and Exchange Commission.
GENERAL
Visio Corporation ("Visio" or the "Company") is a leading supplier of
business drawing and diagramming software. Visio(R) software, introduced in
1992, enables business and technical users to create drawings and diagrams
using a "drag and drop" approach. Customers use the Company's software for
creating drawings and diagrams ranging from simple diagrams such as
flowcharts, block diagrams and organizational charts to complex technical
drawings such as space plans, electrical schematics and network designs.
Visio's flexible product architecture and powerful graphics engine allow
organizations to standardize on a single, easy-to-use drawing technology that
meets a broad range of business drawing and diagramming needs, and thereby
realize savings on purchasing, training and support. The Company's mission is
to become the single standard for creating, storing and exchanging drawings in
business.
BACKGROUND
Drawing and diagramming--the visual representation of concepts, processes
and relationships--can be as important to businesses as words and numbers for
communicating and exchanging ideas. Drawings and diagrams can succinctly
communicate abstract concepts and relationships such as organizational
structures and technical schematics. Business drawings and diagrams,
traditionally done by hand using rulers, templates and graph paper, or
delegated to specialists such as graphic artists or drafters, are increasingly
created using software products. Just as the advent of personal computers made
electronic word processing and spreadsheet preparation possible for the
general user, the widespread acceptance of easy-to-use graphical user
interfaces has created a similar opportunity for personal computer software to
replace traditional paper-based drawing and diagramming for general business
users.
Most existing drawing and diagramming software was introduced for narrowly
defined drawing needs, for specialists or as secondary features of office
suite products. For example, single-purpose products were created for specific
tasks such as flowcharting, organizational charting or network diagramming.
Users were confronted with a variety of products, each with a different user
interface, and the drawings and diagrams they produced were often difficult to
integrate into word-processed documents, spreadsheets or presentation
materials. Illustration, page layout and computer aided design ("CAD")
software has also been created for graphics artists, designers and drafters.
These specialty products generally do not address the needs of nonspecialists
who wish to create, share or modify drawings and diagrams. These products are
also generally expensive, may require special system configurations, usually
require a substantial investment of time to master and must be used regularly
for the investment to be justified and the mastery maintained. Although the
drawing capabilities of office suite products were developed for general
business users, the Company believes that to date they have
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lacked the depth and breadth of functionality necessary to enable users to
easily create a variety of business drawings and diagrams. The result has been
a market highly focused on specific users and fragmented among many
applications.
THE VISIO SOLUTION
To address the limitations of existing drawing and diagramming software, the
Company introduced its first product, "Visio" (currently renamed "Visio
Standard"), in November 1992. Currently, four of the Company's five core
products, Visio Standard, Visio Technical, Visio Professional and Visio
Enterprise, offer users solutions based on a single, easy-to-use technology
for a wide variety of drawing and diagramming needs.
These four core products are based on a common graphics "engine" that drives
parametrically defined SmartShapes(R) symbols, intelligent objects and
connectors that maintain relationships within and between shapes as they are
moved. Visio's SmartShapes objects, its stencil metaphor and its drag-and-drop
features allow users with no prior graphics or CAD training to select shapes
easily, combine them with text and manipulate them to create sophisticated
drawings and diagrams. The Company's fifth core product, IntelliCAD(R),
utilizes a distinct graphics engine and employs DWG as its native file format.
The Visio graphics engine employs Microsoft Windows and ActiveX technology
to embed Visio drawings and diagrams into other documents, link documents and
incorporate information from other sources into Visio drawings and diagrams.
Visio utilizes an open architecture that is easily extensible and customizable
in order to facilitate and encourage the development of specific solutions by
both end users and third-party solution providers and to enable the Company to
expand its products to address new markets.
The Company believes that its software is expanding the market for drawing
and diagramming software. Visio replaces hand-drawing and single-use products
and moves drawing and diagramming out of the specialist art and drafting
departments and onto the desktops of general users throughout business
enterprises. Due to the single architecture of all the Visio named and branded
products, users can share files created with any of the products, and users
trained in one product can easily move to another. Most importantly, Visio
software enables organizations to realize purchasing, training and support
savings by standardizing on a common technology that addresses a wide variety
of drawing and diagramming needs.
VISIO'S STRATEGY
Visio's mission is to become the single standard for creating, storing and
exchanging drawings and diagrams in business. By becoming the standard, the
Company believes it can introduce new users to electronic drawing and
diagramming and thereby expand the market for its products. The Company's
strategy to achieve this objective includes the following elements:
. Focus on Business Users. The Company has focused on personal computer-
based drawing and diagramming for business enterprises such as large
corporations, consulting firms and governmental entities. The Company
targets enterprises that create durable drawings, share those drawings
in electronic form across organizational functions and departments and
create custom solutions for specific drawing needs. The Company believes
these enterprises are more likely to standardize on a single product and
provide the best opportunity for the Company to embed its products
broadly within an organization. The Company offers these entities a
variety of volume licensing arrangements that encourage wide use of, and
standardization on, its products.
. Maintain Leading Technology and Extend Product Line. The Company's
strategy is to maintain and improve the flexibility and extensibility of
its graphics engine and increase the ease-of-use and functionality of
its products. The Company will continue to expand its product lines to
address market segments where the value of drawings is high and is
exploring complementary products. In March 1998, the Company released
IntelliCAD, the Company's Autodesk AutoCAD-compatible software
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product. Also, in November 1998, the Company released Visio Enterprise,
an integrated, multifunction software tool designed for IT professionals
who develop, manage and maintain enterprise information systems. The
Company currently expects to begin introducing the next major upgrades
of its core products in the second half of calendar year 1999.
. Expand Use of Visio as a Development Platform. Taking advantage of the
open architecture, powerful shape technology, and ease of customization
of its products, the Company markets to solution providers, system
integrators, customer in-house developers, and other third-party
software developers who can create custom content and applications for
specific business use. In particular, the Company seeks to develop
business relationships with third parties who have expertise in specific
industries and application markets and who can provide solutions and
services that complement Visio's products. The Company also seeks to
promote the use of its products in business-integrated solutions within
specific customer accounts and within specific industries. To accomplish
these goals, the Company has built a development platform infrastructure
including a developer training program, developer support, a development
website (whitepapers, documentation, samples, forum), a development
seminar series, a consulting partner network and consulting services,
all of which offer knowledge and assistance for organizations and
individuals who wish to develop business relationships with Visio and
more effectively utilize Visio's products.
. Focus on Microsoft Windows. The Company develops products for the
Microsoft Windows environment and has historically worked closely with
Microsoft to more fully utilize the capabilities of Windows technology.
The Company intends to continue to work closely with Microsoft to gain
access to new Windows technology and to maintain its position as a key
developer of products for Windows.
. Expand International Markets. The Company distributes the Visio product
line in 12 languages and in more than 45 countries around the world.
International revenues represented approximately 35% and 41% of the
Company's revenues in fiscal 1997 and 1998, respectively. The Company
plans to continue to expand the number of its products distributed in
international markets as well as its sales and marketing offices and
distribution networks within those markets.
PRODUCTS AND PRODUCT GROUPS
The Company currently sells five core software products, together with add-
on software products. Four of the Company's core products (Visio Standard,
Visio Technical, Visio Professional and Visio Enterprise) offer solutions to a
wide variety of drawing and diagramming needs based on a single, easy-to-use
technology. The Company designs its Visio product features to be intuitive,
enabling even occasional users to draw and diagram efficiently. The Company's
products integrate well with other desktop applications and can be easily
customized to meet individual needs.
Many business drawings and diagrams are composed almost entirely of standard
symbols. Accordingly, the Company's Visio products utilize a visual "stencil"
metaphor. This metaphor is implemented through a stencil window that displays
a collection of standard shapes, including connectors, on a visually
distinctive background. The user incorporates these standard shapes into a
drawing by dragging the shapes from the stencil window and dropping them into
the drawing window. In addition, users can customize the behavior of shapes
and create their own shapes. All Visio shapes can have associated text, which
moves when the shape is moved. The Company's software allows users to
associate nongraphical data with shapes, enabling users to easily generate
nongraphical information, such as parts lists and bills of material, from
Visio drawings and diagrams.
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The Company's fifth core software product, IntelliCAD, utilizes a distinct
graphics engine and employs DWG as its native file format. This allows
IntelliCAD to support the vast number of legacy drawings created by CAD
operators over the years with Autodesk AutoCAD.
The Company classifies its core products, together with the related add-ons,
into three product groups: the Business Diagramming product group, the
Technical Drawing product group and the IT Design and Documentation product
group.
BUSINESS DIAGRAMMING
Visio's Business Diagramming product group focuses on developing and
commercializing tools that help business professionals manage people,
processes and projects and communicate business information more effectively
through graphics. This product group includes the Company's first core
product, Visio Standard.
Visio Standard
Visio Standard, which was first shipped in November 1992, enables general
business personal computer users to create a wide variety of diagrams. Many of
Visio Standard's features are designed to optimize its ease of use. Visio
Standard also includes wizards for organization charts, timelines and page
layouts that automatically generate diagrams based on the data the user
provides and the user's formatting preferences. In addition to enabling users
to easily create diagrams, Visio Standard also includes features to enhance
the information content of diagrams. Visio Standard users can link diagrams to
databases and associate nongraphical data with shapes within a diagram. Some
of the diagrams that can be created with Visio Standard include:
Flowcharts Organization Charts
Timelines Block Diagrams
Geographic Maps Marketing Charts
The Company released its most current major version, Visio Standard 5.0, in
August 1997 and, since that date, has released enhancements to Visio Standard
5.0 that provide additional functionality and content. Visio Standard 5.0 is
the foundation of the 5.0 product family. Visio Standard 5.0 has an estimated
street price (average purchase price paid by end users) of $149. The Company
currently expects to introduce its next major upgrade of Visio Standard by the
end of fiscal 1999.
TECHNICAL DRAWING
The Technical Drawing product group focuses on providing tools for
engineers, engineering salespeople, architects, designers and others who
either produce or utilize technical diagrams and drawings as part of their
work. This product group includes Visio Technical and IntelliCAD.
Visio Technical
Visio Technical is designed for technical professionals such as engineers,
architects and others who produce or work with technical diagrams and space
plans. It offers all the features, content and capabilities of Visio Standard,
plus shapes and capabilities necessary to create professional-quality
technical drawings. Visio Technical enables users to efficiently create two-
dimensional drawings and technical schematics without the long learning curve
normally associated with CAD software. Visio Technical users can easily share
technical drawings with other Windows applications and can create intelligent
drawings by linking them to databases. Visio Technical includes more than
3,800 industry-specific SmartShapes objects. Some of the drawings that can be
created with Visio Technical include:
Space Plans Facilities Management Drawings
Electrical Schematics Construction Drawings
Mechanical Engineering Designs Heating, Ventilation and Air
Process Plant Designs Conditioning Schematics
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The Company released its most current major version, Visio Technical 5.0, in
August 1997. In December 1998 the Company released Visio Technical 5.0 Plus,
which includes additional functionality and content. Visio Technical 5.0 has
an estimated street price of $349. The Company currently expects to introduce
its next major upgrade of Visio Technical by the end of fiscal 1999.
IntelliCAD
IntelliCAD, the Company's Autodesk AutoCAD-compatible software product, was
released in March 1998. By utilizing a distinct engine and employing DWG as
its native file format, IntelliCAD software seamlessly supports the vast
number of legacy drawings created by CAD operators over the years with
Autodesk's AutoCAD product, the dominant PC-based CAD application. IntelliCAD
allows users to exchange DWG files between IntelliCAD and AutoCAD without data
loss, including the new entities introduced in the latest version of AutoCAD,
Release 14. IntelliCAD also supports the same key customization features that
have distinguished AutoCAD in the marketplace. These features include full
support for the AutoLISP macro language, AutoCAD custom menus and dialog
boxes, and the Autodesk Development System API, used by third-party software
developers to create applications that run on AutoCAD. While maintaining
compatibility with legacy data and applications, IntelliCAD software also
includes features that enhance and extend the AutoCAD work environment. These
enhancements include a full, event-driven implementation of Drawing
Explorer(TM) for intuitively managing drawing layers, line types and blocks, a
visual menu editor for easy customization of AutoCAD-compatible menu
structures, and a drag-and-drop button bar editor that easily creates
horizontal fly-out structures on toolbars. IntelliCAD supports a multiple
document interface that permits the simultaneous editing of multiple drawings.
This feature also allows IntelliCAD users to cut, copy and paste drawing
entities between windows. IntelliCAD has an estimated street price of $349.
The Company currently expects to introduce its first major upgrade of
IntelliCAD by the end of fiscal 1999.
IT DESIGN AND DOCUMENTATION
The IT Design and Documentation product group focuses on design,
documentation and modeling tools for the IT professional. This product group
includes Visio Professional and Visio Enterprise.
Visio Professional
Visio Professional is a complete diagramming tool for information systems
("IS") and information technology ("IT") professionals such as local area
network managers, database analysts, software developers and web masters as
well as business process professionals. The Company released its most current
version, Visio Professional 5.0, in August 1997. Visio Professional 5.0, a
superset of Visio Standard 5.0, incorporates all of Visio Standard 5.0's
capabilities and content as well as features specific to IS/IT and business
process management professionals. Visio Professional customers typically rely
on the product to document networks, diagram software architecture, map and
design database structures, and use it as a tool for business process
management initiatives. Visio Professional 5.0 has an estimated street price
of $349. The Company currently expects to introduce its next major upgrade of
Visio Professional in the first half of fiscal 2000.
Visio Enterprise
Visio Enterprise 5.0, built on the foundation of Visio Professional, was
released in November 1998. It extends the Company's reach in IT design and
documentation by offering tools in three main IT domains: network design and
documentation, software engineering, and database design. With respect to
network design and documentation, Visio Enterprise facilitates physical,
logical and wide-area network designs. The product's SNMP-based, layer 3
AutoDiscovery(TM) technology discovers and maps the logical connectivity of a
network, beginning with the address of a single seed router and building a
comprehensive database that includes network
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device and connectivity information. Visio Enterprise integrates this
AutoDiscovery technology with the diagramming capabilities of Visio
Professional and the 14,000-shape Visio Network Equipment library to
automatically represent discovered devices with port-level detail. Integrating
these capabilities produces time savings by automating the three basic tasks
of network management: identifying what equipment is connected to the network,
documenting it and then keeping it up to date. For software engineering, the
product's features include support for the full range of unified modeling
language ("UML") 1.2 diagram types. Visio Enterprise supports reverse
engineering of Microsoft Visual C++ and Visual Basic code into UML models and
integration with other enterprise tools via Microsoft Repository 2.0. Visio
Enterprise allows for the design of databases using standard technologies and
multiple object-oriented notations. For example, users can model in
relational, IDEF1X and other popular notations. The product supports forward
and reverse engineering of databases for maintenance and updating of existing
database management systems ("DBMSs"), and migration between DBMSs from the
leading enterprise database vendors, including IBM Corporation, Oracle
Corporation, Informix Corporation and Microsoft Corporation. The product
enables model import and export via the Microsoft Data Warehousing Framework.
Users can also read and write PLATINUM ERwin and InfoModeler(R) models, as
well as Visio Professional 5.0 database diagrams. Visio Enterprise 5.0 has an
estimated street price of $995. The Company currently expects to introduce its
first major upgrade of Visio Enterprise in the first half of fiscal 2000.
OTHER PRODUCTS
In addition to its core products, the Company offers Visio Maps, a desktop
mapping software product that allows users to create, share and distribute
high-quality, data-rich maps quickly and easily, Visio Network Equipment, an
add-on solution to Visio Standard, Visio Technical and Visio Professional for
the design and documentation of local, wide-area and telecommunications
networks, Visio Frame Relay, which can identify the frame relay endpoints on a
network and help automate the process of diagramming and designing the
network, ArchT(TM) by Visio, an architectural add-on for AutoCAD that in early
1999 is also expected to be available for IntelliCAD, and Visio SmartShapes
Solutions for Accident Reporting and Visio SmartShapes Solutions for Crime
Scenes, two add-on stencil products. These products supplement the Company's
core products by extending the number and types of drawings available for job-
specific drawing needs.
SALES, MARKETING AND DISTRIBUTION
Visio's marketing efforts were initially directed at creating a new product
category--drawing and diagramming software for general business users. Those
marketing efforts were directed at individual end users who purchased the
Company's products through standard retail software distribution channels. As
the need for drawing and diagramming software for general business users has
been recognized, the Company has refocused its marketing efforts on
strengthening Visio brand name recognition to facilitate the introduction of
additional Visio-branded products and on expanding its distribution channels.
In addition, the Company is increasingly focusing its sales and marketing
efforts on volume licensing arrangements with large accounts. As a result of
this effort, volume licensing revenues have been 10%, 17% and 24% of total
revenues in fiscal 1996, 1997 and 1998, respectively. The Company expects
continued investment in the volume licensing sales staff in fiscal 1999 and,
as a result, expects this percentage to increase.
In North America, the Company's products are sold primarily through
distributors, including Ingram Micro, Inc. ("Ingram") and Merisel, Inc.
("Merisel"). These distributors resell the Company's products to retail
software outlets and computer superstores, corporate resellers, value added
resellers and mail order and catalog resellers. The Company has entered into
nonexclusive distribution agreements with both Ingram and Merisel. The
agreement with Ingram may be terminated without cause by either party upon 30
days notice. The agreement with Merisel is automatically renewed on an annual
basis and may be terminated without cause by either party upon 60 days'
notice.
Distribution outside of North America is also primarily through distributors
and is managed by the Company's international headquarters in Dublin, Ireland,
its Asia Pacific operations center in Singapore, and its regional sales and
marketing offices in Miami, Florida, Australia, England, France, Germany,
Italy, Japan,
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Malaysia, the Netherlands, South Africa, South Korea, Switzerland and Taiwan.
Internationally, the Company has numerous non-exclusive distributors.
In fiscal 1998, sales to Ingram and Merisel, the Company's two largest
distributors, were 34% and 10%, respectively, of the Company's revenues. See
also Note 9 of the Company's "Notes to Financial Statements" in Item 8
"Financial Statements and Supplementary Data" of this Annual Report on Form
10-K.
The Company has established OEM arrangements with various hardware
manufacturers, software vendors and book publishers. The Company also sells
products directly to end users.
The Company outsources most of its technical support and customer service.
To the extent it remains economically advantageous to do so, the Company
expects to continue to outsource most of these functions in the future.
PRODUCT DEVELOPMENT
The Company believes that its future success will depend in large part on
its ability to enhance its current product line, develop new products,
maintain technological leadership and satisfy an evolving range of customer
requirements and industry standards for drawing and diagramming software. The
Company's product development group is actively engaged in identifying,
defining and developing new products and product enhancements to meet customer
needs. The Company's principal product development efforts focus on continued
enhancements to the graphics engines for its Visio products and IntelliCAD,
development of new customer solutions and applications, including increased
drawing complexity, increased number of objects, increased "smartness" of
SmartShapes objects and improved database connectivity.
The Company's products have been developed primarily by its product
development group. Certain technologies, such as the spellcheck function, have
been licensed from other sources and integrated into the Company's products.
The Company intends to continue licensing technologies as it increases its
product offerings. In fiscal 1998, the Company completed mergers with MarComp,
Inc. and Kaspia Systems, Inc., and the Company purchased certain technology
from Decision Graphics UK Limited, InfoModelers, Inc. and Ketiv Technologies,
Incorporated. The Company intends to continue to make substantial investments
in product development. The Company's product development expenses totaled
$9.1 million, $16.1 million and $27.3 million, or 15%, 16% and 16% of
revenues, in fiscal 1996, 1997 and 1998, respectively.
COMPETITION
The computer software drawing and diagramming markets are intensely
competitive and subject to rapidly changing technology and evolving standards.
The Company competes with a wide range of companies, from small niche
companies to larger software companies with strong market position and
technology. The Company's principal competitors are companies with leading
products in the special purpose drawing and diagramming, illustration, CAD and
office suite categories. Products competing with the Company's products
include, among others, those named below. Many of these competitors have
significantly greater financial, technical, sales and marketing and other
resources than the Company. As business drawing and diagramming software
markets develop, the Company believes that additional companies may enter
these markets and thereby intensify competition.
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VISIO PRODUCT GROUP COMPETING PRODUCT COMPETITOR
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Business Diagramming Visual Thought Confluent, Inc.
Visio Standard EasyFlow HavenTree Software
Limited
Milestones, Etc. Kidasa Software, Inc.
Flowcharter Micrografx, Inc.
Flow Charting PDQ Patton & Patton Software
Corporation
Org Plus The Learning Company,
Inc.
SmartDraw SmartDraw Software, Inc.
allCLEAR SPSS, Inc.
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VISIO PRODUCT GROUP COMPETING PRODUCT COMPETITOR
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Technical Drawing AutoCAD LT Autodesk, Inc.
Visio Technical AutoCAD Autodesk, Inc.
IntelliCAD AutoSketch Autodesk, Inc.
Actrix Technical Autodesk, Inc.
Imagineer Technical Intergraph Corporation
TurboCAD International Microcomputer
Software, Inc.
MicroStation Bentley Systems, Inc.
IT Design and Documentation netViz NetViz Corporation
Visio Professional ClickNet Pinpoint Software Corporation
Visio Enterprise Network Charter Pro Micrografx, Inc.
NetFormx ImageNet, Inc.
NetSuite NetSuite Development Corp.
EasyER/EasyObject Visible Systems Corporation
ER/Studio Embarcadero Technologies Inc.
ERwin PLATINUM technology, inc.
PowerDesigner Sybase, Inc.
Rational Rose Rational Software Corporation
Visual Studio Microsoft Corporation
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In addition, the drawing capabilities included in Microsoft Office,
SmartSuite by Lotus Development Corp. and WordPerfect Suite by Corel
Corporation compete with Visio Standard. If any of these producers of office
suites aggressively pursues the business drawing and diagramming markets and
commits further resources to development in this area, the Company's results
of operations could be materially adversely affected.
The principal competitive factors affecting the computer software drawing
and diagramming markets include product functionality, ease of use,
performance and reliability; customer service and support; product
availability; vendor credibility; brand awareness; ability to keep pace with
technological change; and price. Although the Company believes that its
products currently compete favorably with respect to these factors, there can
be no assurance that the Company can maintain its competitive position in the
face of increasing competition from new products and enhancements introduced
by existing competitors and new companies entering this market. The markets
for the Company's products are characterized by significant price competition,
and the Company expects it will face increasing pricing pressures. 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, financial condition
and results of operations.
PROPRIETARY RIGHTS
The Company regards its software as proprietary and relies primarily on a
combination of copyright, trademark and patent laws, trade secret protection,
confidentiality procedures and contractual provisions, including nondisclosure
agreements with employees and others, to protect is proprietary rights. The
Company currently has four U.S. patents, one foreign patent and various U.S.
and foreign patent applications pending. However, existing patent, copyright
and trade secret laws afford only limited protection. The Company believes
that, because of the rapid pace of technological change in the computer
software industry, copyright and trade secret protection have less effect on
the Company's business and results of operations than factors such as the
knowledge, ability and experience of the Company's employees, frequent product
enhancements and the timeliness and quality of support services.
The Company provides its products to business enterprises under nonexclusive
licenses that are generally nontransferable. The Company also provides its
products to individual end users, in which case the Company relies on "shrink
wrap" licenses that are not signed by the end user and therefore may not be
enforceable in
11
<PAGE>
certain jurisdictions. The Company's products do not contain copy protection.
Policing unauthorized use of software is difficult and, while the Company is
unable to determine the extent of piracy of its software, it expects software
piracy to be a persistent problem in the computer software industry.
The Company licenses some software programs from independent developers and
incorporates them into the Company's products. Generally, such agreements
grant the Company nonexclusive, perpetual, worldwide licenses with respect to
the subject program and terminate only upon a material breach by the Company.
Certain of these licenses require payment of royalties based on the number of
products sold.
No material claims have been made against the Company for infringement of
proprietary rights of others; however, there can be no assurance that others
will not assert infringement claims in the future. As the number of software
products in the industry increases and the functionality of these products
further overlaps, the Company believes that software programs will
increasingly become subject to infringement claims. The cost of responding to
any such assertion may be material, whether or not the assertion is valid.
PRODUCTION
Production of the Company's software products primarily involves duplication
of various media and the printing of user manuals and packaging materials.
Media for the Company's products include CD-ROMs and 3.5-inch diskettes and
are available from multiple sources. The Company outsources the production of
its products. To date, the Company has not experienced any material
difficulties or delays in production of its software products or
documentation. To the extent it remains economically advantageous to do so,
the Company intends to continue outsourcing production in the future.
EMPLOYEES
As of September 30, 1998, the Company employed 555 persons, including 189 in
sales and marketing, 211 in product development, and 155 in finance,
administration and operations, including customer service and technical
support. The Company believes that its future success will depend in part on
its ability to continue to attract and retain skilled product development,
technical support, marketing and management personnel. Competition for such
personnel in the computer software industry is intense. The Company believes
its relations with its employees are good.
ITEM 2. PROPERTIES
The Company's headquarters are located in Seattle, Washington, where it
currently leases approximately 85,000 square feet in three buildings for
administrative, sales and marketing, customer service and product development
activities. The Company also leases an aggregate of approximately 30,000
square feet of office space in San Diego, Chicago and Beaverton, Oregon;
approximately 14,000 square feet of office space in Dublin, Ireland and an
aggregate of approximately 37,000 square feet of office space in its other
offices worldwide. In 1999, the Company expects to relocate its Seattle
operations to a new 184,000 square foot facility in Seattle and its Dublin
operations to a new 40,000 square foot facility in Dublin. In addition, the
Company currently expects to expand its Seattle operations to another 133,000
square foot facility beginning in mid 2000. The Company believes that such
facilities are adequate to meet its needs for the foreseeable future. The
Company believes that it can acquire additional space, if needed, on
acceptable terms.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during the
fourth quarter of its fiscal year ended September 30, 1998.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED
--------------------------------------------- FISCAL YEAR ENDED
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, SEPTEMBER 30,
FISCAL YEAR 1998 1997 1998 1998 1998 1998
- ---------------- ------------ --------- -------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Common stock prices
High.................. $42.63 $48.13 $50.88 $50.75 $50.88
Low................... $26.50 $32.38 $39.88 $19.00 $19.00
<CAPTION>
FISCAL QUARTER ENDED
--------------------------------------------- FISCAL YEAR ENDED
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, SEPTEMBER 30,
FISCAL YEAR 1997 1996 1997 1997 1997 1997
- ---------------- ------------ --------- -------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Common stock prices
High.................. $26.38 $26.75 $35.03 $42.50 $42.50
Low................... $19.75 $18.13 $19.13 $32.00 $18.13
</TABLE>
Visio's common stock has been traded on the Nasdaq National Market under the
symbol VSIO since the Company's initial public offering in November 1995. The
high and low common stock prices noted above are as reported on the Nasdaq
National Market. On November 30, 1998, there were 229 holders of record of the
Company's common stock. The Company has not paid cash dividends on its common
stock.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data and other operating
information of Visio. The selected financial data in the table are derived from
the financial statements of Visio. The data should be read in conjunction with
the financial statements, related notes and other financial information
included herein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
-------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues.......................... $20,616 $34,224 $59,862 $100,775 $165,995
Operating income.................. $ 157 $ 2,932 $13,570 $ 14,836 $ 32,786
Net income (loss)................. $ (152) $ 2,185 $10,496 $ 13,700 $ 28,108
Basic earnings (loss) per share... $ (0.02) $ 0.23 $ 0.41 $ 0.49 $ 0.96
Diluted earnings (loss) per
share............................ $ (0.02) $ 0.10 $ 0.36 $ 0.44 $ 0.89
Cash and short-term investments... $ 3,669 $ 7,424 $62,058 $ 81,212 $109,018
Total assets...................... $ 7,879 $19,770 $73,207 $112,701 $159,377
Debt.............................. $ 587 $ 453 $ 158 $ 387 $ --
Shareholders' equity (deficit).... $(3,476) $ (521) $55,359 $ 78,768 $127,207
</TABLE>
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Visio Corporation ("Visio" or "Company"), which commenced operations in
September 1990, develops drawing and diagramming software for the general
business personal computer user. All of the Company's products have been
developed for the Microsoft Windows 3.1, Windows 95, Windows 98 and Windows NT
operating systems and are marketed under the Visio brand. The Company's
primary products are Visio Standard, Visio Technical, Visio Professional,
Visio Enterprise and IntelliCAD(R). The Company's first product, Visio
Standard, which first shipped in November 1992, began creating a new market
for business diagramming. The Company shipped its second primary product,
Visio Technical, for technical drawing, in November 1994. The Company
introduced its third primary product in January 1997, Visio Professional, for
information systems and network design and documentation. In March 1998 the
Company introduced IntelliCAD for the computer aided drafting market, and in
November 1998 the Company introduced Visio Enterprise for network design and
documentation, software engineering and database design.
RESULTS OF OPERATIONS
In July 1998 the Company acquired Kaspia Systems, Inc. ("Kaspia"). The
transaction was accounted for as a pooling of interests and accordingly, prior
year results have been restated to include the combined results of operations
for Visio and Kaspia. See "Acquired Technology and Merger Expenses."
The following table sets forth statement of income data as a percentage of
revenues for the fiscal years indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30,
---------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Revenues............................................. 100% 100% 100%
Cost of revenues..................................... 15 11 9
----- ----- -----
Gross profit......................................... 85 89 91
Operating expenses:
Research and development........................... 15 16 16
Sales and marketing................................ 39 40 41
General and administrative......................... 8 8 8
Acquired technology and merger expenses............ -- 10 6
----- ----- -----
Total operating expenses............................. 62 74 71
----- ----- -----
Operating income..................................... 23 15 20
Interest and other income, net....................... 3 3 3
----- ----- -----
Income before income taxes........................... 26 18 23
Provision for income taxes........................... 8 4 6
----- ----- -----
Net income........................................... 18% 14% 17%
===== ===== =====
</TABLE>
REVENUES
Revenues include fees from the license of software products, maintenance and
support contracts, net of reserves for estimated future returns and
allowances. License revenues are derived from packaged software products,
volume licenses and certain OEM arrangements. The Company periodically
upgrades its products. Revenues from upgrades are cyclical and are typically
highest in the periods of and immediately following an upgrade. The last
significant upgrade occurred in August 1997 when Visio Standard, Visio
Technical and Visio Professional were upgraded to version 5.0. Included in
upgrade revenues are revenues from "cross-grades"
14
<PAGE>
whereby customers purchase upgrades to move from one Visio product to another.
The Company's average selling price per unit is typically higher on sales of
new units of packaged products than sales of upgrades, volume licenses or OEM
arrangements. Of the Company's primary products, Visio Professional, Visio
Technical, IntelliCAD and Visio Enterprise have higher average selling prices
than Visio Standard. Volume discounts are generally granted on products sold
through the Volume Licensing channel.
The increase in revenues for the three fiscal years ended September 30, 1998
was due primarily to sales volume growth across product groups, distribution
channels and geographic regions as well as an aggregate increase in average
selling price due to the change in product mix toward the higher priced
products. The Company anticipates increasing the selling prices for most of
its major products in fiscal 1999. However, the Company cannot predict how
such price increases will affect total revenues due to potential changes in
sales volume and continued fluctuations in aggregate average selling prices
from shifts in product, channel and geography mix. Contributing most
significantly to the growth in revenues in fiscal 1997 and fiscal 1998 was the
release of Visio Professional in January 1997.
PRODUCT GROUPS
The following table sets forth revenues by product group with the
corresponding percentage of total revenues and the year-to-year percentage
growth for the fiscal periods indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------
% % % % %
1996 TOTAL 1997 TOTAL GROWTH 1998 TOTAL GROWTH
(IN THOUSANDS) ------- ----- -------- ----- ------ -------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Business Diagramming.......................................... $41,952 70% $ 45,757 45% 9% $ 47,524 29% 4%
Technical Drawing............................................. 17,747 30 29,916 30 69 38,108 23 27
IT Design and Documentation................................... 163 -- 25,102 25 N/A 80,363 48 220
------- --- -------- --- --- -------- --- ---
Total revenues............................................... $59,862 100% $100,775 100% 68% $165,995 100% 65%
- --------------------------------------------------
======= === ======== === === ======== === ===
</TABLE>
The Company classifies its products into the following product groups: Visio
Standard, Visio Business Modeler and Visio Maps in the Business Diagramming
product group, Visio Technical and IntelliCAD in the Technical Drawing product
group, and Visio Professional and Visio Network Equipment in the IT Design and
Documentation product group. In early fiscal 1999, the Company introduced
Visio Enterprise that will be classified in the IT Design and Documentation
product group.
The increase in Business Diagramming product revenues in fiscal 1997
compared to fiscal 1996 was attributable to an increase in the volume of new
licenses, offset by a decrease in upgrade revenues as well as a decrease in
average selling prices due to an increase in the percentage of product sold
through the Volume Licensing channel. The increase in Business Diagramming
product revenues in fiscal 1998 compared to fiscal 1997 was attributable to an
increase in upgrade revenues due to the version 5.0 upgrade released in August
1997. Revenues from new licenses were flat in fiscal 1998 compared to fiscal
1997. The Company believes that in fiscal 1997 and 1998 the percentage growth
in the Business Diagramming product group was impacted by cannibalization from
Visio Professional to the extent that customers such as IT professionals who
may otherwise have purchased Visio Standard chose Visio Professional instead
for its added features and content.
The increase in Technical Drawing product revenues in fiscal 1997 compared
to fiscal 1996 was attributable to an increase in new license volume and
upgrade volume, offset by a decline in average selling prices due to the
increase in the percentage of product sold through the Volume Licensing
channel. The increase in Technical Drawing product revenues in fiscal 1998
compared to fiscal 1997 was attributable to an increase in new license volume,
upgrade volume and the release of IntelliCAD in March 1998. Average selling
prices for Technical Drawing products in fiscal 1998 were up slightly from
fiscal 1997 due to a higher percentage of revenues attributable to new
licenses rather than upgrades, offset by a higher percentage of revenues sold
through the
15
<PAGE>
Volume Licensing channel. The Company believes that in fiscal 1997 and 1998
the percentage growth in the Technical Drawing product group was also impacted
by cannibalization from Visio Professional. Prior to the release of Visio
Professional, Visio Technical was marketed to IT professionals as a solution
for network diagramming.
Visio Professional, the Company's first significant product in the IT Design
and Documentation product group, significantly impacted the revenue mix within
the product groups. Since Visio Professional was introduced in the second
quarter of fiscal 1997, sales of that product have grown as the product has
been accepted as a viable solution for IT professionals in the design and
documentation of their networks, databases, software applications and web
sites. Also contributing to the growth of Visio Professional has been the
growth of the IT design and documentation market as a whole. The revenue
growth of the IT Design and Documentation product group was slightly offset by
decreases in average selling prices due to the increase in the percentage of
products sold through the Volume Licensing channel.
SALES CHANNELS
The following table sets forth revenues by sales channel with the
corresponding percentage of total revenues and the year-to-year percentage
growth for the fiscal periods indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------
% % % % %
1996 TOTAL 1997 TOTAL GROWTH 1998 TOTAL GROWTH
(IN THOUSANDS) ------- ----- -------- ----- ------ -------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Distribution................................................. $45,522 76% $ 76,022 75% 67% $115,253 69% 52%
Direct....................................................... 5,989 10 6,819 7 14 10,966 7 61
Volume Licensing............................................. 6,165 10 17,046 17 176 39,343 24 131
OEM.......................................................... 2,186 4 888 1 (59) 433 -- (51)
------- --- -------- --- --- -------- --- ---
Total revenues............................................. $59,862 100% $100,775 100% 68% $165,995 100% 65%
- --------------------------------------------------
======= === ======== === === ======== === ===
</TABLE>
Visio classifies its revenues into four sales channels: "Distribution,"
"Direct," "Volume Licensing," and "OEM." Distribution revenues represent sales
of packaged products through national distributors and corporate, value added,
retail and mail order resellers. Direct revenues represent sales of packaged
products directly by the Company generally to end users responding to
advertising or marketing promotions. Volume Licensing revenues are derived
from volume licenses which are generally administered through corporate
resellers after the Company's sales staff has negotiated the sale. The sales
cycle for a volume license can extend up to eighteen months on significant
volume licenses as organizations can require extensive time to evaluate and
consider a large-scale implementation. Volume Licensing revenues usually do
not include any significant amount of packaged goods, but do include
maintenance and support revenues which are priced separately and recognized
over the terms of the contracts. OEM revenues include licenses of Visio
products to hardware and software manufacturers for bundling arrangements. OEM
revenues include packaged product sales, as well as royalty payments with no
associated product costs.
Growth during each of fiscal 1997 and 1998 in both the Distribution and
Direct channels was primarily driven by the growth of the IT Design and
Documentation product group revenues as well as revenues from the version 5.0
upgrade in August 1997. The strong growth in Volume Licensing reflects
continued investment in the corporate sales force and the Volume Licensing
programs. The Company increased its corporate sales staff from 45 at September
30, 1997 to 70 at September 30, 1998. The Company expects to hire additional
corporate sales staff in fiscal 1999 and therefore expects revenues from
Volume Licensing to continue to increase as a percentage of total revenues.
16
<PAGE>
GEOGRAPHY
The following table sets forth revenues by geography with the corresponding
percentage of total revenues and the year-to-year percentage growth for the
fiscal periods indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------
% % % % %
1996 TOTAL 1997 TOTAL GROWTH 1998 TOTAL GROWTH
(IN THOUSANDS) ------- ----- -------- ----- ------ -------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
North America................................................ $37,872 63% $ 65,238 65% 72% $ 98,735 59% 51%
Europe....................................................... 14,311 24 22,199 22 55 41,210 25 86
Rest of World................................................ 7,679 13 13,338 13 74 26,050 16 95
------- --- -------- --- --- -------- --- ---
Total revenues............................................. $59,862 100% $100,775 100% 68% $165,995 100% 65%
- --------------------------------------------------
======= === ======== === === ======== === ===
</TABLE>
The increase in Europe and Rest of World revenues in fiscal 1997 compared to
fiscal 1996 was primarily due to the release of Visio Professional and
continued growth of Visio Technical in these geographies. The decrease in
Europe revenues as a percentage of total revenues in fiscal 1997 compared to
fiscal 1996 was due primarily to the strong performance of Visio Professional
in the United States and a lower growth rate in Europe due to weaknesses in
certain European markets.
The increase in Europe and Rest of World revenues in fiscal 1998 compared to
fiscal 1997 was primarily attributable to the growth of the IT Design and
Documentation product group, the upgrade to version 5.0 and the increase in
Volume Licensing. In addition, continued investment in international markets,
including localized products, sales offices and staffing, also contributed to
the growth of international revenues. The growth in Rest of World in fiscal
1998 compared to fiscal 1997 was partially offset by general weakened economic
conditions and foreign currency devaluations in Japan and Southeast Asia.
These economic and currency conditions may continue to negatively impact
revenues and operating results in the Rest of World region in upcoming
periods.
The Company's operating results are affected by foreign exchange rates.
Approximately 20%, 19% and 30% of the Company's revenues were collected in
foreign currencies during fiscal 1996, 1997 and 1998, respectively. The impact
on operating income due to exchange rate fluctuation is partially mitigated as
most of the Company's international production costs and operating expenses
are incurred in foreign currencies as well. Therefore, the net impact of
exchange rate fluctuations on income from operations is less than the impact
on revenues.
COST OF REVENUES
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
------------------------------------
1996 1997 CHANGE 1998 CHANGE
(IN THOUSANDS) ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C>
Cost of revenues.......................... $8,708 $10,682 23% $15,132 42%
Percentage of revenues.................... 15% 11% 9%
</TABLE>
Cost of revenues varies with the mix of Distribution, Direct, Volume
Licensing and OEM revenues and with relative variations in the standard
product costs associated with each product group, and fluctuations in period
costs. Standard product costs consist primarily of documentation, packaging,
media duplication, assembly and material management costs. Period costs
consist primarily of certain royalties, technical support, production
management, freight and fulfillment, amortization of capitalized technology,
standard material variances and inventory valuation adjustments.
Standard costs associated with each product group are primarily determined
by the amount of packaged product delivered in that product group.
Accordingly, most of the Company's standard costs are associated with
Distribution and Direct revenues, the majority of which are derived from sales
of packaged products. Volume
17
<PAGE>
Licensing revenues have the lowest standard cost because they generally do not
include any substantial amount of packaged goods.
The decrease in cost of revenues as a percentage of revenues in each of
fiscal 1997 and 1998 primarily resulted from increased use of lower cost CD-
ROM media and other raw material cost reductions, an increase in the
percentage of revenues from the Technical Drawing and IT Design and
Documentation product groups which generally have lower standard product costs
as a percentage of revenues than the Business Diagramming products, and
increased Volume Licensing revenues which have little or no standard product
costs. These decreases were partially offset by increased royalty costs for
licensed technology including Visual Basic for Applications from Microsoft
Corporation and increased amortization costs of capitalized technology. The
Company believes its cost of revenues as a percentage of revenues may increase
in the future due to expected increases in support for future products of more
complexity and increased amortization of capitalized technology from recent
acquisitions. See "Acquired Technology and Merger Expenses."
RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
------------------------------------
1996 1997 CHANGE 1998 CHANGE
(IN THOUSANDS) ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C>
Research and development................... $9,057 $16,073 77% $27,257 70%
Percentage of revenues..................... 15% 16% 16%
</TABLE>
Research and development expenses consist primarily of personnel, contract
services, occupancy and equipment costs required to conduct the Company's
product development efforts. Product development includes product engineering,
documentation development, localization, usability testing, quality assurance
and advanced research and development costs. Product localization costs and
lump sum payments for technology are capitalized and amortized to development
generally over the lesser of the useful life or 18 months. Research and
development expenses are charged to operations as incurred. The Company has
not capitalized certain software development costs subsequent to the
establishment of technological feasibility, as these costs have not been
material.
Research and development expenses for each of fiscal 1997 and 1998 increased
primarily due to planned hiring in the Company's development organization and
staffing additions associated with the acquisition of certain technology and
assets from third parties. See "Acquired Technology and Merger Expenses." The
Company believes it will be necessary to continue to increase research and
development spending on an absolute basis during fiscal 1999 and beyond to
expand its product lines and introduce new language version product to
international markets.
SALES AND MARKETING
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
-------------------------------------
1996 1997 CHANGE 1998 CHANGE
(IN THOUSANDS) ------- ------- ------ ------- ------
<S> <C> <C> <C> <C> <C>
Sales and marketing...................... $23,496 $40,576 73% $68,596 69%
Percentage of revenues................... 39% 40% 41%
</TABLE>
Sales and marketing expenses have increased each fiscal year as the Company
continues building its worldwide sales, marketing and customer service
infrastructure. The increase in sales and marketing expenses in absolute terms
and as a percentage of revenues for each of fiscal 1997 and 1998 was primarily
due to expansion in international markets, increased product marketing costs
to introduce and support new products and product upgrades and investment in
the corporate sales force and the Volume Licensing programs.
The Company believes substantial spending on marketing awareness and
corporate sales staffing is essential to achieve revenue growth and to
maintain and enhance the Company's competitive position. Accordingly, Visio
expects sales and marketing expenses will continue to increase in absolute
terms over time.
18
<PAGE>
GENERAL AND ADMINISTRATIVE
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
-----------------------------------
1996 1997 CHANGE 1998 CHANGE
(IN THOUSANDS) ------ ------ ------ ------- ------
<S> <C> <C> <C> <C> <C>
General and administrative.................. $5,031 $8,353 66% $12,973 55%
Percentage of revenues...................... 8% 8% 8%
</TABLE>
General and administrative expenses increased in each of fiscal 1997 and
1998 in absolute terms primarily due to increased staffing and new information
technology systems to support the Company's growth as well as the
establishment and growth of Visio's international operations. The Company
expects general and administrative expenses to increase in absolute terms in
future periods as the Company continues to develop a sufficient infrastructure
to support its revenue growth.
ACQUIRED TECHNOLOGY AND MERGER EXPENSES
For all acquisitions accounted for under the purchase method, assets are
recorded at fair market value. The allocation of the purchase price to
acquired technology or capitalized technology is based on known valuation
techniques in the software industry. For some transactions, the Company
obtains an independent appraisal of the technology. Amounts allocated to
acquired technology relate to in-process research and development that were
immediately expensed in the period of acquisition because technological
feasibility was not established and no alternative commercial use was
identified. Amounts allocated to capitalized technology relate to technology
that had achieved technological feasibility at the time of acquisition.
Capitalized technology is amortized on a straight-line basis over the
estimated useful life of the technology.
Boomerang Technology Acquisition. On February 21, 1997, the Company acquired
certain technology and assets of Boomerang Technology Inc. ("Boomerang"), a
privately held developer of Autodesk AutoCAD-compatible software, located in
San Diego, California. Under the terms of the agreement, the Company acquired
source code and certain other assets for a cash payment of $6.7 million. This
transaction was accounted for using the purchase method and resulted in a
charge to acquired technology and merger expenses of $6.7 million for in-
process research and development in fiscal 1997.
SysDraw Software Company Acquisition. On May 1, 1997, the Company acquired
certain assets of Freedom Solutions Group, Inc., d.b.a. SysDraw Software
Company ("SysDraw"), a privately held network design and documentation
solutions provider, located in Lombard, Illinois. Under the terms of the
agreement, the acquisition price included $5.8 million in cash plus the
issuance of a $1.0 million note payable, the principal and interest of which
were paid by Visio in August 1998. Visio is required to pay $1.5 million of
additional consideration if revenues of the acquired products meet certain
performance goals within three years of the acquisition date. The transaction
was accounted for using the purchase method and resulted in capitalized
technology of $3.1 million, other assets of $100,000 and a charge to acquired
technology and merger expenses of $3.6 million for in-process research and
development in fiscal 1997. The capitalized technology is being amortized on a
straight-line basis over five years.
Merger with MarComp. On January 22, 1998, the Company merged with MarComp,
Inc. ("MarComp"), a privately held provider of programming toolkits for access
to Autodesk's AutoCAD .dwg and .dxf file formats, located in Parkton,
Maryland. Under the terms of the merger agreement, Visio exchanged 50,014
shares of its unregistered common stock for all of the outstanding shares of
MarComp. The transaction was accounted for as a pooling of interests and, due
to the immateriality of the amounts involved, prior period financial
statements have not been restated. The transaction resulted in an increase in
equity of $109,000 primarily due to the acquisition of cash and accounts
receivable from MarComp and resulted in approximately $100,000 in merger
related costs in fiscal 1998.
InfoModelers Technology Acquisition. On February 10, 1998, the Company
acquired certain technology and assets of InfoModelers, Inc. ("InfoModelers"),
a privately held, leading supplier of database and data
19
<PAGE>
warehouse visual design, access and query tools, located in Bellevue,
Washington. Under the terms of the agreement, Visio issued 200,000 shares of
its unregistered common stock for accounts receivable, fixed assets, tax
assets and certain technology assets. The transaction was accounted for using
the purchase method and was valued at approximately $8.0 million for
InfoModeler shareholders. This transaction resulted in a total charge to
acquired technology and merger expenses of $7.0 million for in-process
research and development in fiscal 1998. In addition, the Company recorded
approximately $1.0 million in other assets.
Decision Graphics Technology Acquisition. On May 5, 1998, the Company
acquired certain technology from Decision Graphics U.K. Ltd. ("Decision
Graphics"), a privately held provider of computer-aided facilities management
software, located in the U.K., for $729,000. The transaction was accounted for
using the purchase method and resulted in a total charge to acquired
technology and merger expenses of $729,000 for in-process research and
development in fiscal 1998.
Ketiv Technology Acquisition. On June 2, 1998, the Company acquired certain
CAD technology, software products and other assets from Ketiv Technologies,
Incorporated ("Ketiv"), a privately held provider of architecture, engineering
and construction software located in Portland, Oregon, for approximately $2.7
million. The transaction was accounted for using the purchase method and
resulted in capitalized technology of $2.5 million and a total charge to
acquired technology and merger expenses of $247,000 for in-process research
and development in fiscal 1998. The capitalized technology is being amortized
on a straight-line basis over five years.
Merger with Kaspia. On July 10, 1998, the Company merged with Kaspia, a
privately held developer of fully automated enterprise-network audit
functionality, including discovery, monitoring and reporting software, located
in Beaverton, Oregon. Under the terms of the merger agreement, Visio acquired
all of Kaspia's outstanding stock for 482,994 shares of Visio common stock,
valued at approximately $23.3 million for Kaspia shareholders. This
transaction was accounted for as a pooling of interests. Accordingly, the
financial statements include the combined results of operations for Visio and
Kaspia, and all prior financial statements have been restated. The transaction
resulted in approximately $1.2 million in merger related costs in fiscal 1998.
See Note 10 of "Notes to the Financial Statements" in Item 8 for additional
information on the above business combinations.
INTEREST AND OTHER INCOME, NET
Interest income was $1.8 million, $3.3 million and $4.4 million for fiscal
1996, 1997 and 1998, respectively. The increase in each of fiscal 1997 and
1998 was primarily due to larger cash and short-term investment balances.
Other income includes grant income from the Industrial Development Agency of
Ireland and foreign currency transaction gains and losses. The Company
conducts business in various foreign currencies and is therefore subject to
transaction exposures that arise from foreign exchange rate movements between
the dates that foreign currency transactions are recorded and the dates that
they are settled. In fiscal 1997, Visio began hedging certain foreign exchange
transaction exposures through the use of forward exchange contracts. To the
extent the Company has assets and liabilities denominated in foreign
currencies that are not hedged, the Company is subject to foreign currency
gains and losses. At September 30, 1997 and 1998, approximately $42,000 and
$7.9 million, respectively, of forward exchange contracts were outstanding
with maturities not exceeding 240 days. The net asset of forward exchange
contracts was approximately $12,000 and $222,000 at September 30, 1997 and
1998, respectively. There have been no significant foreign currency
transaction gains or losses to date with respect to these activities; however,
there can be no assurance that the Company's strategies will continue to be
effective or that transaction gains or losses can be minimized or forecasted
accurately. The Company does not hedge its translation risk.
INCOME TAXES
The Company's effective income tax rate was 31%, 25% and 25% for fiscal
1996, 1997 and 1998, respectively. The statutory tax rate in the U.S. was 34%
for fiscal 1996 and 1997 and 35% for fiscal 1998. The
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effective tax rate was lower than the statutory rates for the respective
years, and the decline in the effective tax rate in fiscal 1997 and 1998 was
primarily due to increases each year in the percentage of income taxed in
foreign jurisdictions at rates lower than in the U.S., increases in tax-exempt
interest income, increases in research and development credits and tax
benefits from the utilization of net operating loss carryforwards obtained in
the acquisition of certain technology and assets of InfoModelers and the
merger with Kaspia in fiscal 1998. Offsetting the decrease in effective tax
rate in fiscal 1998 was the tax effect of non-deductible acquired technology
and merger expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and short-term investments totaled $81.2 million at
September 30, 1997 compared to $109.0 million at September 30, 1998. The
investment portfolio consisted of high-quality fixed income securities and
government issues. The increase in cash and short-term investments for fiscal
1997 and 1998 was due primarily to cash generated from operations and cash
proceeds from the issuance of shares through the employee stock option and
stock purchase programs. The increase in cash and short-term investments was
partially offset by purchases of equipment, leasehold improvements and
capitalized technology, the payoff of the note payable issued in the
acquisition of SysDraw and the payoff of the Company's lines of credit. The
increase in cash and short-term investments in fiscal 1998 was also partially
offset by the increase in accounts receivable at September 30, 1998. This was
due to a larger percentage of revenues being generated later in the fourth
quarter of fiscal 1998 as compared to the same period in fiscal 1997. In
addition, receivables have grown due to the mix of revenues from international
markets growing from 35% in 1997 to 41% in 1998. Payment cycles are generally
longer in international regions than domestically. The Company believes the
percentage of revenues from international regions will continue to grow and
thus expects that accounts receivable will grow, over time, faster than normal
revenue growth would indicate.
The Company is exposed to market risk related to changes in interest rates
and foreign currency exchange rates, each of which could adversely affect the
value of the Company's investments. The Company does not use derivative
financial instruments for speculative or trading purposes.
The Company maintains a short-term investment portfolio consisting of
interest bearing securities with an average maturity of less than one year.
These securities are classified as "available-for-sale" securities. The
interest bearing securities are subject to interest rate risk and will fall in
value if market interest rates increase. If market interest rates were to
increase immediately and uniformly by 10% from levels at September 30, 1998,
the fair value of the portfolio would decline by an immaterial amount. Because
the Company has the ability to hold its fixed income investments until
maturity, it does not expect its operating results or cash flows to be
affected to any significant degree by a sudden change in market interest rates
on its securities portfolio.
The Company enters into foreign exchange forward contracts to hedge certain
balance sheet exposures against future movement in foreign exchange rates.
Gains and losses on the forward contracts are largely offset by gains and
losses on the underlying exposure. A hypothetical 10% appreciation or
depreciation of each of the denominated foreign currencies from September 30,
1998 market rates would impact the unrealized value of the Company's forward
contracts by plus or minus $800,000. These gains or losses on the forward
contracts are largely offset by the gains and losses on the underlying
transactions and, consequently, the Company does not expect that a sudden or
significant change in foreign exchange rates would have a material impact on
future net income or cash flows. To the extent the Company has assets and
liabilities denominated in foreign currencies that are not hedged, the Company
is subject to foreign currency transaction gains and losses. The Company does
not hedge its translation risk.
At September 30, 1998, the Company's principal commitments consisted
primarily of leases on its facilities. The Company's capital expenditures of
$7.1 million in fiscal 1997 included the purchase of a year 2000 compliant
enterprisewide business software system. The Company's capital expenditures of
$7.7 million in fiscal 1998 included the purchase of furniture and fixtures,
leasehold improvements and computer equipment associated with the increase in
the Company's staffing level. In February 1999, the Company expects to
relocate its Seattle,
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Washington operations to a new leased facility. At September 30, 1998, the
Company had commitments for capital expenditures of approximately $9.4 million
related to facility expansion. Subsequent to September 30, 1998, the Company
entered into a lease for a new facility in Dublin, Ireland. The Company also
exercised an option for additional space in connection with its new facility
in Seattle. The Company believes that its current cash balances, short-term
investments and cash flow from operations will be sufficient to meet its
working capital and capital expenditure requirements for at least the next 12
months.
From time to time, the Company evaluates potential acquisitions of
businesses, products or technologies that complement the Company's business.
In fiscal 1997 the Company paid a combined $12.5 million related to the
acquisition of technology and other assets from Boomerang and SysDraw. In
addition, the Company issued a $1 million note payable to SysDraw, which note
was paid in fiscal 1998, and agreed to pay contingent consideration of $1.5
million based on the achievement of certain performance goals within three
years of the acquisition date. In fiscal 1998 the Company paid a combined $3.4
million related to the acquisition of certain technology from Decision
Graphics and Ketiv. At September 30, 1998, the Company had no other material
agreements or commitments with respect to any such transactions.
YEAR 2000 ISSUES
The calendar year 2000 has the potential to cause problems in computer
systems that record years using only the last two digits of the year. For
example, such systems record 1996 as 96, and 2000 as 00. This method of dating
can introduce problems in date calculation so that systems that rely on two-
digit date identifiers may not work as expected after December 31, 1999 or
when handling dates after December 31, 1999. The year 2000 issue creates risks
for the Company from unforeseen problems in its own products or systems or in
the systems of third parties from whom the Company obtains products or
services or with whom the Company otherwise transacts business.
In fiscal 1997 the Company replaced its worldwide accounting/finance,
manufacturing, sales and distribution systems with a year 2000 compliant
enterprisewide business software system, and in fiscal 1998 the Company
extended the application of such enterprisewide software to its human
resources systems. By mid 1999, the Company intends to replace its worldwide
customer management systems with a system that has been certified as year 2000
compliant. In addition, the Company has established cross-functional teams to
identify and resolve the Company's year 2000 issues. The primary functions of
these teams include (a) conducting audits of the Company's main internal
systems, including telecommunications and all material software and hardware
in the Company's desktop environments, (b) implementing any necessary plans to
correct deficiencies in such internal systems, (c) communicating with certain
key parties with whom the Company conducts business regarding the year 2000
readiness of such parties' systems and (d) coordinating the testing of the
Company's products to determine the year 2000 readiness of those products.
Internal Systems
The Company has completed the audit of its telecommunication systems and
expects to complete the audits of its other internal systems by March 31,
1999. The Company intends to complete any required corrective actions
identified in such audits by September 30, 1999. Although the Company does not
believe that it will incur any material costs or experience material
disruptions in its business associated with preparing its internal systems for
the year 2000, there can be no assurances that the Company will not experience
serious unanticipated negative consequences or material costs caused by
undetected errors or defects in the technology used in its internal systems,
which are composed of third party software, third party hardware that contains
embedded software and the Company's own software. The most reasonably likely
worst case scenarios would include corruption of data contained in the
Company's internal information systems, hardware failure, and the failure of
infrastructure services provided by government agencies and other third
parties (e.g., electricity, phone service, water transport, internet services,
etc.). The Company intends to prepare contingency plans for such events by
September 30, 1999. The Company expects its contingency plans to include,
among other things, manual "work-arounds" for software and hardware failures,
as well as substitution of systems, if necessary.
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Vendors and Service Providers
In September 1998, the Company began distributing detailed questionnaires to
key vendors and service providers to determine the year 2000 status of their
systems. Approximately one-half of those questionnaires have been returned.
Though the Company expects to receive additional questionnaires throughout
1999, there can be no assurance that all of the contacted third parties will
respond. To date, no material year 2000 risks have been identified during the
Company's communications with its key vendors and service providers. To the
extent the Company identifies such risks, the Company will work with the
appropriate third parties to mitigate such risks. However, the disruption or
failure at or after the year 2000 of the systems of key vendors or service
providers, as well as the failure of any contingency plans, remains a
possibility and could have a material adverse effect on the Company's results
of operations or financial condition.
Company Products
With respect to its own products, the Company is continuing to conduct
quality and testing practices regarding the year 2000 transition. Current
information about the year 2000 status of the Company's products is available
on the Company's web site at www.visio.com/yr2000.html. The Company believes
its current products, with any applicable updates, are well prepared for year
2000 issues. However, there can be no guarantee that one or more current
Company products do not contain year 2000 deficiencies that may result in
material costs to the Company. In particular, versions of the Company's
products that are not the most currently released or that are not currently
being developed may not be year 2000 compliant.
Because it is in the business of selling software products, the Company's
risk of being subjected to lawsuits relating to year 2000 issues is likely to
be greater than that of companies in other industries. Because computer
systems may include different hardware, firmware and software components from
different manufacturers, it may be difficult to determine which component in a
computer system may cause a year 2000 issue. As a result, the Company may be
subjected to year 2000-related lawsuits independent of whether its products
and services are year 2000 compliant. The outcomes of any such lawsuits and
the impact on the Company cannot be predicted at this time.
The Company does not expect total costs associated with becoming year 2000
compliant to be material to its financial position or results of operations.
To date, the cost of the year 2000 project has been approximately $75,000 and
the total cost of the project is anticipated to be approximately $125,000.
These amounts do not include the cost of the enterprisewide business software
implemented in fiscal 1997 or the anticipated cost of the Company's new
customer management system.
EUROPEAN MONETARY UNION
Within Europe, the European Economic and Monetary Union (the "EMU") will
introduce a new currency, the Euro, on January 1, 1999. The new currency is in
response to the EMU's policy of economic convergence to harmonize trade
policy, eliminate business costs associated with currency exchange and to
promote the free flow of capital, goods and services.
On January 1, 1999, the participating countries are scheduled to adopt the
Euro as their local currency, initially available only for currency trading on
currency exchanges and non-cash (banking) transactions. The existing local
currencies, or legacy currencies, will remain legal tender through January 1,
2002. Beginning on January 1, 2002, Euro-denominated bills and coins will be
issued for cash transactions. For a period of six months from this date, both
legacy currencies and the Euro will be legal tender. On or before July 1,
2002, the participating countries will withdraw all legacy currency and use
exclusively the Euro.
The Company has recognized the introduction of the Euro as a significant
event with potential implications for existing operations. Currently,
participating countries in the EMU where the Company operates include Ireland,
Germany, France, Italy, Spain and the Netherlands. The Company expects non
participating European Union countries, such as the United Kingdom, to
eventually join the EMU.
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The Company has committed resources to conduct risk assessments and to take
corrective actions, where required, to ensure the Company is prepared for the
introduction of the Euro. The Company has undertaken a review of the Euro
implementation and has concentrated on areas such as operations, finance,
treasury, legal information management, procurement and others, both in
participating and non participating European Union countries where the Company
operates. Also, a review of existing legacy accounting and business systems
and other business assets have been reviewed for Euro compliance, including
assessing any risks from third parties.
Progress regarding Euro implementation is reported periodically to
management. Because of the staggered introduction of the Euro regarding non-
cash and cash transactions, the Company has developed its plans to address
first its accounting and business systems and then its business assets. The
Company expects to be Euro compliant within its accounting and business
systems by December 1998 and compliant within its other business assets prior
to the introduction of the Euro bills and coins. Compliance in participating
and non participating countries will be achieved primarily through upgraded
systems in cases where existing systems were already planned to be upgraded.
Remaining systems for which there is no planned upgrade will be modified to
achieve compliance. The Company does not currently expect to experience any
significant operational disruptions or to incur any significant costs,
including any currency risk, which could materially affect the Company's
liquidity or capital resources. The Company is preparing plans to address
issues within the transitional period when both legacy and Euro currencies may
be tendered. The Company does not anticipate any long-term competitive
implications or the need to materially change its mode of conducting business
as a result of increased transparency of pricing when sales in various
countries are all denominated in the Euro rather than in different currencies.
To the extent the Company is unable, within the necessary timeframe, to
complete any upgrades or modifications to its systems or business assets that
are required to support Euro transactions, the Company's results of operations
and financial condition could be materially adversely affected. In addition,
the Company faces risks to the extent that key vendors and service providers
are unable to make appropriate modifications to support Euro transactions.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In October 1997 the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition"
which supersedes SOP 91-1, the former literature on software revenue
recognition. This Statement will be effective for the Company beginning in
fiscal year 1999. In March 1998, AcSEC issued SOP 98-4, "Deferral of the
Effective Date of a Provision of SOP 97-2, Software Recognition," which amends
certain provisions of SOP 97-2. The Company believes it is substantially in
compliance with the provisions of SOP 97-2 as amended by SOP 98-4 and its
adoption is not expected to have a material impact on the financial position
or results of operations of the Company.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 130, "Reporting Comprehensive Income." Statement No. 130
establishes standards for reporting and displaying comprehensive income and
its components in a full set of financial statements and will require the
Company to display an amount representing total comprehensive income in its
financial statements. The Company will be required to implement Statement No.
130 for its first quarter of fiscal 1999.
In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments
of an Enterprise and Related Information." Statement No. 131 establishes
standards for the manner in which public companies report information about
operating segments in annual and interim financial statements. The Company
will be required to implement Statement No. 131 for its fiscal year 1999.
Management has not yet determined what the impact, if any, will be to the
Company's future disclosures.
In March 1998, the AcSEC issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This statement
requires companies to capitalize qualifying computer software costs incurred
during the application development stage and amortize them over the software's
estimated useful
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life. The Company is required to adopt this statement in fiscal year 2000 and
management has not yet determined what the effect of SOP 98-1 will be on the
earnings and financial position of the Company.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which is required to be adopted in fiscal
year 2000. Statement No. 133 provides a comprehensive and consistent standard
for the recognition and measurement of derivatives and hedging activities. The
Company currently hedges certain foreign exchange transaction exposures.
Management has not yet determined what the effect of Statement No. 133 will be
on the earnings and financial position of the Company.
CERTAIN RISK FACTORS THAT MAY IMPACT FUTURE RESULTS OF OPERATIONS
Except for the historical information contained in this Annual Report on
Form 10K, the matters discussed herein, particularly those identified with the
words "expects," believes," "anticipates" and similar expressions, are
forward-looking statements. These statements reflect management's best
judgment based on factors known to them at the time of such statements. Such
forward-looking statements are subject to certain risks and uncertainties,
including without limitation those set forth below, which risks and
uncertainties could cause actual results to differ materially from those
anticipated. The factors set forth below, many of which are beyond the
Company's control, should be carefully considered when evaluating the
Company's business and prospects and the forward-looking information provided
by Visio pursuant to the safe harbor provisions established by recent
securities legislation. Readers should also carefully review the risk factors
described in other documents the Company files from time to time with the
Securities and Exchange Commission.
Fluctuations in Quarterly Performance. The Company's quarterly results of
operations can be affected substantially by demand for the Company's products,
the timing and customer acceptance of new products, product enhancements and
promotions by the Company or its competitors, product returns, fluctuations in
foreign exchange rates, the impact of acquisitions of other technologies or
companies and changes in economic conditions. The Company is increasingly
focusing its sales efforts on volume licensing to large accounts. The timing
of those licenses could significantly affect quarterly results of operations.
A significant portion of the Company's operating expenses are relatively fixed
in the short term, and planned expenditures are based on the Company's
estimates for quarterly revenues. As a result, variations in timing of
revenues can cause significant variations in quarterly results of operations.
In general, the Company has experienced the strongest demand for its software
products during the December quarter and the weakest demand in the June and
September quarters. These seasonal patterns have been overshadowed in
particular quarters by the timing of new product introductions, expansion into
international markets, the execution of volume licenses and other factors
affecting the Company's business.
Dependence on Microsoft Windows; Relationship With Microsoft. Substantially
all of the Company's revenues are derived from sales of products that are
designed to work within a Microsoft Windows environment and are marketed
primarily to Windows users. As a result, sales of the Company's products would
be materially affected by market developments adverse to Windows-based
products. As a developer of products for Windows, the Company has historically
enjoyed a collaborative working relationship with Microsoft. If the
relationship were disrupted for any reason, such as a decision by Microsoft to
introduce or acquire products that compete directly with the Company's
products, the Company's development efforts and results of operations could be
materially adversely affected.
Competition. The computer software drawing and diagramming markets are
intensely competitive and subject to rapidly changing technology and evolving
standards. The software industry has limited barriers to entry, and the
availability of personal computers with continuously expanding capabilities,
at progressively lower prices, contributes to the ease of market entry.
Because of this and other factors, competitive conditions in the future are
likely to intensify. The markets for the Company's products are characterized
by significant price competition, and the Company expects it will face
increasing pricing pressures. Increased competition could result in price
reductions, reduced profit margins and loss of market share, which could
materially adversely affect the Company's results of operations.
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Substantial Dependence on a Single Technology; Limited Product Line. The
Company has derived substantially all of its revenues to date from sales of
drawing and diagramming products based on its core technology. The Visio
product line and related enhancements are expected to continue to account for
a significant percentage of the Company's revenues for the foreseeable future.
A decline in demand for these products as a result of competition,
technological change or any other reason would have a material adverse effect
on the Company's results of operations.
Rapid Technological Change and New Product Development. The markets for the
Company's products are characterized by rapidly changing technology, evolving
industry standards, changes in customer needs and frequent new product
introductions. The Company's future success will depend on its ability to
enhance its current products, to develop new products that meet changing
customer needs on a timely and cost-effective basis and to respond to emerging
industry standards and other technological changes. Any failure by the Company
to anticipate or respond adequately to changes in technology and customer
preferences, or any significant delays in product development or introduction,
would have a material adverse effect on the Company's results of operations.
New Product Introductions. The Company periodically introduces new products
and upgrades its current products in order to meet changing customer needs and
anticipated market demand. Due to potential difficulties in the development
process, there can be no assurance that such future products and upgrades will
be released in a timely manner or that they will receive market acceptance, if
and when released. Despite significant testing by the Company and by current
and potential customers, errors or "bugs" may still be found in new products
or upgrades after commencement of commercial shipments. Delays in the
commencement of commercial shipments of new products or upgrades, as well as
the discovery of errors or bugs after release, may result in adverse
publicity, customer dissatisfaction and delay or loss of product revenues.
Furthermore, from time to time the Company and others may announce new
products, capabilities or technologies that have the potential to replace or
shorten the life cycles of the Company's existing products. There can be no
assurance that announcements of currently planned or other new products by the
Company, by Microsoft or by the Company's competitors will not cause customers
to defer purchasing existing Company products or cause distributors to return
products to the Company. Delays or difficulties associated with new product
introductions or upgrades could have a material adverse effect on the
Company's business, financial condition and results of operations.
Management of Growth and Future Acquisitions; Risks Associated With Lease
Commitments. The Company has recently experienced rapid growth that has
placed, and will continue to place, a significant strain on its management and
operations. The Company's ability to manage its growth effectively will
require it to improve its operating, financial and management information
systems and to attract, train, motivate, manage and retain key employees.
Furthermore, the Company intends to enter into strategic relationships and
make strategic acquisitions of technologies and businesses in order to expand
its product lines and the capabilities of its current products. The risks
associated with acquisitions, including increased costs and uncertain benefits
and the ability to integrate operations of acquired companies, could adversely
affect the Company's results of operations. In addition, the Company has
committed to significant expansions of its corporate headquarters in Seattle,
Washington and the headquarters of its international operations in Dublin,
Ireland. If the Company's business does not grow at rates currently
anticipated by management, the Company may be unable to cost-effectively
utilize or sublease the new space, and the Company's results of operations
could be materially adversely affected.
Risks Associated With International Operations. The Company expects that
international sales will account for an increasing portion of its revenues.
Most of the Company's international revenues are denominated in foreign
currencies. Consequently, a decrease in the value of a relevant foreign
currency in relation to the U.S. dollar occurring after establishment of
prices and before receipt of payment by the Company would have an adverse
effect on the Company's results of operations. Additionally, the Company may
be materially and adversely affected by increases in duty rates, exchange or
price controls, repatriation restrictions, or other restrictions on foreign
currencies. The Company's international operations are subject to certain
other risks common to international operations, including without limitation
government regulations, import restrictions, and, in certain jurisdictions,
reduced protection for the Company's intellectual property rights.
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Change in Licensing and Marketing Methods. The Company is increasingly
emphasizing sales to enterprises through volume, installment and enterprise
licensing arrangements. These licensing arrangements typically involve a
longer cycle (up to 18 months from first contact to execution of an initial
license) than sales through other distribution channels, require a greater
investment of resources in establishing the enterprise relationship and result
in lower operating margins. The timing of the execution of volume licenses, or
their nonrenewal or renegotiation by large customers, could cause volatility
in the Company's quarterly results of operations and could materially
adversely affect it's results of operations.
Continued Reliance on Resellers and Distributors. The Company expects to
continue to rely on resellers and distributors for sales of its products in
domestic and international markets. Sales to the Company's two largest
distributors during fiscal 1996, 1997 and 1998 accounted for an aggregate of
50%, 47% and 44% of the Company's revenues, respectively. The distribution
channels through which software products are sold have been characterized by
rapid change, including consolidations and financial difficulties of certain
distributors and resellers, the emergence of new resellers such as general
mass merchandisers and the development of new channels such as electronic
networks. The Company's resellers and distributors carry competing product
lines. There can be no assurance that resellers and distributors will continue
to purchase the Company's products or be able to market them effectively or
that the Company will be able to effectively distribute its products through
new distribution channels.
Reliance on Outsourcing. The Company outsources most of the production of
its products, which primarily involves duplication of various media and the
printing of user manuals and packaging materials. In addition, the Company
outsources certain aspects of order fulfillment, technical support, customer
service and localization of its products. So long as it remains economically
advantageous to do so, the Company intends to continue, and possibly to
increase, outsourcing in the future. Although the Company believes that it has
adequate alternative suppliers of such services, the loss of a supplier or its
inability to perform contracted services could materially adversely affect the
Company's results of operations.
Dependence on Proprietary Technology. The Company's ability to compete
effectively depends in large part on its ability to develop and maintain
proprietary aspects of its technology. The Company relies on a combination of
copyright, trademark and patent laws, trade secret protection, confidentiality
procedures and contractual provisions, including nondisclosure agreements with
employees and others, to protect its proprietary rights. However, despite the
Company's efforts, unauthorized parties may attempt to copy aspects of the
Company's products or to obtain and use information that the Company regards
as proprietary. Policing unauthorized use of the Company's products is
difficult, and while the Company is unable to determine the extent to which
piracy of its software products exists, software piracy can be expected to be
a persistent problem. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to as great an extent as the laws of
the United States. There can be no assurance that the Company's means of
protecting its proprietary rights will be adequate, that competitors will not
independently develop similar technology or that claims of infringement of
third parties' intellectual property rights will not occur and, possibly,
prevail. Costs associated with an adverse judgment or settlement of
intellectual property litigation, as well as the cost of responding to a
claim, both in legal fees and expenses and the diversion of management
resources, whether or not the claim is valid, could have a material adverse
effect on the Company's results of operations.
Dependence on Key Personnel. The Company's success depends to a significant
extent on a small number of senior management and technical personnel. The
Company's growth and future success will depend in large part on its
continuing ability to hire, motivate and retain highly qualified management,
technical, sales and marketing personnel. Competition for such personnel is
intense and there can be no assurance that the Company will be successful in
hiring, motivating or retaining such qualified personnel.
Changing Accounting Standards. The principal organizations responsible for
establishing accounting standards, including the Securities and Exchange
Commission and the Financial Accounting Standards Board, continually review,
modify, provide interpretations on and create new accounting standards.
Changes to, interpretations of and the creation of new accounting standards
could materially modify the presentation of the
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Company's financial results, and such a change in presentation could
materially adversely affect the Company's business, financial condition and
results of operations. If such changes to accounting standards were applied
retroactively, the Company may be required to restate its financial statements
for prior periods.
Reliance on Independent Developers for Future Market Expansion. The Company
has designed its technology with an open architecture and has incorporated
certain features to encourage independent solution providers, system
integrators and other software developers to design industry or customer-
specific drawing and diagramming solutions that will extend the adoption and
use of the Company's products. There can be no assurance, however, that
developers will design solutions to extend the Company's products, and the
failure of these development efforts to materialize could adversely affect the
expansion of the markets for the Company's products. If independent developers
do design solutions for specific industries or customers, the Company could be
effectively precluded from offering add-on products that address the same
industries or customers.
Year 2000. The year 2000 issue creates risks for the Company from unforeseen
problems in its own products or systems or in the systems of third parties
from whom the Company obtains products or services or with whom the Company
otherwise transacts business. For a discussion of such risks, readers should
refer to the disclosure under the heading "Year 2000" in this Item 7
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Euro Implementation. For a discussion of the risks associated with the
introduction of the Euro currency, readers should refer to the disclosure
under the heading "European Monetary Union" in this Item 7 Management's
Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated by reference from the
section labeled "Liquidity and Capital Resources" in Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of
this Annual Report on Form 10-K.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Visio Corporation
We have audited the accompanying balance sheets of Visio Corporation as of
September 30, 1997 and 1998, and the related statements of income,
shareholders' equity, and cash flows for each of the three years in the period
ended September 30, 1998. Our audits also include the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Visio Corporation at
September 30, 1997 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended September 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/ Ernst & Young LLP
_____________________________________
Seattle, Washington
October 23, 1998
29
<PAGE>
VISIO CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
1997 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash....................................................... $ 59,840 $ 67,088
Short-term investments..................................... 21,372 41,930
Accounts receivable........................................ 6,587 15,934
Inventories................................................ 1,079 1,228
Prepaid expenses and other................................. 4,231 6,662
Deferred income taxes...................................... 4,873 4,709
-------- --------
Total current assets..................................... 97,982 137,551
Equipment and leasehold improvements......................... 8,254 10,191
Capitalized technology....................................... 2,861 4,609
Other assets................................................. -- 380
Non-current deferred income taxes............................ 3,604 6,646
-------- --------
Total assets............................................. $112,701 $159,377
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... $ 6,019 $ 5,223
Accrued compensation and benefits.......................... 2,706 4,464
Other accrued liabilities.................................. 11,751 13,717
Deferred revenue........................................... 9,082 7,830
Income taxes payable....................................... 2,988 936
Current portion of notes payable........................... 1,000 --
-------- --------
Total current liabilities................................ 33,546 32,170
Long-term notes payable...................................... 387 --
Commitments
Shareholders' equity:
Common stock, $.01 par value per share:
Authorized--100,000 shares; issued and outstanding--28,633
and 30,191................................................ 56,367 75,434
Retained earnings.......................................... 22,401 51,773
-------- --------
Total shareholders' equity............................... 78,768 127,207
-------- --------
Total liabilities and shareholders' equity............... $112,701 $159,377
======== ========
</TABLE>
See accompanying notes.
30
<PAGE>
VISIO CORPORATION
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
-------------------------------
1996 1997 1998
-------------------- ----------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Revenues...................................... $ 59,862 $ 100,775 $ 165,995
Cost of revenues.............................. 8,708 10,682 15,132
--------- ---------- ----------
Gross profit.................................. 51,154 90,093 150,863
Operating expenses:
Research and development.................... 9,057 16,073 27,257
Sales and marketing......................... 23,496 40,576 68,596
General and administrative.................. 5,031 8,353 12,973
Acquired technology and merger expenses..... -- 10,255 9,251
--------- ---------- ----------
Total operating expenses...................... 37,584 75,257 118,077
--------- ---------- ----------
Operating income.............................. 13,570 14,836 32,786
Interest and other income, net................ 1,538 3,466 4,894
--------- ---------- ----------
Income before income taxes.................... 15,108 18,302 37,680
Provision for income taxes.................... 4,612 4,602 9,572
--------- ---------- ----------
Net income.................................... $ 10,496 $ 13,700 $ 28,108
========= ========== ==========
Basic earnings per share...................... $ 0.41 $ 0.49 $ 0.96
========= ========== ==========
Shares used in computation of basic earnings
per share.................................... 25,598 27,839 29,394
========= ========== ==========
Diluted earnings per share.................... $ 0.36 $ 0.44 $ 0.89
========= ========== ==========
Shares used in computation of diluted earnings
per share.................................... 29,358 30,792 31,669
========= ========== ==========
</TABLE>
See accompanying notes.
31
<PAGE>
VISIO CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
----------------------------------
1996 1997 1998
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net income............................... $ 10,496 $ 13,700 $ 28,108
Depreciation and amortization............ 1,357 2,632 6,736
Amortization of (premiums) discounts on
short-term investments.................. 85 92 (852)
Deferred income taxes.................... (13) (6,241) (1,894)
Issuance of common stock for acquired
technology.............................. -- -- 6,718
Other non-cash items..................... (183) 24 (137)
Changes in operating assets and
liabilities............................. 8,399 11,836 (7,823)
---------- ---------- ----------
Net cash from operations................. 20,141 22,043 30,856
---------- ---------- ----------
CASH FLOWS USED FOR INVESTMENTS:
Purchases of short-term investments...... (27,653) (21,012) (49,995)
Proceeds from maturities of short-term
investments............................. 9,150 18,275 30,500
Purchases of equipment and leasehold
improvements............................ (2,568) (7,139) (7,684)
Purchases of capitalized technology...... -- (2,135) (2,532)
Purchases of other assets................ 180 -- (385)
---------- ---------- ----------
Net cash used for investments............ (20,891) (12,011) (30,096)
---------- ---------- ----------
CASH FLOWS FROM FINANCING:
Issuance of common stock................. 1,447 6,698 7,030
Proceeds from initial public offering.... 35,680 -- --
Proceeds from notes payable.............. -- 400 647
Payments on notes payable................ (373) (495) (2,034)
---------- ---------- ----------
Net cash from financing.................. 36,754 6,603 5,643
---------- ---------- ----------
Net increase in cash....................... 36,004 16,635 6,403
Effect of exchange rates on cash........... 29 (252) 845
Cash, beginning............................ 7,424 43,457 59,840
---------- ---------- ----------
Cash, ending............................... $ 43,457 $ 59,840 $ 67,088
========== ========== ==========
SUPPLEMENTAL DISCLOSURES:
Income tax payments...................... $ 4,010 $ 6,996 $ 10,196
========== ========== ==========
Interest paid............................ $ -- $ -- $ 70
========== ========== ==========
</TABLE>
See accompanying notes.
32
<PAGE>
VISIO CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30,
--------------------------
1996 1997 1998
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
COMMON STOCK
Balance, beginning of year......................... $ 1,223 $46,578 $ 56,367
Conversion of preferred stock..................... 6,545 -- --
Initial public offering, net of offering of
$3,848........................................... 35,680 -- --
Issuance of common stock.......................... 210 3,209 944
Issuance of common stock for acquisitions......... -- -- 7,785
Stock options exercised........................... 153 1,732 4,297
Stock warrants exercised.......................... 750 395 376
Stock issued under employee stock purchase plan... 341 1,427 2,329
Repurchase of common stock........................ (7) (64) --
Stock option tax benefit.......................... 1,683 3,090 3,336
------- ------- --------
Balance, end of year............................... 46,578 56,367 75,434
------- ------- --------
RETAINED EARNINGS
Balance, beginning of year......................... (1,744) 8,781 22,401
Net income........................................ 10,496 13,700 28,108
Acquired company's retained earnings.............. -- -- 109
Translation adjustments........................... 29 (230) 1,149
Net short-term investment unrealized gains........ -- 150 6
------- ------- --------
Balance, end of year............................... 8,781 22,401 51,773
------- ------- --------
Total shareholders' equity.......................... $55,359 $78,768 $127,207
======= ======= ========
</TABLE>
See accompanying notes.
33
<PAGE>
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Visio Corporation ("Visio" or the "Company") is a leading supplier of
business drawing and diagramming software products. The Company's primary
products are Visio(R) Standard, Visio Technical, Visio Professional and
IntelliCAD(R). Visio's software enables business and technical users to create
drawings and diagrams ranging from simple diagrams such as flowcharts, block
diagrams and organizational charts to complex technical drawings such as space
plans, electrical schematics and network designs.
Basis of Presentation
The Company's fiscal year is the 52/53-week period that ends on the Friday
nearest September 30. For convenience of presentation, all fiscal periods in
these financial statements are treated as ending on a calendar month end. The
accompanying financial statements are consolidated to include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated. Certain reclassifications were
made to prior-year financial statements to conform to the current year
presentation. During fiscal 1998, Visio merged with MarComp, Inc. ("MarComp")
and Kaspia Systems, Inc. ("Kaspia") in transactions accounted for as pooling
of interests. All financial information has been restated to reflect the
combined operations of Visio and Kaspia. The results of operations of MarComp
were not material to Visio's financial statements, and therefore, amounts
prior to the period of the merger were not combined with Visio's financial
statements.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Foreign Currency Translation
Assets and liabilities denominated in foreign currencies are translated to
U.S. dollars at the exchange rate on the balance sheet date. Revenues and
expenses are translated at the average rates of exchange prevailing during the
year. The cumulative translation adjustments resulting from this process are
included as a separate component of retained earnings. Gains and losses on
foreign currency transactions are netted and included in other income.
Revenue Recognition
Revenues and accounts receivable are principally from distributors and
resellers of the Company's products. The Company performs periodic credit
evaluations of its customers and maintains reserves for potential credit
losses. Revenues are generally recognized at the time of shipment, net of
deferrals for inventory at distributors which the Company estimates to be in
excess of levels appropriate for that channel and adjustments for estimated
future returns. Revenues attributable to free upgrade rights are deferred and
not recognized until the free upgrade has been shipped to the customer.
Revenues attributable to the sale of extended customer support and maintenance
programs are deferred and recognized ratably over the contract period.
Financial Instruments
The Company considers highly liquid financial instruments purchased with an
original maturity of three months or less to be cash equivalents and
classifies these instruments as cash on the balance sheet. Management
34
<PAGE>
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
currently classifies its short-term investments consisting primarily of debt
securities as available-for-sale. These securities are reported at market
value. Unrealized gains and losses are included as a separate component of
retained earnings. Realized gains and losses and declines in value judged to
be other than temporary on available-for-sale securities are included in other
income. The cost of securities sold is based on the specific identification
method. At each of September 30, 1997 and 1998, all short-term investments had
contractual maturities of less than three years. The weighted average maturity
of short-term investments was 170 days at September 30, 1998.
Concentration of Credit Risk
The Company's product revenues are concentrated in the personal computer
software industry which is highly competitive and rapidly changing.
Significant technological changes in the industry or customer requirements, or
the emergence of competitive products with new capabilities or technologies,
could adversely affect operating results. In addition, a significant portion
of the Company's revenues and net income is derived from international sales
and distributors. Fluctuations of the U.S. dollar against foreign currencies,
changes in local tax, regulatory or economic conditions, piracy or
nonperformance by distributors could adversely affect operating results.
The Company places its cash and short-term investments with financial
institutions with high credit standing. The Company's investment portfolio is
diversified and consists of investment grade securities. The Company is
exposed to credit risks in the event of default by these institutions to the
extent of the amount recorded on the balance sheet. Risk in accounts
receivable is mitigated by the Company's credit evaluation process, reasonably
short collection terms and the geographical dispersion of sales transactions.
The Company generally does not require collateral and maintains reserves for
potential credit losses and such losses have been within management's
expectations.
Inventories
Inventories are stated at the lower of cost or market and include
adjustments for estimated obsolescence. Cost is principally determined using
currently adjusted standard costs, which approximate actual cost on a first-
in, first-out basis.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are recorded at cost. Equipment
depreciation is provided on the straight-line method for financial statement
purposes over its estimated useful life of two to five years. Leasehold
improvements are amortized over the lesser of the lease term or estimated
useful life.
Capitalized Technology
Capitalized technology represents the amount of developed technology
acquired from third parties. Amortization is provided on the straight-line
method over its remaining useful life, generally five years. Management
periodically assesses the recoverability of capitalized technology. At
September 30, 1998, management believes this capitalized technology is fully
recoverable.
Research and Development
Research and development costs are expensed as incurred and consist
primarily of software development costs. The effects of financial accounting
rules requiring capitalization of certain internally developed software costs
have not been material to date.
35
<PAGE>
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Acquired Technology and Merger Expenses
Acquired technology represents the amount of in-process technology acquired
from third parties that had not reached technological feasibility and for
which no alternative commercial use was identified. Merger expenses include
all merger related costs such as legal and accounting fees, investment banking
fees and other related costs incurred in connection with transactions
accounted for as pooling of interests.
Advertising Expenses
Advertising costs are expensed as incurred. Total advertising expenses
incurred during fiscal years 1996, 1997 and 1998 were $5.5 million, $10.7
million and $18.2 million, respectively.
Income Taxes
Income taxes are computed using the liability method whereby the provision
for income taxes includes income taxes currently payable and deferred taxes
arising from temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income
tax purposes.
Per Share Data
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128, Earnings Per Share, which the Company adopted in fiscal
year 1998. Pursuant to the requirements of Statement No. 128, the Company has
changed the method previously used to compute earnings per share and has
restated all prior periods whereby the calculation of primary and fully
diluted earnings per share have been replaced by basic and diluted earnings
per share. Under the new requirements for calculating basic earnings per
share, the dilutive effect of stock options and stock warrants are excluded.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30
--------------------------------------------------
BASIC DILUTED
------------------------- -----------------------
1996 1997 1998 1996 1997 1998
------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<S> <C> <C> <C> <C> <C> <C>
Weighed average common
shares outstanding........ 26,370 28,172 29,446 26,370 28,172 29,446
Restricted stock subject to
repurchase................ (772) (333) (52) N/A N/A N/A
Net effect of dilutive
common stock
equivalents*.............. N/A N/A N/A 2,988 2,620 2,223
------- ------- ------- ------- ------- -------
Total...................... 25,598 27,839 29,394 29,358 30,792 31,669
======= ======= ======= ======= ======= =======
Net income................. $10,496 $13,700 $28,108 $10,496 $13,700 $28,108
======= ======= ======= ======= ======= =======
Earnings per share......... $ 0.41 $ 0.49 $ 0.96 $ 0.36 $ 0.44 $ 0.89
======= ======= ======= ======= ======= =======
</TABLE>
- --------
* Common stock equivalents include stock options and stock warrants calculated
using the treasury method. Excludes stock options which were antidilutive of
92,000, 67,000 and 496,000 in 1996, 1997 and 1998, respectively.
Recently Issued Accounting Pronouncements
In October 1997 the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition"
which supersedes SOP 91-1, the former literature on software revenue
recognition. This Statement will be effective for the Company beginning in
fiscal year 1999. In March 1998, AcSEC issued SOP 98-4, "Deferral of the
Effective Date of a Provision of SOP 97-2, Software Recognition," which amends
certain provisions of SOP 97-2. The Company believes it is substantially in
36
<PAGE>
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
compliance with the provisions of SOP 97-2 as amended by SOP 98-4 and its
adoption is not expected to have a material impact on the financial position
or results of operations of the Company.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income." Statement No. 130 establishes standards for reporting and displaying
comprehensive income and its components in a full set of financial statements
and will require the Company to display an amount representing total
comprehensive income in its financial statements. The Company will be required
to implement Statement No. 130 for its first quarter of fiscal 1999.
In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments
of an Enterprise and Related Information." Statement No. 131 establishes
standards for the manner in which public companies report information about
operating segments in annual and interim financial statements. The Company
will be required to implement Statement No. 131 for its fiscal year 1999.
Management has not yet determined what the impact, if any, will be to the
Company's future disclosures.
In March 1998, the AcSEC issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This statement
requires companies to capitalize qualifying computer software costs incurred
during the application development stage and amortize them over the software's
estimated useful life. The Company is required to adopt this statement in
fiscal year 2000 and management has not yet determined what the effect of SOP
98-1 will be on the earnings and financial position of the Company.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which is required to be adopted in fiscal
year 2000. Statement No. 133 provides a comprehensive and consistent standard
for the recognition and measurement of derivatives and hedging activities. The
Company currently hedges certain foreign exchange transaction exposures.
Management has not yet determined what the effect of Statement No. 133 will be
on the earnings and financial position of the Company.
2. BALANCE SHEET INFORMATION
Detailed balance sheet data is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
1997 1998
------- --------
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable:
Receivables........................................... $ 7,751 $ 18,179
Allowance for doubtful accounts....................... (1,164) (2,245)
------- --------
$ 6,587 $ 15,934
======= ========
Inventories:
Raw materials......................................... $ 299 $ 628
Finished goods........................................ 780 600
------- --------
$ 1,079 $ 1,228
======= ========
Equipment and leasehold improvements:
Computer hardware..................................... $ 7,449 $ 10,967
Office furniture, equipment, and leasehold
improvements......................................... 6,111 10,461
------- --------
13,560 21,428
Accumulated depreciation and amortization............. (5,306) (11,237)
------- --------
$ 8,254 $ 10,191
======= ========
</TABLE>
37
<PAGE>
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
1997 1998
------- --------
(IN THOUSANDS)
<S> <C> <C>
Capitalized technology:
Capitalized technology................................ $ 3,135 $ 5,667
Accumulated amortization.............................. (274) (1,058)
------- --------
$ 2,861 $ 4,609
======= ========
Other accrued liabilities:
Advertising and promotion............................. $ 4,339 $ 4,169
Other................................................. 7,412 9,548
------- --------
$11,751 $ 13,717
======= ========
</TABLE>
3. CHANGES IN OPERATING ASSETS AND LIABILITIES
The changes in operating assets and liabilities, net of effects of non-cash
items, are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30,
------------------------
1996 1997 1998
------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Decrease (increase) in accounts receivable......... $2,174 $(4,401) $(8,902)
Decrease (increase) in inventories................. 828 (460) (133)
(Increase) in prepaid expenses and other........... (734) (1,814) (2,376)
(Decrease) increase in accounts payable............ (593) 2,441 (783)
Increase in accrued compensation and benefits...... 976 749 1,693
Increase in other accrued liabilities.............. 3,629 4,991 2,756
Increase (decrease) in deferred revenue............ 1,505 5,787 (1,292)
Increase in income taxes payable................... 614 4,543 1,214
------ ------- -------
$8,399 $11,836 $(7,823)
====== ======= =======
</TABLE>
4. SHORT-TERM INVESTMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Available-for Sale Investments
All short-term investments have been classified as available-for-sale
securities. As of September 30, 1997 and 1998, the estimated fair value of
short-term investments consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------
1997 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Estimated fair value of short-term investments by
investment type:
Fixed income securities................................. $ -- $20,503
U.S. Treasury bills..................................... 21,372 21,427
------- -------
Total available-for-sale.............................. $21,372 $41,930
======= =======
</TABLE>
38
<PAGE>
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
(IN THOUSANDS)
--------------
<S> <C>
Estimated fair value of short-term investments by
contractual maturity:
Due in one year or less............................... $31,475
Due after one year through two years.................. 9,021
Due after two years through three years............... 1,434
-------
Total available-for-sale............................ $41,930
=======
</TABLE>
Unrealized gains (losses) on all available-for-sale securities are reported
as a component of retained earnings and are not material. During the period
covered by the financial statements, the Company has not used any derivative
instrument for trading purposes. Visio utilizes some natural hedging to
mitigate the Company's foreign currency exposures and the Company hedges
certain residual exposures through the use of foreign exchange forward
contracts, which the Company enters into with financial institutions to
protect against currency exchange risks associated with certain balance sheet
positions. The fair value of foreign exchange forward contracts is based on
quoted market prices. At September 30, 1997 and 1998, the Company held forward
contracts to deliver approximately $42,000 and $7.9 million, respectively, in
foreign currencies with maturities not exceeding 240 days.
At September 30, 1997 and 1998, the fair value of the forward exchange
contracts approximated cost. The Company does not hedge its translation risk.
5. COMMITMENTS
Visio rents office facilities and automobiles under operating leases.
Certain office facility leases contain renewal and escalation clauses and
space expansion provisions. In February 1999, the Company expects to relocate
its Seattle, Washington operations to its new leased facility. At September
30, 1998, the Company had commitments for capital expenditures of
approximately $9.4 million related to this new facility.
At September 30, 1998, future minimum lease payments under noncancelable
operating leases are:
<TABLE>
<CAPTION>
OPERATING LEASES
----------------
(IN THOUSANDS)
<S> <C>
1999..................................................... $ 5,359
2000..................................................... 5,636
2001..................................................... 5,045
2002..................................................... 4,736
2003..................................................... 4,464
2004 and thereafter...................................... 23,213
-------
Total minimum lease payments........................... $48,453
=======
</TABLE>
Rental expenses under operating leases totaled $1,138,000, $1,223,000 and
$2,478,000 in fiscal 1996, 1997 and 1998, respectively.
Subsequent to September 30, 1998, the Company entered into a lease for a new
facility in Dublin, Ireland. The Company also exercised an option for
additional space in connection with its new facility in Seattle. The aggregate
minimum lease payments for these noncanceable leases are as follows: $430,000
in fiscal 1999, $1.4 million in fiscal 2000, $2.5 million in fiscal 2001, $3.8
million in fiscal 2002, $4.3 million in fiscal 2003 and $31.3 million
thereafter.
39
<PAGE>
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES
Income before income taxes consists of the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
----------------------------------
1996 1997 1998
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S.................................... $ 12,244 $ 14,783 $ 17,387
International.......................... 2,864 3,519 20,293
---------- ---------- ----------
$ 15,108 $ 18,302 $ 37,680
========== ========== ==========
The provision for income taxes consists of the following:
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
----------------------------------
1996 1997 1998
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current tax expense:
U.S. federal......................... $ 4,445 $ 9,555 $ 7,535
State................................ -- 385 893
Foreign.............................. 180 882 2,363
---------- ---------- ----------
Total current provision................ 4,625 10,822 10,791
---------- ---------- ----------
Deferred tax provision (benefit)
U.S. federal......................... 51 (5,541) (1,107)
State................................ (64) (377) (287)
Foreign.............................. -- (302) 175
---------- ---------- ----------
Total deferred tax..................... (13) (6,220) (1,219)
---------- ---------- ----------
Total provision for income taxes....... $ 4,612 $ 4,602 $ 9,572
========== ========== ==========
Total income tax expense differs from the U.S. federal statutory rate of 34%
for fiscal years 1996 and 1997, and 35% for fiscal year 1998, as follows:
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
----------------------------------
1996 1997 1998
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax provision at statutory
rate.................................. $ 5,137 $ 6,223 $ 13,188
State taxes, net of federal benefit.... (42) (6) 453
Impact of international operations..... -- (1,293) (5,292)
Tax-free interest...................... (429) (454) (711)
Non-deductible write-off of acquired
in-process research and development... -- -- 2,774
Federal research and development
credits............................... (10) (21) (590)
Other.................................. (44) 153 (250)
---------- ---------- ----------
$ 4,612 $ 4,602 $ 9,572
========== ========== ==========
</TABLE>
The current federal and state provisions do not reflect the tax savings
resulting from deductions associated with Visio's various stock option plans.
These savings were approximately $1.7 million in fiscal 1996, $3.1 million in
fiscal 1997 and $3.3 million in fiscal 1998 and were credited to common stock.
40
<PAGE>
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of the temporary differences that give rise to significant
portions of the deferred tax assets are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
SEPTEMBER 30,
---------------
1997 1998
------ -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Reserves for sales returns and doubtful accounts.......... $ 933 $ 1,154
Deferred revenue.......................................... 2,951 2,850
Reserves and expenses not currently deductible............ 862 1,535
Acquired technology....................................... 2,825 4,042
Net operating loss carryforwards.......................... 1,080 2,481
Tax credit carryforwards.................................. 35 123
------ -------
8,686 12,185
Deferred tax liabilities:
Deductible prepaid expenses and other..................... (209) (830)
------ -------
Net deferred tax assets..................................... $8,477 $11,355
====== =======
</TABLE>
No provision has been recorded for federal income taxes on unremitted
earnings of certain of the Company's foreign subsidiaries since the Company
plans to reinvest all such earnings for the foreseeable future. At September
30, 1998, cumulative unremitted earnings from these subsidiaries were $27.6
million. The unrecognized deferred tax liability was approximately $7.5
million.
The Company's deferred tax assets include net operating loss carryforwards
of approximately $7.5 million and research and development tax credit
carryforwards of $123,000 which were obtained in the acquisition of certain
technology and assets of InfoModelers, Inc. ("InfoModelers") and the merger
with Kaspia in fiscal 1998. The net operating loss carryforwards and research
and development tax credit carryforwards begin expiring in fiscal year 2009.
The Company expects to utilize these carryforwards prior to expiration.
7. EMPLOYEE BENEFITS
Stock Option Plans
The 1995 Nonemployee Director Stock Option Plan provides for the granting of
options to nonemployee directors of the Company. Options under this plan may
be granted at not less than 85% of fair market value on the date of grant,
expire after ten years and vest after one year. At September 30, 1998, a total
of 172,500 shares of common stock remained available under the plan for future
grants. There were 22,500 options granted under the plan in fiscal 1998.
The 1995 Long-Term Incentive Compensation Plan provides for the granting of
incentives and awards to employees, agents and consultants of the Company and
its subsidiaries. The plan combines the features of an incentive and a
nonqualified stock option plan, a stock appreciation rights plan, a stock
award plan and a performance-based plan. Options under this plan generally
have been granted at fair market value on the date of grant, expire after ten
years and vest over a period of four years. In fiscal 1998, the Company's
shareholders approved an amendment to the plan that increased the number of
shares of common stock which may be issued under the plan by 3,000,000. At
September 30, 1998, a total of 2,695,802 shares of common stock remained
available under the plan for future grants. There were 1,393,865 options
granted under this plan in fiscal 1998.
41
<PAGE>
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1995 Employee Stock Purchase Plan
The 1995 Employee Stock Purchase Plan permits eligible employees of the
Company to purchase common stock at not less than 85% of fair market value as
defined in the plan through payroll deductions of up to 15% of their
compensation, provided that no employee may purchase common stock worth more
than $25,000 in any calendar year or more than 10,000 shares of common stock
during any offering period. The Company has reserved an aggregate of 750,000
shares of common stock for issuance under this plan, and this plan expires in
2005. There were 102,949 shares issued under this plan in fiscal 1998. At
September 30, 1998, the Company had reserved 448,000 shares of common stock
for future grants under this plan.
Stock option activity and option price information were as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES SHARE PRICE
------------ ---------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Balance, October 1, 1995...................... 3,127 $ 0.91
Granted..................................... 970 14.69
Exercised................................... (518) 0.27
Exercised and converted to restricted
stock...................................... (81) 0.10
Canceled.................................... (157) 4.01
------------ ------------
Balance, September 30, 1996................... 3,341 4.84
Granted..................................... 1,776 24.01
Exercised................................... (590) 2.91
Exercised and converted to restricted
stock...................................... (20) 0.37
Canceled.................................... (280) 10.88
------------ ------------
Balance, September 30, 1997................... 4,227 12.63
Granted..................................... 1,416 40.50
Exercised................................... (1,079) 3.99
Canceled.................................... (325) 22.34
------------ ------------
Balance, September 30, 1998................... 4,239 $ 23.34
============ ============
</TABLE>
The Company has reserved shares of common stock for future issuance under
its stock option plans of 7.1 million at September 30, 1998.
For various price ranges, weighted average characteristics of outstanding
stock options at September 30, 1998 were as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
------------------------------ ------------------------
RANGE OF REMAINING WEIGHTED WEIGHTED
EXERCISE LIFE AVERAGE AVERAGE
PRICES SHARES (YEARS) PRICE SHARES PRICE
-------- ------ --------- -------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
$ 0.06--$10.00 943 6.22 $ 2.09 754 $ 1.80
10.01-- 20.00 1,025 7.97 17.43 472 16.98
20.01-- 30.00 759 8.49 22.84 222 22.74
30.01-- 40.00 934 9.12 37.68 45 35.50
40.01-- 49.94 578 9.51 45.94 11 41.38
----- ---- ------ --------- ----------
4,239 8.14 $23.34 1,504 $ 10.95
===== ==== ====== ========= ==========
</TABLE>
42
<PAGE>
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company follows APB 25, "Accounting for Stock Issued to Employees," to
account for stock option and employee stock purchase plans. No compensation
cost is recognized because the option exercise price is generally equal to the
market price of the underlying stock on the date of grant. The fair value of
options granted in 1996, 1997, and 1998 reported below has been estimated at
the date of grant using a Black Scholes option pricing model with the
following weighted average assumptions:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
--------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Stock option plans:
Expected life in years.................... 5.0 5.0 5.0
Risk-free interest rate................... 6.5% 6.0% 6.0%
Volatility................................ 0.38 0.38 0.52
Dividend yield............................ 0.0% 0.0% 0.0%
Stock purchase plan:
Expected life in years.................... 1.09 1.03 1.54
Risk-free interest rate................... 6.5% 6.0% 6.0%
Volatility................................ 0.38 0.38 0.52
Dividend yield............................ 0.0% 0.0% 0.0%
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
Because the Company's stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in the
opinion of management, the existing models do not necessarily provide a
reliable single measure of the fair value of its options. The weighted average
estimated fair value of stock options granted in fiscal years 1996, 1997, and
1998 was $5.20, $8.38, and $17.50 per share, respectively. The weighted
average estimated fair value of shares granted under the Employee Stock
Purchase Plan in fiscal years 1996, 1997, and 1998 was $1.72, $6.13, and
$10.32 per share, respectively. Had compensation cost for these plans been
determined based on the Black-Scholes value at the grant dates for awards as
prescribed in SFAS Statement 123, "Accounting for Stock-Based Compensation,"
pro forma net income and earnings per share would have been:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
---------------------------------------
1996 1997 1998
------------ ------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Pro forma net income............... $ 9,378 $ 8,710 $ 17,600
Pro forma basic earnings per
share............................. $ 0.37 $ 0.31 $ 0.60
Pro forma diluted earnings per
share............................. $ 0.32 $ 0.28 $ 0.56
</TABLE>
The pro forma disclosures above include the amortization of the fair value
of all options vesting during fiscal 1996, 1997, and 1998 net of stock option
tax benefits. Because the method prescribed by SFAS 123 has not been applied
to options granted prior to September 30, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years.
43
<PAGE>
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. SHAREHOLDERS' EQUITY
Common Shares Outstanding
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30,
----------------------
1996 1997 1998
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year............................ 11,312 27,503 28,633
Conversion of preferred stock......................... 10,410 -- --
Initial public offering............................... 4,941 -- --
Issuance of common stock.............................. 26 232 14
Issuance of common stock for acquisitions............. -- -- 250
Stock options exercised............................... 599 610 1,079
Stock warrants exercised.............................. 226 146 112
Stock issued under employee stock purchase plan....... 43 156 103
Repurchase of restricted common stock................. (54) (14) --
------ ------ ------
Balance, end of year................................ 27,503 28,633 30,191
====== ====== ======
</TABLE>
Warrants
In connection with a venture lease agreement entered into in fiscal 1993,
the Company granted a warrant to purchase 33,518 shares of Series B preferred
stock at $0.60 per share. In fiscal 1997, the warrant was exercised in full.
In connection with the 1994 sale of Series B preferred stock, Visio granted a
warrant to purchase 450,000 shares of common stock at approximately $3.34 per
share to an officer of the Company. In fiscal 1998, the remaining 112,500
warrants were exercised.
9. BUSINESS SEGMENT AND OTHER INFORMATION
The Company operates in one business segment: software products and related
services for users of personal computers. Sales to unaffiliated customers
accounting for greater than 10% of sales are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
SEPTEMBER 30,
----------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Ingram Micro, Inc............................................. 34% 35% 34%
Merisel, Inc.................................................. 16 12 10
</TABLE>
Information regarding the Company's operations in different geographic areas
is set forth below. Revenues, operating income and identifiable assets are
reported based on the location of the Company's customers.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30,
-------------------------
1996 1997 1998
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
North America customers.................... $37,872 $ 65,238 $ 98,735
Europe customers........................... 14,311 22,199 41,210
Rest of World customers.................... 7,679 13,338 26,050
------- -------- --------
$59,862 $100,775 $165,995
======= ======== ========
</TABLE>
44
<PAGE>
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30,
--------------------------
1996 1997 1998
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating income:
North America customers.................. $10,326 $20,791 $27,344
Europe customers......................... 610 1,510 8,516
Rest of World customers.................. 2,634 2,790 6,177
Acquired technology and merger expenses.. -- (10,255) (9,251)
------- -------- --------
$13,570 $14,836 $32,786
======= ======== ========
Identifiable assets:
North America customers.................. $64,178 $ 96,364 $114,685
Europe customers......................... 6,674 10,944 29,097
Rest of World customers.................. 2,355 5,393 15,595
------- -------- --------
$73,207 $112,701 $159,377
======= ======== ========
</TABLE>
10. ACQUIRED TECHNOLOGY AND MERGER EXPENSES
For all acquisitions accounted for under the purchase method, assets are
recorded at fair market value. The allocation of the purchase price to
acquired technology or capitalized technology is based on known valuation
techniques in the software industry. For some transactions, the Company
obtains an independent appraisal of the technology. Amounts allocated to
acquired technology relate to in-process research and development that were
immediately expensed in the period of acquisition because technological
feasibility was not established and no alternative commercial use was
identified. Amounts allocated to capitalized technology relate to technology
that had achieved technological feasibility at the time of acquisition.
Capitalized technology is amortized on a straight-line basis over the
estimated useful life of the technology.
Boomerang Technology Acquisition. On February 21, 1997, the Company acquired
certain technology and assets of Boomerang Technology, Inc. ("Boomerang"), a
privately held developer of Autodesk AutoCAD-compatible software, located in
San Diego, California. Under the terms of the agreement, the Company acquired
source code and certain other assets for a cash payment of $6.7 million. This
transaction was accounted for using the purchase method and resulted in a
charge to acquired technology and merger expenses of $6.7 million for in-
process research and development in fiscal 1997.
SysDraw Software Company Acquisition. On May 1, 1997, the Company acquired
certain assets of Freedom Solutions Group, Inc., d.b.a. SysDraw Software
Company ("SysDraw"), a privately held network design and documentation
solutions provider, located in Lombard, Illinois. Under the terms of the
agreement, the acquisition price included $5.8 million in cash plus the
issuance of a $1.0 million note payable, the principal and interest of which
were paid by Visio in August 1998. Visio is required to pay $1.5 million of
additional consideration if revenues of the acquired products meet certain
performance goals within three years of the acquisition. The transaction was
accounted for using the purchase method and resulted in capitalized technology
of $3.1 million, other assets of $100,000 and a charge to acquired technology
and merger expenses of $3.6 million for in-process research and development in
fiscal 1997. The capitalized technology is being amortized on a straight-line
basis over five years.
Merger with MarComp. On January 22, 1998, the Company merged with MarComp, a
privately held provider of programming toolkits for access to Autodesk's
AutoCAD .dwg and .dxf file formats, located in Parkton, Maryland. Under the
terms of the merger agreement, Visio exchanged 50,014 shares of its
unregistered
45
<PAGE>
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
common stock for all of the outstanding shares of MarComp. The transaction was
accounted for as a pooling of interests and due to the immateriality of the
amounts involved, prior period financial statements have not been restated.
The transaction resulted in an increase in equity of $109,000 primarily due to
the acquisition of cash and accounts receivable from MarComp and resulted in
approximately $100,000 in merger related costs in fiscal 1998.
InfoModelers Technology Acquisition. On February 10, 1998, the Company
acquired certain technology and assets of InfoModelers, Inc. ("InfoModelers"),
a privately held, leading supplier of database and data warehouse visual
design, access and query tools, located in Bellevue, Washington. Under the
terms of the agreement, Visio issued 200,000 shares of its unregistered common
stock for accounts receivable, fixed assets, tax assets and certain technology
assets. The transaction was accounted for using the purchase method and was
valued at approximately $8.0 million for InfoModeler shareholders. This
transaction resulted in a total charge to acquired technology and merger
expenses of $7.0 million for in-process research and development in fiscal
1998. In addition, the Company recorded approximately $1.0 million in other
assets.
Decision Graphics Technology Acquisition. On May 5, 1998, the Company
acquired certain technology from Decision Graphics UK Ltd. ("Decision
Graphics"), a privately held provider of computer-aided facilities management
software, located in the U.K., for $729,000. The transaction was accounted for
using the purchase method and resulted in a total charge to acquired
technology and merger expenses of $729,000 for in-process research and
development in fiscal 1998.
Ketiv Technology Acquisition. On June 2, 1998, the Company acquired certain
CAD technology, software products and other assets from Ketiv Technologies,
Incorporated ("Ketiv"), a privately held provider of architecture, engineering
and construction software located in Portland, Oregon, for approximately $2.7
million. The transaction was accounted for using the purchase method and
resulted in capitalized technology of $2.5 million and a total charge to
acquired technology and merger expenses of $247,000 for in-process research
and development in fiscal 1998. The capitalized technology is being amortized
on a straight-line basis over five years.
Merger with Kaspia. On July 10, 1998, the Company merged with Kaspia, a
privately held developer of fully automated enterprise-network audit
functionality, including discovery, monitoring and reporting software, located
in Beaverton, Oregon. Under the terms of the merger agreement, Visio acquired
all of Kaspia's outstanding stock for 482,994 shares of Visio common stock,
valued at approximately $23.3 million for Kaspia shareholders. This
transaction was accounted for as a pooling of interests. Accordingly, the
financial statements include the combined results of operations for Visio and
Kaspia, and all prior financial statements have been restated. The transaction
resulted in approximately $1.2 million in merger related costs in fiscal 1998.
46
<PAGE>
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Statements of Income for the three years ended September 30, 1998 and
the Balance Sheets at September 30, 1997 and 1998 contain the combined results
of both Visio and Kaspia. The combined results prior to the merger with Kaspia
are stated below:
<TABLE>
<CAPTION>
NINE
FISCAL YEAR ENDED MONTHS
SEPTEMBER 30, ENDED
--------------------------- JUNE 30,
1996 1997 1998
------------ ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues:
Visio......................... $ 59,699 $ 99,515 $ 120,442
Kaspia........................ 163 1,260 1,330
------------ ------------- ------------
Combined.................... $ 59,862 $ 100,775 $ 121,772
============ ============= ============
Net income:
Visio......................... $ 11,091 $ 15,113 $ 20,579
Kaspia........................ (965) (2,121) (2,232)
Adjustment for Kaspia tax
benefit...................... 370 708 806
------------ ------------- ------------
Combined.................... $ 10,496 $ 13,700 $ 19,153
============ ============= ============
Diluted earnings (loss) per
share:(1)
Visio......................... $ 0.38 $ 0.50 $ 0.66
Kaspia........................ (3.02) (3.72) (3.05)
------------ ------------- ------------
Combined.................... $ 0.36 $ 0.44 $ 0.61
============ ============= ============
</TABLE>
--------
(1) Adjusted for exchange ratio of 0.0301688 shares of Visio common stock
for each share of Kaspia common stock.
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1997 1998
------------- --------
(IN THOUSANDS)
<S> <C> <C>
Total assets
Visio.............................................. $109,215 $149,440
Kaspia............................................. 3,079 3,163
Adjustment for Kaspia deferred tax assets.......... 407 445
-------- --------
Combined......................................... $112,701 $153,048
======== ========
</TABLE>
The technologies acquired in the MarComp, Boomerang, Decision Graphics and
Ketiv transactions are being integrated into the Company's products in the
Technical Drawing product group. The technologies acquired in the SysDraw,
InfoModelers and Kaspia transactions are being integrated into the Company's
products in the IT Design and Documentation product group.
The operating results of MarComp, Boomerang, SysDraw, InfoModelers, Decision
Graphics, and Ketiv were not material to the financial statements of Visio,
and accordingly, pro forma financial information has not been presented for
these acquisitions.
47
<PAGE>
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information is as follows:
FISCAL YEAR 1998
<TABLE>
<CAPTION>
FISCAL
FISCAL QUARTER ENDED YEAR
------------------------------- ENDED
DEC 31 MAR 31 JUN 30 SEP 30 SEP 30
------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues............................. $37,497 $40,089 $44,186 $44,223 $165,995
Gross profit......................... $34,105 $36,452 $40,046 $40,260 $150,863
Net income........................... $ 7,378 $ 3,326 $ 8,449 $ 8,955 $ 28,108
Basic earnings per share............. $ 0.26 $ 0.11 $ 0.28 $ 0.30 $ 0.96
Shares used in computation of basic
earnings per share.................. 28,607 29,243 29,740 29,987 29,394
Diluted earnings per share........... $ 0.24 $ 0.11 $ 0.26 $ 0.28 $ 0.89
Shares used in computation of diluted
earnings per share.................. 31,395 31,659 32,018 31,604 31,669
Common stock prices
High............................... $ 42.63 $ 48.13 $ 50.88 $ 50.75 $ 50.88
Low................................ $ 26.50 $ 32.38 $ 39.88 $ 19.00 $ 19.00
FISCAL YEAR 1997
<CAPTION>
FISCAL
FISCAL QUARTER ENDED YEAR
------------------------------- ENDED
DEC 31 MAR 31 JUN 30 SEP 30 SEP 30
------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues............................. $19,207 $23,812 $26,367 $31,389 $100,775
Gross profit......................... $17,214 $21,399 $23,616 $27,864 $ 90,093
Net income........................... $ 4,157 $ 216 $ 2,942 $ 6,385 $ 13,700
Basic earnings per share............. $ 0.15 $ 0.01 $ 0.10 $ 0.23 $ 0.49
Shares used in computation of basic
earnings per share.................. 27,263 27,685 28,063 28,344 27,839
Diluted earnings per share........... $ 0.14 $ 0.01 $ 0.10 $ 0.20 $ 0.44
Shares used in computation of diluted
earnings per share.................. 30,405 30,519 30,943 31,300 30,792
Common stock prices
High............................... $ 26.38 $ 26.75 $ 35.03 $ 42.50 $ 42.50
Low................................ $ 19.75 $ 18.13 $ 19.13 $ 32.00 $ 18.13
</TABLE>
Visio's common stock has been traded on the Nasdaq National Market under the
symbol VSIO since the Company's initial public offering in November 1995. The
high and low common stock prices noted above are as reported on the Nasdaq
National Market. On November 30, 1998, there were 229 holders of record of the
Company's common stock. The Company has not paid cash dividends on its common
stock.
48
<PAGE>
SCHEDULE II
VISIO CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE
BEGINNING OF CHARGED TO COSTS REDUCTIONS AT END
PERIOD AND EXPENSES WRITE-OFFS OF PERIOD
------------ ---------------- ---------- ---------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL
ACCOUNTS:
Year ended September 30,
1996..................... $ 344 $ 329 $ (24) $ 649
Year ended September 30,
1997..................... $ 649 $ 539 $ (24) $1,164
Year ended September 30,
1998..................... $1,164 $1,385 $(304) $2,245
<CAPTION>
BALANCE AT ADDITIONS BALANCE
BEGINNING OF CHARGED TO COSTS REDUCTIONS AT END
PERIOD AND EXPENSES WRITE-OFFS OF PERIOD
------------ ---------------- ---------- ---------
<S> <C> <C> <C> <C>
RESERVE FOR OBSOLETE
INVENTORY:
Year ended September 30,
1996..................... $ 746 $ 646 $(813) $ 579
Year ended September 30,
1997..................... $ 579 $ 281 $(293) $ 567
Year ended September 30,
1998..................... $ 567 $ 186 $(347) $ 406
</TABLE>
49
<PAGE>
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
The information required by this item is incorporated by reference from the
sections labeled "Election of Directors" and "Additional Information" in the
Company's definitive Proxy Statement for the Annual Meeting of Shareholders to
be held on February 24, 1999.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
sections labeled "Election of Directors" and "Additional Information" in the
Company's definitive Proxy Statement for the Annual Meeting of Shareholders to
be held on February 24, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
sections labeled "Additional Information" in the Company's definitive Proxy
Statement for the Annual Meeting of Shareholders to be held on February 24,
1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
sections labeled "Additional Information" in the Company's definitive Proxy
Statement for the Annual Meeting of Shareholders to be held on February 24,
1999.
50
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) LIST OF DOCUMENTS FILED AS A PART OF THIS REPORT:
(1)INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.................... 29
Balance Sheets as of September 30, 1997 and 1998..................... 30
Statements of Income for each of the three years ended
September 30, 1998.................................................. 31
Statements of Cash Flows for each of the three years ended
September 30, 1998.................................................. 32
Statements of Shareholders' Equity for each of the three years ended
September 30, 1998.................................................. 33
Notes to Financial Statements........................................ 34
(2)INDEX TO FINANCIAL STATEMENT SCHEDULES
Schedule II--Valuation and Qualifying Accounts for each of the three
years ended September 30, 1998...................................... 49
</TABLE>
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.
(3)EXHIBITS
The exhibits filed in response to Item 601 of Regulation S-K are
listed in the Exhibit Index contained herein.
(B) REPORTS ON FORM 8-K
On July 23, 1998, Visio Corporation filed with the Securities and
Exchange Commission a Current Report on Form 8-K reporting the merger with
Kaspia Systems, Inc.
51
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION LOCATION
------ ----------- --------
<C> <S> <C>
2.1 Agreement and Plan of Merger by and among Visio Corporation,
Kaspia Systems, Inc., VMS-1, Inc. and the stockholders of
Kaspia named therein, dated July 10, 1998.................. (H)
3.1 Fourth Restated Articles of Incorporation of Visio
Corporation................................................ (F)
3.2 Restated Bylaws of Visio Corporation........................ (F)
4.1 Specimen Common Stock Certificate of Visio Corporation...... (A)
4.2 Investor Rights Agreement between Visio Corporation and the
investors named therein, dated July 10, 1998............... (H)
10.1 1990 Stock Option Plan, as amended.......................... (F)
10.2 1995 Long-Term Incentive Stock Option Plan, as amended...... (G)
10.3 1995 Stock Option Plan for Nonemployee Directors, as
amended.................................................... (F)
10.4 1995 Employee Stock Purchase Plan, as amended............... (F)
10.5 Office Lease between Visio Corporation and Sixth & Pike
Associates, L.P. dated October 28, 1993.................... (A)
10.6 Amendment to Office Lease between Visio Corporation and
Sixth & Pike Associates, L.P. dated June 13, 1996.......... (B)
10.7 Lease Agreement between WRC Trade Center LLC and Visio
Corporation dated January 9, 1998.......................... +
10.8 Office Lease between Visio International Limited and Erin
Executor & Trustee Co. Limited dated August 20, 1996....... (C)
10.9 Registration Rights Agreement among Visio Corporation and
the Investors, as defined therein, dated as of
April 11, 1991, as amended................................. (A)
10.10 Loan and Security Agreement between Silicon Valley Bank and
Visio Corporation dated January 26, 1994, as amended....... (A)
10.11 Amendment to the Loan and Security Agreement between Silicon
Valley Bank and Visio Corporation dated April 3, 1996...... (B)
10.12 Amendment to the Loan and Security Agreement between Silicon
Valley Bank and Visio Corporation dated February 28, 1997.. (D)
10.13 Form of Indemnification Agreement for directors and
officers................................................... (A)
10.14* Distribution Agreement dated as of December 14, 1992, as
amended, between Visio Corporation and Merisel, Inc. ...... (A)
10.15* Distributor Agreement dated as of November 2, 1992, as
amended, between Visio Corporation and Ingram Micro,
Inc. ...................................................... (A)
10.16* License Agreement dated as of July 10, 1995................. (A)
10.17 Asset Purchase Agreement between Visio Corporation and
Boomerang Technology, Inc. dated February 21, 1997......... (D)
10.18 Asset Purchase Agreement between Visio Corporation and
SysDraw Software Company dated May 1, 1997................. (E)
21.1 Subsidiaries of the registrant.............................. +
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION LOCATION
------ ----------- --------
<C> <S> <C>
23.1 Consent of Ernst & Young LLP, Independent Auditors............ +
24.1 Power of Attorney (contained on signature page)............... +
27.1 Financial Data Schedule, which is submitted electronically to
the Securities and Exchange Commission for information
purposes only and not filed.................................. +
27.2 Financial Data Schedule, which is submitted electronically to
the Securities and Exchange Commission for information
purposes only and not filed.................................. +
27.3 Financial Data Schedule, which is submitted electronically to
the Securities and Exchange Commission for information
purposes only and not filed.................................. +
27.4 Financial Data Schedule, which is submitted electronically to
the Securities and Exchange Commission for information
purposes only and not filed.................................. +
</TABLE>
- --------
+ Filed herewith.
(A)Filed as an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 33-96986) effective November 9, 1995 and incorporated
herein by reference.
(B)Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1996 and incorporated herein by
reference.
(C)Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1996 and incorporated herein by
reference.
(D)Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1997 and incorporated herein by
reference.
(E)Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1997 and incorporated herein by
reference.
(F)Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1997 and incorporated herein by
reference.
(G)Filed as an exhibit to the Company's Post-Effective Amendment No. 1 to the
Registration Statement on Form S-8 (Registration No. 333-50619)
effective June 18, 1998 and incorporated herein by reference.
(H)Filed as an exhibit to the Company's Current Report on Form 8-K filed with
the Securities and Exchange Commission on July 23, 1998.
*Confidential treatment has been granted for portions of the exhibit.
53
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES ACT OF
1934, AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF OF THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Visio Corporation
/s/ Jeremy A. Jaech
By: _________________________________
JEREMY A. JAECH
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Date: December 23, 1998
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes and appoints
Jeremy A. Jaech and Theodore C. Johnson, and each of them, with full power of
substitution and full power to act without the other, as his true and lawful
attorney-in-fact and agent to act in his name, place and stead and to execute
in the name and on behalf of each person, individually and in each capacity
stated below, and to file, any and all amendments to this Annual Report on
Form 10-K.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, AS AMENDED, THIS
REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS, ON BEHALF OF THE REGISTRANT,
IN THE CAPACITIES AND ON THE DAYS INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Jeremy A. Jaech President, Chief Executive December 23, 1998
______________________________________ Officer and Director
JEREMY A. JAECH (Principal Executive
Officer)
/s/ Steve M. Gordon Chief Financial Officer December 23, 1998
______________________________________ and Senior Vice
STEVE M. GORDON President, Finance and
Administration (Principal
Financial and Accounting
Officer)
/s/ Theodore C. Johnson Chief Technology Officer, December 23, 1998
______________________________________ Executive Vice President,
THEODORE C. JOHNSON and Director
/s/ Tom A. Alberg Director December 23, 1998
______________________________________
TOM A. ALBERG
/s/ Thomas H. Byers Director December 23, 1998
______________________________________
THOMAS H. BYERS
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ John R. Johnston Director December 23, 1998
______________________________________
JOHN R. JOHNSTON
/s/ Douglas J. Mackenzie Director December 23, 1998
______________________________________
DOUGLAS J. MACKENZIE
/s/ Scott Oki Director December 23, 1998
______________________________________
SCOTT OKI
</TABLE>
55
<PAGE>
(C) 1998 Visio Corporation. All rights reserved.
Part No. 19356-0199
<PAGE>
EXHIBIT 10.7
WORLD TRADE CENTER
EAST OFFICE BUILDING
LEASE AGREEMENT
BETWEEN
WRC TRADE CENTER LLC
LANDLORD
AND
VISIO CORPORATION
TENANT
<PAGE>
LEASE AGREEMENT
WORLD TRADE CENTER
EAST OFFICE BUILDING
THIS LEASE made this 9th day of January, 1998 between WRC TRADE CENTER
LLC, a Washington limited liability company ("Landlord"), and VISIO CORPORATION,
a Washington corporation ("Tenant").
As parties hereto, Landlord and Tenant agree:
1. LEASE DATA AND EXHIBITS. The following terms as used herein shall
-----------------------
have the meanings provided in this Section l, unless otherwise specifically
modified by provisions of this Lease:
(a) Building: Known as World Trade Center, East Office Building, or
--------
such other name as Landlord and Tenant may, pursuant to Section 37(k) below,
designate from time to time, situated on a portion of the real property more
particularly described in Section 2 hereof, with an address of xxx Elliott
Avenue, Seattle, WA 98101. The Building will be constructed above a five-story
parking garage (the "Garage") that is presently being constructed on the Land
and that will be owned by the Port of Seattle. In order to construct the
Building, Landlord will purchase a fee simple interest in the air rights above
the Garage (together with all other rights acquired under the Purchase Agreement
defined below, the "Air Rights"). Although Landlord does not presently own the
Air Rights, Landlord has the right to acquire them pursuant to that certain Air
Rights Purchase and Sale Agreement with the Port of Seattle dated July 14, 1997
(the "Purchase Agreement"). Landlord represents to Tenant that the Purchase
Agreement is the only agreement between Landlord or any of its affiliates and
the Port of Seattle with respect to the Air Rights, and that to Landlord's
knowledge there are no defaults under the Purchase Agreement and it is in full
force and effect. Landlord hereby covenants to fully comply with its
obligations under the Purchase Agreement and to purchase the Air rights, all as
necessary for Landlord to fulfill its obligations hereunder. Notwithstanding
the fact that Landlord does not presently own the Air Rights, Landlord shall be
bound hereunder as though it did presently own them, and upon Landlord's
acquisition of the Air Rights this Lease shall become an encumbrance on the Air
Rights.
(b) Premises: Consisting of the area on Floors one, two, three,
--------
four, five and six (1,2,3,4,5 and 6) of the Building, as outlined on the floor
plans attached hereto as Exhibit A-1, including tenant improvements, if any, as
described in Exhibit B. The Premises shall be occupied in phases, as described
in Exhibit C. See Exhibit C, Item 1.
(c) Tenant's Pro Rata Share: Landlord and Tenant agree that, for
-----------------------
purposes of this Lease, the rentable area of the Premises is deemed to be
approximately 183,927 net rentable square feet and Tenant's Pro Rata Share of
the Building is deemed to be 98.48%. See Exhibit C, Item 1. The balance of the
Building will be occupied by a single retail tenant whose space will contain
approximately 2,830 net rentable square feet.
(d) Basic Plans Delivery Date: February 18, 1998.
-------------------------
(e) Final Plans Delivery Date: May 1, 1998.
-------------------------
(f) Commencement Date: January 1, 1999, or such later date as
-----------------
provided in Section 3 hereof, provided, however that Tenant shall have access
rent-free to the Premises prior to January 1, 1999 for the installation of
furniture and equipment set up and partial phased occupancy, the mutually-
satisfactory schedule of which is to be determined by Landlord and Tenant. The
term "Commencement Date" is more fully defined in Section 3(c).
(g) Expiration Date: Midnight on the day immediately preceding the
---------------
tenth (10th) anniversary of the Commencement Date.
(h) Rent: Commencing on the Commencement Date, Rent is payable
----
monthly on or before the first day of each month. Rent for each month of the
Lease term shall be one-twelfth (1/12) of the annual rent calculated by
multiplying the applicable rental rate times the number of rentable square feet
then included within the Premises. See Exhibit C, Item 2.
B-1
<PAGE>
(i) Security Deposit: Intentionally omitted.
----------------
(j) Base Year: Intentionally omitted.
---------
(k) Agency Disclosure: At the signing of this Lease Agreement, the
-----------------
Landlord's Leasing Agent, Wright Runstad & Company, represented ( X )
------
Landlord (__) Tenant or (__) both Landlord and Tenant. The listed Tenant's
agent, Ed Curtis, of Washington Partners (formerly with CB Commercial Real
Estate), represented (__) Landlord, ( X ) Tenant or (__) both Landlord and
---
Tenant. Each party signing this document confirms that the prior oral and/or
written disclosure of agency was provided to him/her in this transaction. (As
required by WAC 308-124D-040).
(l) Parking: Tenant shall have the right to purchase up to 228
-------
permits to park automobiles in the Garage on an unassigned self-park basis at
the prevailing monthly market rates established by the Port of Seattle from time
to time.
(m) Notice Addresses:
----------------
Landlord: WRC TRADE CENTER LLC
1191 Second Avenue, Suite 2000
Seattle, Washington 98101
Attention: Jon F. Nordby
Tenant: Prior to Commencement Date:
--------------------------
Visio Corporation
520 Pike Street, Suite 1800
Seattle, Washington 98101
Attention: General Counsel
After Commencement Date:
-----------------------
Visio Corporation
[Address of Premises]
Attention: General Counsel
(n) PAYMENT ADDRESS: WRC TRADE CENTER LLC
---------------
1191 Second Avenue, Suite 2000
Seattle, Washington 98101
(o) EXHIBITS: THE FOLLOWING EXHIBITS OR RIDERS ARE MADE A PART OF
--------
THIS LEASE:
Exhibit A- Legal Description of Land
Exhibit B- Tenant Improvements
Exhibit B-1 Plans and Specifications for Building
Exhibit C- Addendum to Lease
Exhibit D- Base Building Specifications
Exhibit E- Subordination, Attornment and Non-Disturbance
Agreement Form
Exhibit F- Janitorial Specifications
Exhibit G Signage
Exhibit H Shell and Core Costs
Exhibit I Satellite Dish Fees
Exhibit J Multitenant Lobby Floor Plan
Exhibit K Storage Space
2. PREMISES: Landlord does hereby lease to Tenant, and Tenant does
--------
hereby lease from Landlord, upon the terms and conditions herein set forth, the
Premises described in Section l(b)
B-2
<PAGE>
hereof as shown on the Plans referenced in Exhibit B-1 attached hereto and
incorporated herein, together with rights of ingress and egress over common
areas in the Building and, pursuant to easements granted to Landlord, access
through the Garage located on the land ("Land") more particularly described on
Exhibit A attached hereto. This Lease shall be amended to replace Exhibit A with
the legal description of the Air Rights as soon as that legal description has
been determined.
"Net rentable square feet" and "rentable area" as used herein shall mean
"Rentable Area" as defined in BOMA American National Standard Z65.1-1996.
3. CONSTRUCTION; COMMENCEMENT AND EXPIRATION DATES:
-----------------------------------------------
(a) Completion of Construction: Landlord will at its sole cost and
--------------------------
expense proceed in good faith with all due diligence to:
(i) Complete plans and specifications for the Building,
(ii) Secure the necessary permits from appropriate governmental
authorities to begin construction of the Building, and
(iii) Construct the Building shell and core areas, including all
shell and core mechanical installations, substantially in
accordance with this Lease and the Exhibits hereto. Such
shell and core work is hereinafter referred to as
"Landlord's Work."
Tenant improvements with respect to the Initial Premises ("Initial
Tenant Improvements") shall be constructed pursuant to Tenant's plans for the
Premises approved by Landlord to the extent and in the manner set forth in
Exhibit B, and the Initial Tenant Improvements and any subsequent tenant
improvements are herein called "Tenant Improvements." Landlord shall enter into
the contract with the Initial Tenant Improvement contractor, who shall be
selected in accordance with the provisions of Exhibit B. Tenant is aware that
its selection of an Initial Tenant Improvements contractor other than the
contractor engaged by Landlord to construct the shell and core of the Building
could cause delays in completion of the Initial Tenant Improvements.
(b) Payment for Tenant Improvements: Tenant shall receive from
-------------------------------
Landlord an allowance ("Allowance") of Thirty Five Dollars ($35.00) per square
foot of net rentable area in the Premises as a credit against the Tenant
Improvement work to be performed or paid as follows:
(i) If the Initial Premises (as defined below) includes partial
floors and Tenant wishes to finish the service areas (such as the computer room
and mail room) so as to be able to service the Building when it is fully
occupied, and provided such service areas are not on Floor 2 of the Building,
Landlord will cause such service areas to be fully finished by the Commencement
Date, and Landlord shall pay the full share of the Allowance allocable to such
service areas. Rent and Additional Rent on such service areas shall be as set
forth in Section 2(d) of Exhibit C attached hereto.
(ii) The Allowance may be applied to all costs of design,
architectural, engineering and construction fees; provided the Allowance
allocable to a phase of the Premises upon which construction has not begun shall
not be paid until commencement of Tenant Improvements construction on such
phase. The Allowance shall be paid by Landlord upon receipt of invoices for work
actually performed or materials supplied.
(iii) Any allocable portion of the Allowance not used with
respect to a portion of the Premises shall be paid to Tenant upon demand or
applied to the next phase of the Tenant Improvements.
(iv) All costs of designing and constructing the Tenant
Improvements in excess of the Allowance shall be borne solely by Tenant. If the
budgeted cost of designing or constructing the Tenant Improvements exceeds the
Allowance, all payments for the Tenant Improvements shall be shared by Landlord
and Tenant in proportion to their estimated sharing of the total costs of the
Tenant Improvements. Landlord may adjust that sharing ratio from time to time if
the cost of completing the Tenant Improvements has increased pursuant to change
orders approved by Landlord and Tenant. Such amounts shall be paid by Landlord
and Tenant on a monthly basis no later than the date required under the
construction contract for the Tenant Improvements.
(c) Commencement Date: Landlord and Tenant shall use their best
-----------------
efforts to complete the Building and the Initial Tenant Improvements in
accordance with Exhibit B hereto on
B-3
<PAGE>
the date specified in Section l(f) or as soon thereafter as practicable. The
"Commencement Date" shall mean the date that the initial portion of the Premises
described in Exhibit C, Section 2 (the "Initial Premises") are substantially
completed and made available for Tenant's occupancy. It is presently estimated
that the term of this Lease shall commence on January 1, 1999.
The determination of the Commencement Date with respect to the
Initial Premises shall depend on which contractor is selected to construct the
Initial Tenant Improvements. If Tenant selects Turner Construction, Inc.
("Turner"), the contractor engaged to construct the shell and core of the
Building, Landlord shall cause the Commencement Date to occur by January 1,
1999. If Turner is the low bidder for construction of the Initial Tenant
Improvements, in accordance with the terms of Exhibit B, but Tenant chooses
another contractor, the Commencement Date shall be deemed to occur on the date
that it otherwise would have occurred had Turner been chosen to construct the
Initial Tenant Improvements. If Turner is not the low bidder and Tenant selects
the contractor that is the low bidder, Landlord shall cause the Commencement
Date to occur by March 1, 1999. All of the foregoing dates are subject to the
delay provisions contained in Section 3(d) below. The contractor so selected to
construct the Tenant Improvements shall be hereinafter referred to as the
"Tenant Improvement Contractor."
The Commencement Date with respect to the Initial Premises shall
be deemed to occur on (A) the later of (I) the completion date specified in the
notice ("30 Day Notice") delivered to Tenant at least thirty (30) days prior to
the date that the Initial Premises will be completed for occupancy or (II) the
date the entirety of the Initial Premises is in fact delivered to Tenant with
all of Landlord's Work and the Initial Tenant Improvements substantially
completed, or (B) such earlier date as Landlord would have been able to so
deliver the entire Premises to Tenant but for Tenant Delay (defined below).
Subject to Tenant Delay or other causes beyond Landlord's control, Landlord
shall use its best efforts to deliver the Premises to Tenant no later than the
completion date specified in the 30 Day Notice. Notwithstanding the foregoing,
the Commencement Date shall be deemed to have occurred with respect to the
Initial Premises on the date Tenant first occupies the Initial Premises for
normal business operations, if such date is earlier than the dates described
above, but in no event earlier than January 1, 1999.
The Commencement Date shall not be deemed to occur until the
following conditions shall have been satisfied by Landlord:
(i) The utility and other systems servicing the Building and
necessary for the operation of the Building or Tenant's occupancy and full
enjoyment of the Initial Premises (such as elevators, plumbing, heating,
ventilating, air conditioning, electrical and security systems) shall be
completed and in good order and operating condition except for (A) details of
construction, decoration and mechanical adjustments which do not materially
interfere with Tenant's use of the Initial Premises, and (B) any part thereof
the non-completion of which shall be due to Tenant Delay;
(ii) Landlord (A) shall have obtained a temporary Certificate
of Occupancy for the Initial Premises, or (B) would have been entitled to the
issuance of a temporary Certificate of Occupancy for the Initial Premises, but
for Tenant Delay;
(iii) The lobby of the Building and the entrances and public
portions (including the Garage, but excluding all retail space), stairways,
corridors and elevators (including freight elevators) of the Building, shall
have been finished (except for details of construction, decoration and
mechanical adjustments which do not materially detract from the appearance of
such areas or materially interfere with their use for normal purposes) and shall
be in a clean and orderly condition affording reasonable access to all portions
of the Initial Premises, or would be in such condition but for Tenant Delay; and
(iv) The exterior of the Building (including the installation of
glass therein) shall have been completed except for (A) minor portions thereof
which in the aggregate do not materially affect Tenant's use of the Premises,
(B) all retail space, and (C) any part thereof the non-completion of which shall
be due to Tenant Delay.
As used herein, the term "Tenant Delay" shall mean, as to any
delay experienced by Landlord in its work on the Building or the Tenant
Improvements, (a) any interference or delay caused by occurrences within the
reasonable control of Tenant; (b) any delay caused by Tenant's failure or
refusal to furnish plans, or approve or disapprove plans for the Tenant
Improvements, within the periods set out in Exhibit B; (c) any delay
attributable to changes in or additions to Landlord's plans requested by Tenant;
or (d) any other delay in acts of Tenant required under Exhibit B, provided that
the foregoing clauses (a) through (d) shall apply only to the extent that
B-4
<PAGE>
such delay impedes or otherwise adversely affects Landlord's work or schedule
for preparing the Premises for occupancy. Landlord shall notify Tenant as soon
as reasonably possible when Landlord becomes aware of an event constituting
Tenant Delay.
As used herein, the term "Landlord Delay" shall mean, as to any
delay experienced by Tenant in its work on Tenant Improvements, (a) any
interference or delay caused by occurrences within the reasonable control of
Landlord, or (b) any delay caused by Landlord's failure or refusal to either
approve or disapprove Tenant's plan for Tenant Improvements, or to furnish
plans, as and within the time periods specified in Exhibit B hereto, or (c) any
delay attributable to changes in or additions to Tenant's plans requested by
Landlord or on account of interference by Landlord or its contractors, employees
or agents, or (d) any delay in Landlord or Landlord's contractor giving
approvals, consents, prices or quotes, or taking other action with respect to
Tenant's improvements, all as required or contemplated under Exhibit B; provided
that the foregoing clauses (a) through (d) shall apply only to the extent that
such delay impedes or otherwise adversely affects Tenant's work or schedule for
preparing the Premises for occupancy. Tenant shall notify Landlord as soon as
reasonably possible when Tenant becomes aware of an event constituting Landlord
Delay.
The occurrence of the Commencement Date prior to the completion in
full of all work required to be performed by Landlord as provided herein shall
not relieve Landlord of its obligation thereafter to complete the same with due
dispatch and in a workmanlike manner. Without waiving any rights of Tenant,
Landlord, Tenant, and Landlord's and Tenant's architects shall prepare within
thirty (30) days after the Commencement Date or as soon thereafter as
practicable a "punch-list" which shall consist of the items that have not been,
but should have been, finished or furnished by Landlord in the Premises. Upon
presentation of such punch-list to Landlord, Landlord shall, with all due
diligence, proceed to complete and furnish all punch-list items. If such items
relate to shell and core work, they shall be completed at Landlord's sole cost
and expense. If such items relate to Tenant Improvements, they shall be paid in
the same manner that the costs of Tenant Improvements are paid. If within thirty
(30) days after presentation of the punch-list, Landlord shall not have
commenced, and be proceeding with due diligence, to complete and furnish such
items, or if Landlord thereafter fails to prosecute its work to completion with
due diligence, Tenant may deliver written notice of such failure to Landlord,
and if Landlord does not commence and proceed with due diligence to complete
such work within ten (10) days after Landlord's receipt of such notice, Tenant
may complete such items and, to the extent Landlord is responsible for such
costs as set forth above, Landlord will reimburse Tenant upon demand for the
reasonable costs incurred by Tenant for such work. If such costs are properly
chargeable to Landlord and are not paid within ten (10) days after demand, such
costs shall be credited to and deducted from Tenant's next monthly installments
of Rent and Additional Rent payable hereunder as an offset against such amounts
owing by Tenant. Any such punch-list items which do not materially interfere
with Tenant's enjoyment of the portion of the Premises involved shall not delay
the Commencement Date with respect thereto.
Landlord shall promptly correct all defects in Landlord's Work and
Tenant Improvement work performed by the Tenant Improvement Contractor, and all
failures of such work to conform to the plans and specifications for such work
which have been agreed upon by Landlord and Tenant, which defects or non-
conformities are discovered before or within one year after the date upon which
Tenant first occupies the applicable portion of the Premises. Landlord shall
bear all costs of correcting Landlord's Work and, to the extent caused by the
act or omission of Landlord, Tenant Improvement work performed by the Tenant
Improvement Contractor. Landlord and Tenant shall each give the other prompt
written notice after discovering the existence of any such defects or non-
conformities in Landlord's work and Tenant Improvement work performed by the
Tenant Improvement Contractor.
(d) Delays: In the event, due to delays from any cause other than
------
Tenant Delay, the Initial Premises are not available for occupancy by Tenant and
the Commencement Date shall not have occurred within five (5) months following
the date specified in Section 1(f) (provided, however, that such five (5) month
period shall be extended for no more than an additional four (4) months for
delays due to causes beyond the reasonable control of Landlord, or longer if
such delays are due to Tenant Delay), then:
(i) Landlord shall use its reasonable best efforts to provide or
secure for Tenant alternative space or expansion space as required by Tenant,
such space to be within the downtown Seattle area and reasonably acceptable to
Tenant, and Landlord shall pay to the landlord of such alternative or expansion
space (whether such space is provided or secured by Landlord or through Tenant's
own efforts) the differential in base rent and additional rent required over the
amount of base rent and additional rent that Tenant would have otherwise paid in
the Premises had such delay not occurred;
B-5
<PAGE>
(ii) Landlord shall pay, and shall indemnify, defend and hold
Tenant harmless from and against, any holdover rent premiums or other rent
differential (excluding nominal base rent and any consequential damages payable
to Tenant's current landlords) accruing from and after the date Landlord is
obligated to deliver the completed Initial Premises to Tenant, subject to the
extensions described above; and
(iii) Landlord shall pay all third party costs of a second move,
if required by Tenant, which costs shall include without limitation cabling and
utility installation costs in any alternative or expansion space into which
Tenant moves pending completion of the Premises.
The five (5) and four (4) month extension periods referred to in this
Section 3(d) above shall be cumulative with, and not in addition to, the five
(5) and (4) month extension periods referred to in Section 4(a) below. For
example, a three (3) month delay in commencing construction will reduce the
extension period available to Landlord for substantial completion on the Initial
Premises to two (2) months (assuming both delays were due to causes within
Landlord's control).
(e) Confirmation of Commencement Date: In the event the
---------------------------------
Commencement Date is established as a later or earlier date than the date
provided in Section l(f) hereof, Landlord and Tenant shall confirm the same in
writing.
(f) Expiration Date: This Lease shall expire on the date specified
---------------
in Section l(g).
4. TERMINATION; CONDITIONS PRECEDENT:
---------------------------------
(a) Landlord anticipates that commencement of construction (as defined
in Section 4(b)) on the Building shall occur on or before May 5, 1998. If
Landlord has not commenced construction of the Building by the date five (5)
months after such date (provided, however, that such five (5)-month period shall
be extended for no more than an additional four (4) months for delays due to
causes beyond the reasonable control of Landlord, or longer if such delays are
due to Tenant Delay), then, in such event, at its option, either Landlord or
Tenant may, by notice in writing to the other within thirty (30) days
thereafter, terminate this Lease without liability to the other, except as
hereinafter provided. Termination under this Section 4(a) shall be the sole
remedy at law or equity of Landlord and Tenant, except that, in the event of
such termination, Landlord shall reimburse Tenant for Tenant's documented third
party out-of-pocket expenses incurred in connection with designing the Tenant
Improvements (including engineering, architectural, programming, legal and
project management) but excluding any such costs incurred prior to October 1,
1997 (the date of execution of the Letter of Intent with respect to this Lease).
(b) For the purposes of this Lease, "commencement of construction,"
"commenced construction," construction has commenced," "commencement of
construction has occurred" and "commencing construction" shall mean Landlord has
acquired the Air Rights and has commenced work pursuant to a building permit for
work defined in the construction documents for the Building. Landlord
represents to Tenant that Landlord has obtained the Master Use Permit from the
City of Seattle for construction of the Building.
5. RENT AND ADDITIONAL RENT: Tenant shall pay Landlord without notice
------------------------
the Rent stated in Section l(h) hereof and Additional Rent as provided in
Section 9 and Section 10 and any other payments due under this Lease without
deduction or offset (except as otherwise set forth in this Lease) in lawful
money of the United States in advance on or before the first day of each month
at Landlord's Payment Address set forth in Section 1(n) hereof, or to such other
party or at such other place as Landlord may hereafter from time to time
designate in writing. Rent and Additional Rent for any partial month at the
beginning or end of the Lease term shall be prorated in proportion to the number
of days in such month. All amounts which Tenant assumes or agrees to pay to
Landlord pursuant to this Lease other than Rent shall be deemed Additional Rent
hereunder and, in the event of nonpayment thereof, Landlord shall have all
remedies provided for in the case of nonpayment of Rent.
6. SECURITY DEPOSIT: Intentionally omitted.
----------------
7. PARKING: Use of parking in the Garage by Tenant shall be subject to
-------
such reasonable rules and regulations as the Port of Seattle or its parking
operator, or the City of Seattle, Washington may publish from time to time.
Tenant shall provide Landlord with thirty (30) days prior written notice of the
number of parking permits required by Tenant from time to time, up to the
maximum number specified in Section 1(l) and of any changes in those
requirements. Short-term hourly parking shall be offered on a space available
basis during Normal Business Hours (as defined
B-6
<PAGE>
in Section 9(b)), except Saturdays, Sundays or legal holidays, for Tenant's
clients and customers. Landlord has confirmed with the Port of Seattle that the
Port will install a card key system in the Garage and Building, at Landlord's
cost, which will allow Tenant's employees who are not monthly parkers to have
access to the Garage and Building seven days per week, 24 hours per day at
market rates.
8. USES: The Premises are to be used only for general office purposes,
----
software research, development and testing, training, travel arrangements,
internet broadcasting and other uses incident thereto, including but not limited
to the operation of a day care, cafeteria, and physical fitness facility
("Permitted Uses"), and for no other business or purpose without the prior
written consent of Landlord, which consent may be withheld if Landlord, in its
reasonable discretion, determines that any proposed use is inconsistent with or
detrimental to the maintenance and operation of the Building as a first-class
office building or is inconsistent with any restriction on use of the Premises,
the Building, or the Land contained in any lease, mortgage, or other instrument
or agreement by which the Landlord is bound or to which any of such property is
subject. In consideration of the possibility that the Building may at some
point in the future become a multi-tenanted building, Landlord's approval, not
to be unreasonably withheld, shall be required in locating and, if applicable,
relocating, the day care center, cafeteria, and physical fitness center so as to
minimize the possible noise and traffic disturbance to other occupants of the
Building. Landlord represents that the use of the Premises for general office
purposes is permitted by law and is consistent with all such restrictions as of
the date of this Lease. Tenant shall not commit any act that will increase the
then existing cost of insurance on the Building without Landlord's consent.
Tenant shall promptly pay upon demand the amount of any increase in insurance
costs caused by any act or acts of Tenant. Tenant shall not commit or allow to
be committed any waste upon the Premises, or any public or private nuisance or
other act which disturbs the quiet enjoyment of any other tenant in the Building
or which is unlawful. Tenant shall not, without the written consent of
Landlord, use any apparatus, machinery or device in or about the Premises which
will cause any substantial noise, vibration or fumes (but Landlord acknowledges
that Tenant may install, maintain and test weekly a diesel generator in the
Building for emergency back-up use). Tenant shall not permit smoking in the
Premises; Landlord has designated all internal portions of the Building as a
smoke-free zone. If any of Tenant's office machines or equipment should disturb
the quiet enjoyment of any other tenant in the Building, then Tenant shall
provide adequate insulation, or take other action as may be necessary to
eliminate the disturbance. Tenant shall comply with all laws relating to its
use or occupancy of the Premises, including without limitation any laws relating
to Tenant's modification of the Premises, and shall observe such reasonable
rules and regulations (not inconsistent with the terms of this Lease) as may be
adopted and made available to Tenant by Landlord from time to time for the
safety, care and cleanliness of the Premises or the Building, and for the
preservation of good order therein.
9. SERVICES AND UTILITIES:
----------------------
(a) Standard Services: Landlord shall maintain or cause to be
-----------------
maintained in good order and repair and first-class condition and in accordance
with the janitorial specifications attached hereto as Exhibit F, the Premises
and the core area of the Building, the structural portions of the Building,
including elevators, plumbing, air conditioning, heating and electrical system,
and the public and common areas of the Building, including lobbies, elevators,
stairs, corridors and restrooms, except for fire and other casualty, including
acts of God, and subject to the provisions of Section 13 pertaining to the
repair or rebuilding of damaged or destroyed property. Landlord shall also
maintain and keep in good order and repair the following in the Building: roof,
curtain wall including but not limited to all glass connections at the perimeter
of the Building, all exterior doors, including any exterior plate glass within
the Building, exterior surfaces of the Building (including but not limited to
glass, stone and other material(s)), ventilating systems, elevators, janitor
closets, escalators, telephone and electrical closets, public portions of the
Building, balconies, landscaping, walkways, and, other than Tenant improvements,
other interior portions of the Building above and below grade. Landlord
covenants and agrees that alterations, repairs or additions shall be done with
the least amount of interference to Tenant, and, to the extent possible, such
work shall be done after Normal Business Hours. Nothing contained herein shall
be deemed to excuse or relieve Landlord from any liability for the negligence or
willful misconduct of Landlord, its officers, agents, servants, employees,
contractors, licensees or invitees. If Landlord fails to commence any repairs
hereunder within five (5) business days after receipt of written notice from
Tenant and thereafter diligently proceed to complete any repairs required to be
made by Landlord under this Lease, Rent and Additional Rent shall thereafter
abate to the extent the Premises are rendered unusable for Tenant's normal
business operations as a result of such failure to make repairs.
Each floor of the Building shall have two electrical closets. Each
closet shall contain a 42 circuit panelboard (277/480-volt) serving mainly
lighting and VAV boxes. In addition,
B-7
<PAGE>
each closet will contain a 75kVA transformer feeding a 84 circuit panelboard
(120/208-volt) for service to convenience outlets. Landlord shall also provide
lamp replacement service for building standard light fixtures, toilet room
supplies and window washing at reasonable intervals.
(b) Normal Business Hours: From 7:00 a.m. to 8:00 p.m. on weekdays
---------------------
and from 8:00 a.m. to 2:00 p.m. on Saturdays, excluding legal holidays ("Normal
Business Hours"), Landlord shall furnish to the Premises heat and air
conditioning sufficient to maintain a comfortable interior temperature range
between 69 and 72 degrees Fahrenheit. Landlord shall provide 24-hour per day
HVAC service in the telephone and computer rooms pursuant to final construction
documents; the capacity for which service shall be paid for by Tenant from the
Tenant Allowance described in Exhibit B. If requested by Tenant, Landlord shall
furnish heat and air conditioning at times other than Normal Business Hours and
the actual cost of such services shall be paid by Tenant as Additional Rent.
During other than Normal Business Hours, Landlord may restrict access to the
Building in accordance with the Building's security system, provided that Tenant
shall have at all times during the term of this Lease (24 hours of all days)
reasonable access to the Premises. The Normal Business Hours may be modified
from time to time upon the mutual agreement of Landlord and Tenant.
(c) Interruption of Services: Landlord shall not be liable for any
------------------------
loss, injury or damage to person or property caused by or resulting from any
variation, interruption, or failure of any services or facilities provided by
Landlord pursuant to this Lease due to any cause whatsoever, unless such
variation, interruption or failure was due to the negligence or willful
misconduct of Landlord, its officers, agents, servants, employees, contractors,
licensees or invitees. No temporary interruption or failure of such services or
facilities incident to the making of repairs, alterations, or improvements, or
due to accident, strike or conditions or events beyond Landlord's reasonable
control shall be deemed an eviction of Tenant or relieve Tenant from any of
Tenant's obligations hereunder; provided, however, if such interruption or
failure shall continue for five (5) business days, Tenant's Rent hereunder shall
thereafter abate to the extent the Premises are thereby rendered untenantable
for Tenant's normal business operations until such services are restored.
Landlord shall use its best efforts in good faith to respond quickly to any
interruption of services and to minimize any disruption of Tenant's use of the
Premises arising from any interruption or failure of such services or
facilities.
(d) Additional Services: The Building mechanical system is designed
-------------------
to accommodate heating loads generated by lights and equipment using up to 4.6
watts per square foot (1.2 watts per foot for lights and 3.4 watts per foot for
equipment). Before installing lights and equipment in the Premises which in the
aggregate exceed such amount, Tenant shall obtain the written permission of
Landlord. Landlord may refuse to grant such permission unless Tenant shall
agree to pay the costs of Landlord for installation of supplementary air
conditioning capacity or electrical systems as necessitated by such equipment or
lights.
10. COSTS OF OPERATIONS AND REAL ESTATE TAXES:
-----------------------------------------
(a) Additional Rent: Tenant shall pay as Additional Rent its Pro
---------------
Rata Share of Taxes and Operating Costs. Taxes and Operating Costs shall be
determined and shall be payable separately in accordance with the provisions of
this Section 10.
(b) Definitions:
-----------
(i) For the purposes of this section, "Taxes" shall mean taxes
and assessments (including special district levies) on real and personal
property payable during any calendar year, based on the actual assessment
period, with respect to the Land, the Building and all property of Landlord,
real or personal, used directly in the operation of the Building and located in
or on the Building, together with any taxes levied or assessed in addition to or
in lieu of any such taxes or any tax upon leasing of the Building or the rents
collected (excluding any net income or franchise tax) ("Taxes").
(ii) For purposes of this Section, "Operating Costs" or "Costs"
shall mean all reasonable and customary expenses of Landlord for maintaining,
operating and repairing the Building and the personal property used in
connection therewith, including without limitation insurance premiums,
utilities, market rate management fees (not to exceed four percent (4%) of the
Rent and Additional Rent) and other expenses which in accordance with generally
accepted accounting and management practices would be considered an expense of
maintaining, operating or repairing the Building ("Operating Costs" or "Costs");
excluding, however: (I) costs of any special services rendered to individual
tenants for which a separate charge is collected; (II) leasing commissions and
other leasing expenses; (III) costs of improvements required to be capitalized
in accordance with generally accepted accounting principles, except Operating
Costs shall include amortization of capital improvements (A) made subsequent to
initial development of the Building
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<PAGE>
which are designed with a reasonable probability of improving the operating
efficiency of the Building, or providing savings in the cost of operating the
Building or, (B) which are reasonably responsive to requirements imposed with
respect to the Building under any amendment to any applicable building, health,
safety, fire, nondiscrimination, or similar law or regulation ("law"), or any
new law, or any new interpretation of an existing law ("new interpretation"),
which amendment, law or new interpretation is adopted or arose after the
Commencement Date of this Lease (for purposes of this Lease, a new
interpretation shall mean any interpretation, enforcement or application of a
law enacted prior to the Commencement Date that imposes requirements with
respect to the Building that Landlord in the exercise of sound business judgment
and good faith at the time of Landlord's execution of this Lease would not have
deemed applicable to the Building); (IV) executives' salaries above the grade of
Building manager; (V) amounts received by Landlord through proceeds of insurance
to the extent the proceeds are compensation for expenses which were previously
included in Operating Costs hereunder; (VI) cost of repair or replacements
incurred by reason of fire or other casualty or by the exercise of the right of
eminent domain; (VII) consulting fees, marketing fees, advertising and
promotional expenditures; (VIII) legal fees in connection with the negotiation
and preparation of leases of space or legal fees in connection with the sale of
all or any portion of the Building in which the Premises are located, or an
interest therein, or the financing or refinancing of Landlord's interest in all
or any portion of the Building in which the Premises are located, or in
connection with disputes with tenants, and legal and auditing fees, other than
legal and auditing fees reasonably incurred in connection with the maintenance
and operation of all or any portion of such Building or in connection with the
preparation of the statements required pursuant to additional rent or lease
escalation provisions contained in leases of space in such Building; (IX)
depreciation or loan payments; (X) costs resulting from the correction of any
latent construction defects in all or any portion of the Premises or Building;
(XI) penalties due to any violation of law by Landlord or other tenants; (XII)
costs of preparing tenant space for tenant occupancy; (XIII) costs allocable to
properties in which Landlord has an interest other than the Building; (XIV)
damages incurred by Landlord for any default, breach, claim, judgment or
settlement; (XV) structural replacements (including replacements to the roof and
foundations).
(iii) "Year" shall mean the calendar year.
(c) Estimated Costs: At least sixty (60) days prior to the
---------------
beginning of each Year, Landlord shall furnish Tenant a written statement of
estimated Operating Costs and Taxes for such year and a calculation of Tenant's
Pro Rata Share of the Operating Costs and Taxes. Tenant shall pay one-twelfth
(1/12) of that amount as Additional Rent for each month during the Year. If at
any time during the Year Landlord reasonably believes that the actual Operating
Costs or Taxes will vary from such estimated Operating Costs or Taxes by more
than five percent (5%), Landlord may by written notice to Tenant revise the
estimate for such year, and Additional Rent for the balance of such Year shall
be paid based upon such revised estimates. Landlord and Tenant may also agree
that Tenant will pay certain Operating Costs directly to the provider thereof.
(d) Actual Costs: Within ninety (90) days after the end of each
------------
Year, Landlord shall deliver to Tenant a written statement setting forth
Tenant's Pro Rata Share of the actual Operating Costs and Taxes during the
preceding Year. If the actual Operating Costs or actual Taxes, or both, exceed
the estimates for each paid by Tenant during the Year, Tenant shall pay the
amount of such excess to Landlord as Additional Rent within thirty (30) days
after receipt of such statement. If the actual Operating Costs or actual Taxes,
or both, are less than the amount paid by Tenant to Landlord, then the amount of
such overpayment by Tenant shall be, at Landlord's option, credited against any
amounts owed by Tenant under this Lease, refunded by check to Tenant, or
credited against the next Rent payable by Tenant hereunder. Notwithstanding this
Section 10, the Rent payable by Tenant shall in no event be less than the Rent
specified in Section 1(h) hereof.
(e) Records and Adjustments: Each written statement of actual costs
-----------------------
given by Landlord to Tenant pursuant to Section 10(d) shall be conclusive and
binding upon Tenant unless within ninety (90) days after the receipt of such
statement Tenant shall notify Landlord in writing that it disputes the
correctness of the statement, specifying the particular respects in which the
statement is claimed to be incorrect. If such disputes shall not have been
settled by agreement, Tenant, within thirty (30) days of receipt of such
statement, shall pay Additional Rent in accordance with the statement, without
prejudice to Tenant's favor. If the dispute shall be determined in Tenant's
favor, Landlord shall forthwith pay to Tenant the amount of Tenant's overpayment
of rents resulting from compliance with the statement. Tenant may, within ninety
(90) days after the receipt of such statements, upon thirty (30) days prior
notice to Landlord, cause a complete audit to be made of Landlord's records
regarding Operating Costs for the prior Year. If the audit discloses that
Operating Costs have been over-reported to the extent of five percent (5%) or
more on an annual basis for such
B-9
<PAGE>
Year, Landlord shall pay the reasonable costs of the audit and actual Operating
Costs for that Year shall be adjusted accordingly.
(f) Personal Property Taxes: Tenant shall pay all personal property
-----------------------
taxes with respect to property of Tenant located on the Premises or in the
Building. "Property of Tenant" shall include all improvements which are paid
for by Tenant and "personal property taxes" shall include all property taxes
assessed against the property of Tenant, whether assessed as real or personal
property.
(g) Net Lease: This Lease shall be a net lease and base Rent shall
---------
be paid to Landlord absolutely net of all costs and expenses. The provisions
for payment of Tenant's Pro Rata Share of Taxes and Operating Costs are intended
to pass on to Tenant and reimburse Landlord for all costs and expenses of the
nature described in Section 10(b)(i) and (ii) incurred in connection with
ownership and operation of the Building.
(h) Contest of Taxes; Substantiation of Taxes: Landlord shall, if
-----------------------------------------
Tenant so requests, take all reasonable action necessary to preserve the right
to contest any Taxes, including paying them under protest, and shall consult
with Tenant, and act in good faith to contest or seek recovery of Taxes if and
to the extent such action is reasonable. Any payment of Taxes by Tenant either
directly or by way of reimbursement to Landlord pursuant to any provision of
this Lease shall be, whenever such Taxes have not been directly assessed against
Tenant, subject to appropriate substantiation by Landlord upon the request of
Tenant. All costs incurred by Landlord in any such contest, including
attorneys' fees and court costs, shall be considered Taxes for purposes of this
Lease.
11. CARE OF PREMISES; ALTERATIONS: Landlord shall perform all normal
-----------------------------
maintenance and repairs reasonably determined by Landlord, or as notified by
written notice from Tenant, as necessary to maintain the Premises and the
Building as a first-class office building; provided that Landlord shall not be
required to maintain or repair any property of Tenant or any appliances (such as
refrigerators, water heaters, microwave ovens, and the like) which are part of
the Premises. Tenant shall take good care of the Premises.
Tenant shall not make any alterations, additions or improvements which
constitute a structural change to the Building or the HVAC system, electrical
service or plumbing system ("Alterations") in or to the Premises, or make
changes to wiring affecting Building-wide systems ("Changes") without first
obtaining the written consent of Landlord (which shall not be unreasonably
withheld) and, where appropriate, in accordance with plans and specifications
reasonably approved by Landlord. As a condition to its approval, and only if so
stated in writing at the time of such approval, Landlord may require Tenant to
remove any such Alterations or Changes which are not designed in a normal or
standard office configuration upon the expiration or earlier termination of the
Term and to restore the Premises to the condition they were in prior to such
Alterations or Changes, including restoring any damage resulting from such
removal, all at Tenant's expense. Tenant shall reimburse Landlord for any
reasonable out-of-pocket sums expended for examination and approval of the
architectural and mechanical plans and specifications of the Alterations and
Changes (provided that Landlord shall have given Tenant a good faith estimate of
such sums in advance) and direct costs reasonably incurred during any inspection
or supervision of the Alterations or Changes. All damage or injury done to the
Premises or Building by Tenant or by any persons who may be in or upon the
Premises or Building with the express or implied consent of Tenant, including
but not limited to the cracking or breaking of any glass of windows and doors,
shall be paid for by Tenant.
Tenant may make nonstructural alterations, additions or improvements
to the interior of the Premises, including wiring within the Premises,
nonstructural partitioning, and painting and redecorating, without the necessity
of obtaining Landlord's consent, provided in all such cases (other than cabling,
painting or decoration solely within the Premises) Tenant shall give Landlord
five (5) business days' prior written notice of such modifications. Any such
alterations, additions or improvements shall be installed by Tenant at its sole
cost and in compliance with all laws, orders and regulations of any applicable
governing body and Tenant at its expense shall furnish to Landlord drawings for
such work to enable the Building's record drawings to be updated to reflect such
changes.
12. ACCESS:
------
(a) Tenant shall permit Landlord and its agents to enter into and upon
the Premises at all reasonable times, on reasonable prior notice, for the
purpose of inspecting the same or for the purpose of cleaning, repairing,
altering or improving the Premises or the Building. Upon reasonable notice, and
subject to Tenant's reasonable consent, Landlord shall have the right to enter
the Premises for the purpose of showing the Premises to prospective tenants
within the period of one hundred eighty (180) days prior to the expiration or
sooner termination of the Lease term.
B-10
<PAGE>
(b) Tenant currently intends that the Building be limited to Tenant's
sole use and therefore Tenant reserves the right to direct Landlord to prohibit
public access to or from the Garage through the Building lobby. If Tenant
exercises such right, such restriction shall remain effective as long as Tenant
occupies (or has the right to occupy and no other party has been given such
right) one hundred percent (100%) of the rentable area of the Building,
excluding only the retail tenant on the first floor of the Building and any
subtenants of Tenant which are suppliers or customers. Upon the request of
Tenant, Landlord shall attempt to obtain the right to (i) post signs at
appropriate locations in the Garage which direct Garage users to Elliott Avenue
and the Bell Street Overpass, and (b) post appropriate signs at Levels P-1 and
P-M in the Garage.
13. DAMAGE OR DESTRUCTION:
---------------------
(a) Landlord Obligated to Repair: If the Building or the Premises
----------------------------
shall be materially damaged or destroyed by fire or other casualty to the extent
that the cost of restoration, as reasonably estimated by Landlord, will be less
than fifty percent (50%) of the replacement value of the Building (exclusive of
foundations) and Landlord has available insurance proceeds (or a like recovery
of funds) with respect thereto, and such damage or destruction can be repaired
or replaced under then applicable laws and ordinances, Landlord shall promptly
commence and diligently proceed to repair or replace such damage or destruction.
If Landlord so repairs or replaces such damage the term of this Lease shall
continue, subject, however, to the provisions of Sections 13(c) and (d).
(b) Landlord Not Obligated to Repair: If the Building or the
--------------------------------
Premises shall be materially damaged or destroyed by fire or other casualty and
Section 13(a) is not applicable, Landlord shall not be obligated to, but may
repair or replace such damage. If Landlord elects to repair or replace, and
promptly commences and diligently proceeds to do so, the term of this Lease
shall continue, subject, however, to the provisions of Sections 13(c) and (d).
If Landlord elects not to repair or replace, the term of this Lease shall end
with the occurrence of the damage or destruction and rental and other payments
owing by Tenant hereunder shall be prorated as of such date.
(c) Elections and Determinations: Landlord shall provide Tenant
----------------------------
with written notice of its determination of the extent of the damage and, if
Landlord has the option to repair or rebuild, whether or not Landlord will
repair or rebuild. Such notice shall be delivered within sixty (60) days after
the damage occurs, or as soon thereafter as Landlord determines the availability
of insurance proceeds, but in no event later than 120 days after the damage
occurs. If Landlord intends to repair or rebuild, the notice shall also include
an estimated date for completion of rebuilding. If such date is later two
hundred seventy (270) days following the casualty, or if Landlord fails to
deliver such notice within the 120 day period specified above, then Tenant at
its option may terminate the Lease by providing Landlord with written notice
within fifteen (15) days after Tenant's receipt of Landlord's notice or
expiration of such 120 day period.
(d) Repair Duties: In any case described in Sections 13(a) or (b)
-------------
where the damage or destruction to the Premises is being repaired or replaced,
Tenant shall repair or replace the Tenant improvements involved to the extent
legally permissible, and Landlord and Tenant shall share the expense thereof in
the same proportion and same manner as they shared the expenses of the
installation of the original Tenant improvements. All rebuilding and repair
contemplated by this Section 13 shall be in conformity with this Lease, except
Tenant may elect to change the standards and details of the Tenant improvements
as it may see fit (so long as the same are not inconsistent with the
requirements of Exhibit B), and Tenant shall bear any additional cost resulting
from such changes.
(e) Abatement of Rent: During the period between the occurrence of
-----------------
any loss, damage or destruction referred to in this Section 13 and the
completion of repair or reconstruction of such loss or damage, this Lease shall
continue in full force and effect (except as provided above), but payment of
rent and other charges payable by Tenant hereunder for the space affected by
such loss, damage or destruction shall be abated during such period of repair or
reconstruction in fair and just proportion to the portion of the Premises for
which normal and usual utilization by Tenant is made impractical.
(f) Repair or Reconstruction After Loss Which is Not Material:
---------------------------------------------------------
Landlord shall be obligated to promptly commence and shall thereafter diligently
proceed to repair any damage or destruction to the Building which is not
material or is required or elected to be repaired hereunder.
(g) Destruction During Last Year of Term: In case the Building
------------------------------------
shall be materially destroyed by fire or other cause at any time during the last
twelve months of the term of this Lease, either Landlord or Tenant may terminate
this Lease upon written notice to the other party hereto given within sixty (60)
days of the date of such destruction.
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<PAGE>
(h) Tenant Improvements: Landlord will not carry insurance of any
-------------------
kind on any improvements paid for by Tenant as provided in Exhibit B or on
Tenant's furniture or furnishings or on any fixtures, equipment, improvements or
appurtenances of Tenant under this Lease and Landlord shall not be obligated to
repair any damage thereto or replace the same.
14. WAIVER OF SUBROGATION: Whether a loss or damage is due to the
---------------------
negligence of either Landlord or Tenant, their agents or employees, or any other
cause, Landlord and Tenant do each hereby release and relieve the other, their
agents or employees, from responsibility for, and waive their entire claim of
recovery for (a) any loss or damage to the real or personal property of either
located anywhere in the Building or on the Land, including the Building itself,
arising out of or incident to the occurrence of any of the perils which are
covered by their respective insurance policies; and (b) any loss resulting from
business interruption at the Premises or loss of rental income from the
Building, arising out of or incident to the occurrence of any of the perils
which are covered by a business interruption insurance policy or loss of rental
income insurance policy held by Landlord or Tenant. Each party shall cause its
insurance carriers to consent to the foregoing waiver of rights of subrogation
against the other party. Notwithstanding the foregoing, no such release shall
be effective unless the aforesaid insurance policy or policies shall expressly
permit such a release or contain a waiver of the carrier's right to be
subrogated.
15. INDEMNIFICATION:
---------------
(a) Tenant shall indemnify, defend and hold Landlord harmless from and
against liabilities, damages, losses, claims, and expenses, including reasonable
attorneys fees, arising from any act or negligence of Tenant or its officers,
contractors, licensees, agents, employees, clients or customers in or about the
Building or Premises or arising from any breach or default under this Lease by
Tenant. The foregoing provisions shall not be construed to make Tenant
responsible for loss, damage, liability or expense resulting from injuries to
third parties caused by the negligence or willful misconduct of Landlord, or its
officers, contractors, licensees, agents, employees, clients or customers or
other tenants of the Building.
(b) Landlord shall indemnify, defend and hold Tenant harmless from and
against all liabilities, damages, losses, claims, and expenses, including
reasonable attorneys' fees arising from any act or negligence of Landlord or its
officers, contractors, licensees, agents, employees, clients, or customers in or
about the Building or Premises, or arising from any breach or default under this
Lease by Landlord. Landlord shall not be liable for any act or neglect of
Tenant or any other tenant or occupant of the Building or any third parties. In
no event shall Landlord be liable to Tenant for any damage to the Premises or
for any loss, damage or injury to any property therein or thereon occasioned by
bursting, rupture, leakage or overflow of any plumbing or other pipes
(including, without limitation, water, steam and/or refrigerant lines),
sprinklers, tanks, drains, drinking fountains or washstands or other similar
cause in, above, upon or about the Premises or the Building, unless due to the
negligence or willful misconduct of Landlord or its officers, contractors,
licensees, agents, employees, clients or customers.
16. INSURANCE:
---------
(a) Liability Insurance: Tenant shall, throughout the term of this
-------------------
Lease and any renewal hereof, at its own expense, keep and maintain in full
force and effect, a policy of commercial general liability (occurrence form)
insurance, including contractual liability insuring Tenant's activities upon, in
or about the Premises or the Building, against claims of bodily injury or death
or property damage or loss with a combined single limit of not less than Three
Million Dollars ($3,000,000) per occurrence and Five Million Dollars
($5,000,000) in the aggregate. Landlord and the Building manager shall be named
as additional insureds.
(b) Property Insurance: Tenant shall, throughout the term of this
------------------
Lease and any renewal thereof, at its own expense, keep and maintain in full
force and effect, what is commonly referred to as "All Risk" or "Special"
coverage insurance (excluding earthquake and flood) on the Tenant Improvements
in an amount not less than ninety percent (90%) of the replacement value thereof
with a coinsurance waiver. As used in this Lease, "Tenant's Leasehold
Improvements" shall mean any alterations, additions or improvements installed in
or about the Premises by or with Landlord's permission or otherwise permitted by
this Lease, whether or not the cost thereof was paid for by Tenant.
(c) Insurance Policy Requirements: All insurance required under
-----------------------------
this Section 16 shall be with companies rated AX or better by A.M. Best or
otherwise reasonably approved by Landlord. No insurance policy required under
this Section 16 shall be canceled or
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<PAGE>
reduced in coverage except after thirty (30) days prior written notice to
Landlord, except after ten (10) days prior written notice to Landlord in the
case of non-payment of premium.
(d) Certificate of Insurance: Tenant shall deliver to Landlord
------------------------
prior to the Commencement Date, and from time to time thereafter, copies of
policies of such insurance or certificates evidencing the existence and amounts
of same and evidencing Landlord and the Building manager as additional insureds
thereunder. In no event shall the limits of any insurance policy required under
this Section 16 be considered as limiting the liability of Tenant under this
Lease.
(e) Primary Policies: All policies required under Section 16(a)
----------------
shall be written as primary policies and not contributing to or in excess of any
coverage Landlord may choose to maintain.
(f) Landlord's Insurance: Landlord shall procure and maintain
--------------------
commercial general liability insurance with broad form general liability
endorsement covering all claims with respect to injuries or damages to persons
or property sustained in, on or about the Building and the appurtenances
thereto, including the sidewalks and alleyways adjacent thereto, with limits of
liability no less than five million dollars ($5,000,000) combined single limit
per occurrence and in the aggregate. Such limits may be achieved through the
use of umbrella liability insurance otherwise meeting the requirements of this
Section 16(f). Landlord shall name Tenant as an additional insured under its
liability insurance policies to the extent of Landlord's obligation to indemnify
Tenant as set forth in this Lease.
Landlord will procure and maintain physical damage insurance
covering all real and personal property, excluding property paid for by tenants
and not reimbursed by Landlord or paid for by Landlord for which tenants have
reimbursed Landlord, located on or in, or constituting a part of, the Building
in an amount equal to at least ninety percent (90%) of replacement value of all
such property with a coinsurance waiver. Such insurance shall afford coverage
for damages resulting from (i) perils covered by what is commonly referred to as
"all risk" coverage insurance (but excluding earthquake and flood), and (ii)
boilers and machinery coverage as appropriate for apparatus located in the
Building.
(g) Deductibles: All insurance carried by Landlord and Tenant
-----------
pursuant to this Section 16 shall provide for deductible amounts consistent with
standards then customary in the Seattle office building market for the type and
amount of coverage.
17. ASSIGNMENT AND SUBLETTING:
-------------------------
(a) Assignment or Sublease: Except as set forth in Section 17(c),
----------------------
Tenant shall not assign, mortgage, encumber or otherwise transfer this Lease nor
sublet the whole or any part of the Premises without in each case first
obtaining Landlord's prior written consent. Subject to Section 17(b), below,
such consent shall not be unreasonably withheld or delayed, except: (i)
Landlord may withhold its consent if in Landlord's reasonable judgment occupancy
by any proposed assignee, subtenant, or other transferee (A) is not consistent
with the maintenance and operation of a first-class office building due to the
nature of the proposed occupant's business or manner of conducting business or
its experience or reputation in the community; or (B) is likely to cause
disturbance to the normal use and occupancy of the Building; (ii) Landlord may
withhold in its absolute and sole discretion consent to any mortgage,
hypothecation, pledge, or other encumbrance of any interest in this Lease or the
Premises by Tenant or any subtenant; (iii) Landlord may withhold its consent to
the extent it deems necessary to comply with any restriction on use of the
Premises, the Building, or the Land contained in any applicable laws or in any
lease, mortgage, or other agreement or instrument by which the Landlord is bound
or to which any of such property is subject.
No such assignment, subletting or other transfer shall relieve
Tenant of any liability under this Lease. Consent to any such assignment,
subletting or transfer shall not operate as a waiver of the necessity for
consent to any subsequent assignment, subletting or transfer. Each request for
an assignment or subletting must be accompanied by a Processing Fee of $500 in
order to reimburse Landlord for expenses, including attorneys fees, incurred in
connection with such request ("Processing Fee"). Tenant shall provide Landlord
with copies of all assignments, subleases and assumption instruments.
(b) Landlord Right to Terminate Portion of Lease: If Tenant intends
--------------------------------------------
to assign this Lease or sublease all or any portion of the Premises for the
remainder of the Term of this Lease, Landlord reserves the right to recapture
the space and terminate this Lease, or if consent is requested for subletting
less than the entire Premises for the remainder of the Term of this Lease, to
terminate this Lease with respect to the portion for which such consent is
requested, provided that Landlord
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shall notify Tenant in writing ("Recapture Notice") of its intent to recapture
the space within ten business (10) days after receipt of written notification of
Tenant's intent to market space for sublease or assignment. If Landlord provides
a timely Recapture Notice, Tenant shall have the right within ten business (10)
days thereafter to rescind its request for consent, in which case the Recapture
Notice shall be null and void and of no further force or effect and Tenant shall
have no right to market the space for assignment or sublease hereunder. In
addition, upon sublease or assignment, if Landlord has not elected to recapture
such space, Tenant shall pay Landlord, as Additional Rent, the amount by which
all sums received under the sublease or assignment exceed the total of (i) the
Rent and Additional Rent due under this Lease plus (ii) reasonable market rate
leasing commissions, legal fees, design fees and tenant improvement costs
incurred by Tenant with respect to the sublease or assignment. Tenant shall
provide Landlord copies of all sublease or assignment documentation as soon as
reasonably possible. Notwithstanding the foregoing, Landlord's ability to
recapture any space and to retain any rent received in excess of amounts payable
hereunder (as described above) shall not apply in the event Landlord is unable
to provide Tenant with adequate expansion space as described in Section 11 of
Exhibit C attached hereto.
(c) Permitted Transfers: Notwithstanding anything herein to the
-------------------
contrary, Landlord hereby consents to an assignment of this Lease, or a
subletting of all or part of the Premises, to (i) the parent of Tenant or to a
wholly owned subsidiary of Tenant or of such parent, (ii) any corporation in
whom or with which Tenant may be merged or consolidated, or (iii) any entity to
whom Tenant sells all or substantially all of its assets, provided that in each
such instance such entity expressly assumes all of Tenant's obligations
hereunder and has a net worth at least equal to the greater of (A) the net worth
of Tenant on the date hereof or (B) the net worth of Tenant immediately prior to
such assignment or transaction. With respect to the transactions described in
Subsections (i) and (ii) above, such net worth may be on a consolidated basis
with Tenant's affiliated entity. Landlord also consents to a subletting by
Tenant from time to time of portions of the Premises to Tenant's vendors,
suppliers and other customers. Landlord acknowledges that Tenant is a publicly
owned corporation and that the transfer of all or any portion of the ownership
of stock in Tenant shall not be deemed an assignment of this Lease.
(d) Assignee Obligations: As a condition to Landlord's approval,
--------------------
any potential assignee otherwise approved by Landlord shall assume in writing
all obligations of Tenant under this Lease and shall be liable to Landlord for
rental and other payments and performance of all terms, covenants and conditions
of this Lease.
(e) Sublessee Obligations: Any sublessee shall assume all
---------------------
obligations of Tenant as to that portion of the Premises which is subleased.
18. SIGNS: Tenant shall not place or in any manner display any sign,
-----
graphics, or other advertising matter anywhere in or about the Premises or the
Building at places visible (either directly or indirectly) from anywhere outside
the Premises without first obtaining Landlord's written consent thereto.
Provided such sign complies with the requirements set forth on Exhibit G
attached hereto, Landlord shall not unreasonably withhold its consent thereto.
Any such consent by Landlord shall be upon the understanding and condition that
Tenant shall remove the same at the expiration or sooner termination of this
Lease and Tenant shall repair any damage to the Premises or the Building caused
thereby. Landlord shall not unreasonably withhold its consent to normal Tenant
signage within the Premises which is consistent in Landlord's opinion with the
Building's image and signage and graphics program. Signage other than building
standard elevator lobby directory signage is at Tenant's sole expense. If
allowed by applicable law, and so long as Tenant leases sixty-two and one half
percent (62.5%) or more of the rentable area of the Building: (a) Tenant shall
have the right to place its corporate logo (or other corporate "brand") in a
visible location on the outside of the Building in one (but not more than one)
of the locations depicted on Exhibit G attached hereto, as selected by Tenant;
and (b) Tenant shall also be allowed to erect and maintain a monument sign
outside the Building. The size, location and design of the monument sign shall
be subject to the reasonable approval of Landlord and Tenant.
19. LIENS AND INSOLVENCY:
--------------------
(a) Liens: Tenant shall keep its interest in this Lease, the
-----
Premises, the Land and the Building free from any liens arising out of any work
performed and materials ordered or obligations incurred by or on behalf of
Tenant and hereby indemnifies, defends and holds Landlord harmless from any
liability from any such lien. In the event any lien is filed against the
Building, the Land or the Premises by any person claiming by, through or under
Tenant, Tenant shall, upon request of Landlord and at Tenant's expense, cause
such lien to be released of record within ten (10) days or furnish to Landlord a
bond, in form and amount and issued by a surety reasonably satisfactory to
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<PAGE>
Landlord, indemnifying Landlord, the Land and the Building against all
liability, costs and expenses, including attorneys fees, which Landlord may
incur as a result thereof. Provided that such bond has been furnished to
Landlord, Tenant, at its sole cost and expense and after written notice to
Landlord, may contest, by appropriate proceedings conducted in good faith and
with due diligence, any lien, encumbrance or charge against the Premises arising
from work done or materials provided to or for Tenant, if, and only if, such
proceedings suspend the collection thereof against Landlord, Tenant and the
Premises and neither the Premises, the Building nor the Land nor any part
thereof or interest therein is or will be in any danger of being sold, forfeited
or lost.
(b) Insolvency: If Tenant becomes insolvent or voluntarily or
----------
involuntarily bankrupt, or if a receiver, assignee or other liquidating officer
is appointed for the business of Tenant (and not discharged within ninety (90)
days with respect to an involuntary proceeding), Landlord at its option may
terminate this Lease and Tenant's right of possession under this Lease and in no
event shall this Lease or any rights or privileges hereunder be an asset of
Tenant in any bankruptcy, insolvency or reorganization proceeding.
20. DEFAULT:
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(a) Cumulative Remedies: All rights of Landlord and Tenant herein
-------------------
enumerated shall be cumulative, and none shall exclude any other right or remedy
allowed by law. In addition to the other remedies provided in this Lease,
Landlord and Tenant shall be entitled to restrain by injunction the violation or
threatened violation of any of the covenants, agreements or conditions of this
Lease.
(b) Tenant's Right to Cure: Tenant shall have a period of three (3)
----------------------
business days from the date of written notice from Landlord to Tenant within
which to cure any default in the payment of Rent, Additional Rent and other sums
due hereunder. Tenant shall have a period of thirty (30) days from the date of
written notice from Landlord to Tenant within which to cure any other default
hereunder; provided, however, that with respect to any such default capable of
being cured by Tenant which cannot be cured within thirty (30) days, the default
shall not be deemed to be uncured if Tenant commences to cure within thirty (30)
days and for so long as Tenant is diligently pursuing the cure thereof.
(c) Abandonment: Abandonment shall be defined as an absence from
-----------
the Premises of thirty (30) days or more while Tenant is in monetary default.
Any abandonment by Tenant shall be considered a default with no right to cure,
allowing Landlord to re-enter the Premises as hereinafter set forth.
(d) Landlord's Reentry: Upon abandonment or an uncured default of
------------------
this Lease by Tenant, Landlord, in addition to any other rights or remedies it
may have, at its option, may enter the Premises or any part thereof, and expel,
remove or put out Tenant or any other persons who may be thereon, together with
all personal property found therein; and Landlord may terminate this Lease, or
it may from time to time, without terminating this Lease, relet the Premises or
any part thereof for such term or terms (which may be for a term less than or
extending beyond the term hereof) and at such rental or rentals and upon such
other terms and conditions as Landlord in its sole discretion may deem
advisable, with the right to repair, renovate, remodel, redecorate, alter and
change the Premises, Tenant remaining liable for any deficiency computed as
hereinafter set forth. In the case of any default, reentry and/or dispossession
all Rent and Additional Rent shall become due thereupon, together with such
expenses as Landlord may reasonably incur for attorneys fees, advertising
expenses, brokerage fees and/or putting the Premises in good order or preparing
the same for re-rental, together with interest thereon as provided in Section
37(f) hereof, accruing from the date of any such expenditure by Landlord. No
such re-entry or taking possession of the Premises shall be construed as an
election on Landlord's part to terminate this Lease unless a written notice of
such intention be given to Tenant.
(e) Reletting the Premises: At the option of Landlord, rents
----------------------
received by Landlord from such reletting shall be applied first to the payment
of any indebtedness from Tenant to Landlord other than Rent and Additional Rent
due hereunder; second, to the payment of any costs and expenses of such
reletting and including, but not limited to, attorneys fees, advertising fees
and brokerage fees, and to the payment of any repairs, renovations, remodeling,
redecoration, alterations and changes in the Premises; third, to the payment of
Rent and Additional Rent due and to become due hereunder, and, if after so
applying said Rents there is any deficiency in the Rent or Additional Rent to be
paid by Tenant under this Lease, Tenant shall pay any deficiency to Landlord
monthly on the dates specified herein. Any payment made or suits brought to
collect the amount of the deficiency for any month shall not prejudice in any
way the right of Landlord to collect the deficiency for any
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<PAGE>
subsequent month. The failure of Landlord to relet the Premises or any part or
parts thereof shall not release or affect Tenant's liability hereunder, nor
shall Landlord be liable for failure to relet, or in the event of reletting, for
failure to collect the Rent thereof, and in no event shall Tenant be entitled to
receive any excess of net Rents collected over sums payable by Tenant to
Landlord hereunder. Notwithstanding any such reletting without termination,
Landlord may at any time elect to terminate this Lease for such previous breach
and default. Should Landlord terminate this Lease by reason of any default, in
addition to any other remedy it may have, it may recover from Tenant the then
present value of Rent and Additional Rent reserved in this Lease for the balance
of the Term, as it may have been extended, over the then fair market rental
value of the Premises for the same period, plus all court costs and attorneys
fees incurred by Landlord in the collection of the same.
21. PRIORITY: Landlord represents that it will be, no later than the
--------
commencement of construction (as defined in Section 4(b) above), the sole owner
in fee simple of the Air Rights and the Building, and that the Building is not
encumbered by or subject to the lien of any mortgage or deed of trust as of the
date of this Lease. Tenant agrees that this Lease shall be subordinate to any
first mortgage or deed of trust hereafter placed upon the Premises or the
Building created by or at the instance of Landlord and to any and all advances
to be made thereunder and to interest thereon and all renewals, replacements, or
extensions thereof ("Landlord's Mortgage") ; provided, however, that the
subordination of this Lease and the estate hereby granted to Landlord's Mortgage
shall be upon the condition that the holder of Landlord's Mortgage ("Holder")
shall execute and deliver to Tenant, and fully perform and abide by the terms
of, an instrument in recordable form and reasonably satisfactory to Tenant
("Nondisturbance Agreement") providing that so long as conditions do not exist
entitling Landlord to declare this Lease at an end under the provisions of
Section 20 (including the expiration of all periods to cure):
(a) This Lease and the estate hereby created shall not be terminated;
(b) Nether Tenant nor any subtenant or assigns of Tenant shall be
joined by the Holder of Landlord's Mortgage in any foreclosure proceedings;
(c) Tenant's possession or enjoyment of the Premises shall not be
interfered with by or in any foreclosure, bankruptcy, reorganization action,
sale or other action or proceeding instituted under or in connection with such
Landlord's Mortgage, it being the express intention of Landlord, the Holder of
Landlord's Mortgage and Tenant that Tenant shall not be disturbed in its
possession and use of the Premises under this Lease for any reason other than
the termination of this Lease in accordance with its terms; and
(d) If the interest of Landlord under this Lease shall be transferred,
Tenant shall attorn to any such transferee upon such transferee's succession to
the interest of Landlord under this Lease and notice to Tenant to that effect,
upon and subject to all the terms, covenants and conditions hereof.
Landlord and Tenant agree that, subject to the execution and delivery
of a Nondisturbance Agreement, the provision for the subordination of this Lease
and the estate hereby granted to the lien of such Landlord's Mortgage shall be
self-operative and no further instrument shall be required to effect such
subordination; but Tenant shall, upon request by Landlord, at any time or times
(a) execute and deliver any and all instruments as shall be reasonably required
to effect such subordination and (b) execute and deliver any and all further or
other instruments that may be reasonably necessary or proper to confirm or
evidence such subordination. Without limiting the foregoing, upon request of
Landlord, Tenant shall execute, acknowledge and deliver to the Holder of any
First Mortgage a Subordination, Attornment and Nondisturbance Agreement in the
form attached as Exhibit E hereto.
Notwithstanding the foregoing, upon demand of such Holder, such
Landlord's Mortgage shall be subordinate to this Lease; provided, however, that
in such event, notwithstanding such subordination, such Landlord's Mortgage
shall be superior to this Lease with respect to (i) the right, claim and lien of
the Landlord's Mortgage in, to and upon any award or other compensation for any
taking by eminent domain of any part of the Premises or the Building and the
right of disposition thereof in accordance with the provisions of the Landlord's
Mortgage; and upon any proceeds payable under any policies of fire and rental
insurance upon the Premises or the Building and to the right of disposition
thereof in accordance with the terms of the Landlord's Mortgage; (ii) any lien,
right or judgment which may have arisen at any time under the terms of the
Lease; and (iii) such other matters as may be specifically reserved by the
Holder of such Landlord's Mortgage in writing in connection with such
subordination.
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<PAGE>
22. SURRENDER OF POSSESSION: Subject to the terms of Section 13
-----------------------
relating to damage and destruction, upon expiration of the term of this Lease,
whether by lapse of time or otherwise, Tenant shall promptly and peacefully
surrender the Premises to Landlord in as good condition as when received by
Tenant from Landlord or as thereafter improved (subject to Tenant's obligation
to remove any Alterations or Changes if requested by Landlord at the time of
Landlord's initial consent pursuant to Section 11, above), reasonable use and
wear and tear excepted.
23. REMOVAL OF PROPERTY: Tenant shall remove all of its movable
-------------------
personal property, telephone, data and computer cabling, and trade fixtures paid
for by Tenant which can be removed without damage to the Premises at the
expiration or earlier termination of this Lease, and shall pay Landlord any
damages for injury to the Premises or Building resulting from such removal. All
other improvements and additions to the Premises shall thereupon become the
property of Landlord.
24. NON-WAIVER: Waiver by Landlord or Tenant of any term, covenant or
----------
condition herein contained or any breach thereof shall not be deemed to be a
waiver of any subsequent breach of the same or any other term, covenant, or
condition herein contained. The subsequent acceptance of any payment hereunder
by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant
of any term, covenant or condition of this Lease, other than the failure of
Tenant to pay the amount so accepted, regardless of Landlord's knowledge of such
preceding breach at the time of acceptance of such payment.
25. HOLDOVER: If Tenant shall, with the written consent of Landlord,
--------
hold over after the expiration of the term of this Lease, such tenancy shall be
deemed a month-to-month tenancy, which tenancy may be terminated as provided by
applicable law. During such tenancy, Tenant agrees to pay to Landlord one
hundred thirty-five percent (135%) of the Rent and Additional Rent in effect
upon the date of such expiration as stated herein, and to be bound by all of the
terms, covenants and conditions herein specified, so far as applicable.
Acceptance by Landlord of Rent and Additional Rent after such expiration or
earlier termination shall not result in a renewal of this Lease. The foregoing
provisions of this Section 25 are in addition to and do not affect Landlord's
right of re-entry or any rights of Landlord hereunder or as otherwise provided
by law. If Tenant shall hold over after the expiration or earlier termination
of this Lease without the written consent of Landlord, such occupancy shall be
deemed an unlawful detainer of the Premises subject to the applicable laws of
the state in which the Building is located and, in addition, Tenant shall be
liable for any costs, damages, losses and expenses incurred by Landlord as a
result of Tenant's failure to surrender the Premises in accordance with this
Lease.
26. CONDEMNATION:
------------
(a) Entire Taking: If all of the Premises or such portions of the
-------------
Building as may be required for the reasonable use of the Premises, are taken by
eminent domain, this Lease shall automatically terminate as of the date title
vests in the condemning authority and all Rent, Additional Rent and other
payments shall be paid to that date.
(b) Constructive Taking of Entire Premises: In the event of a
--------------------------------------
taking of a material part of but less than all of the Building, where Landlord
or Tenant shall reasonably determine that the remaining portions of the Premises
cannot be economically and effectively used by Tenant (whether on account of
physical, economic, aesthetic or other reasons), or if, in the opinion of
Landlord or Tenant, the Building should be restored in such a way as to alter
the Premises materially, Landlord or Tenant shall forward a written notice to
the other of such determination not more than sixty (60) days after the date of
taking. The term of this Lease shall expire upon such date as such party shall
specify in such notice but not earlier than sixty (60) days after the date of
such notice.
(c) Partial Taking: In case of taking of a part of the Premises, or
--------------
a portion of the Building not required for the reasonable use of the Premises,
then this Lease shall continue in full force and effect and the Rent shall be
equitably reduced based on the proportion by which the floor area of the
Premises is reduced, such Rent reduction to be effective as of the date title to
such portion vests in the condemning authority. If a portion of the Premises
shall be so taken which renders the remainder of the Premises unsuitable for
continued occupancy by Tenant under this Lease, Tenant may terminate this Lease
by written notice to Landlord within sixty (60) days after the date of such
taking and the term of this Lease shall expire upon such date as Tenant shall
specify in such notice not later than sixty (60) days after the date of such
notice.
(d) Awards and Damages: Landlord reserves all rights to damages to
------------------
the Premises for any partial, constructive, or entire taking by eminent domain,
and Tenant hereby assigns to Landlord any right Tenant may have to such damages
or award, and Tenant shall make no claim
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<PAGE>
against Landlord or the condemning authority for damages for termination of the
leasehold interest or interference with Tenant's business. Tenant shall have the
right, however, to claim and recover from the condemning authority compensation
for any loss to which Tenant may be put for Tenant's moving expenses, business
interruption or taking of Tenant's personal property and leasehold improvements
paid for by Tenant (not including Tenant's leasehold interest) provided that
such damages may be claimed only if they are awarded separately in the eminent
domain proceedings and not out of or as part of the damages recoverable by
Landlord.
27. NOTICES: All notices under this Lease shall be in writing and
-------
delivered in person or sent by registered or certified mail, or nationally
recognized courier (such as Federal Express, DHL, etc.), postage prepaid, to
Landlord and to Tenant at the Notice Addresses provided in Section 1(m) and to
the holder of any mortgage or deed of trust at such place as such holder shall
specify to Tenant in writing; or such other addresses as may from time to time
be designated by any such party in writing. Notices mailed as aforesaid shall
be deemed given on the day which is two (2) business days after the date of such
mailing.
28. COSTS AND ATTORNEYS FEES: If Tenant or Landlord shall bring any
------------------------
action for any relief against the other, declaratory or otherwise, arising out
of this Lease, including any suit by Landlord for the recovery of Rent,
Additional Rent or other payments hereunder or possession of the Premises, each
party shall, and hereby does, to the extent permitted by law, waive trial by
jury and the losing party shall pay the prevailing party a reasonable sum for
attorneys fees in such suit, at trial and on appeal, and such attorneys fees
shall be deemed to have accrued on the commencement of such action.
29. LANDLORD'S LIABILITY: Anything in this Lease to the contrary
--------------------
notwithstanding, covenants, undertakings and agreements herein made on the part
of Landlord are made and intended not as personal covenants, undertakings and
agreements for the purpose of binding Landlord personally or the assets of
Landlord except Landlord's interest in the Premises and Building (and any
proceeds thereof), but are made and intended for the purpose of binding only the
Landlord's interest in the Premises and Building (and any proceeds thereof), as
the same may from time to time be encumbered. No personal liability or personal
responsibility is assumed by, nor shall at any time be asserted or enforceable
against Landlord or its partners or their respective heirs, legal
representatives, successors, and assigns on account of the Lease or on account
of any covenant, undertaking or agreement of Landlord in this Lease contained.
30. ESTOPPEL CERTIFICATES: Tenant shall, from time to time, upon
---------------------
written request of Landlord, execute, acknowledge and deliver to Landlord or its
designee a written statement prepared by Landlord stating: The date this Lease
was executed and the date it expires; the date the term commenced and the date
Tenant accepted the Premises; the amount of minimum monthly Rent and the date to
which such Rent has been paid; and certifying to the extent true: That this
Lease is in full force and effect and has not been assigned, modified,
supplemented or amended in any way (or specifying the date and terms of
agreement so affecting this Lease); that this Lease represents the entire
agreement between the parties as to this leasing; that all conditions under this
Lease to be performed by Landlord have been satisfied; that all required
contributions by Landlord to Tenant on account of Tenant's improvements have
been received; that on this date there are no existing claims, defenses or
offsets which Tenant has against the enforcement of this Lease by Landlord; and
that the security deposit is as stated in the Lease. It is intended that any
such statement delivered pursuant to this paragraph may be relied upon by a
prospective purchaser of Landlord's interest or the holder of any mortgage upon
Landlord's interest in the Building. If Tenant shall fail to respond within ten
(10) business days of receipt by Tenant of a written request by Landlord as
herein provided, Tenant shall be deemed to have given such certificate as above
provided without modification and shall be deemed to have admitted the accuracy
of any information supplied by Landlord to a prospective purchaser or mortgagee
and that this Lease is in full force and effect, that there are no uncured
defaults in Landlord's performance, that the security deposit is as stated in
the Lease, and that not more than one month's Rent has been paid in advance.
31. TRANSFER OF LANDLORD'S INTEREST: In the event of any transfers of
-------------------------------
Landlord's interest in the Premises or in the Building, other than a transfer
for security purposes only, the transferor shall, upon the transfer of the
security deposit (if any), be automatically relieved of any and all obligations
and liabilities on the part of Landlord accruing from and after the date of such
transfer and such transferee shall have no obligation or liability with respect
to any matter occurring or arising prior to the date of such transfer. Tenant
agrees to attorn to the transferee. Notwithstanding anything to the contrary
contained in this Section 31 or elsewhere in this Lease, the obligations of
Landlord to complete Landlord's Work, as provided in Section 3(a), and cause the
Commencement Date to occur, subject to all other terms and conditions of this
Lease, are hereby guaranteed by Wright
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<PAGE>
Runstad Associates Limited Partnership, a Washington limited partnership
("Guarantor"), and upon any transfer described in this Section 31 the
obligations of Guarantor shall continue unmodified and in full force and effect,
and the Guarantor shall not be relieved of any such liabilities or obligations
by reason of such transfer. Upon fulfillment of the above-described obligations
and expiration of the warranty period in Section 3(c) above, Guarantor's
obligations hereunder shall terminate.
32. RIGHT TO PERFORM: If Tenant shall fail to pay any sum of money,
----------------
other than Rent and 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 for ten (10) days after notice thereof by Landlord,
Landlord may, but shall not be obligated so to do, and without waiving or
releasing Tenant from any obligations of Tenant, make such payment or perform
any such other act on Tenant's part to be made or performed as provided in this
Lease. Any sums paid by Landlord hereunder shall be immediately due and payable
by Tenant to Landlord and Landlord shall have (in addition to any other right or
remedy of Landlord) the same rights and remedies in the event of the nonpayment
of sums due under this Section as in the case of default by Tenant in the
payment of Rent.
If Landlord defaults in its obligations under this Lease, and such
failure shall continue for fifteen (15) days after notice thereof by Tenant
(provided such fifteen (15) day period shall be extended if such default is not
curable within fifteen (15) days and Landlord commences such cure within fifteen
(15) days and thereafter diligently and continuously pursues such cure), Tenant
may, but shall not be obligated so to do, and without waiving or releasing
Landlord from any obligations of Landlord, five (5) business days after
providing Landlord with a second written notice, if such failure of Landlord to
perform continues, make such payment or perform any such other act on Landlord's
part to be made or performed as provided in this Lease. Any sums paid by Tenant
hereunder, plus interest accrued at the rate set forth in Section 37(f) below,
shall be immediately due and payable by Landlord to Tenant, or if Landlord fails
to pay such amounts on demand, Tenant may deduct the amount so expended by
Tenant from the next due installments of Rent and Additional Rent hereunder.
33. QUIET ENJOYMENT: Tenant shall have the right to the peaceable and
---------------
quiet use and enjoyment of the Premises, subject to the provisions of this
Lease, as long as Tenant is not in default hereunder.
34. AUTHORITY: If Tenant is a corporation, limited liability company,
---------
limited liability partnership or limited or general partnership, Tenant
represents and warrants that the person executing this Lease on Tenant's behalf
is duly authorized to execute and deliver this Lease on behalf of Tenant, in
accordance with a duly adopted resolution or consents of all appropriate persons
or entities required therefor and in accordance with the formation documents of
Tenant, and that this Lease is binding upon Tenant in accordance with its terms.
At Landlord's request, Tenant shall, prior to execution of this Lease, deliver
to Landlord a copy of a resolution or consent, certified by an appropriate
officer, partner or manager of Tenant authorizing or ratifying the execution of
this Lease. Landlord represents and warrants that the person executing this
Lease on Landlord's behalf is duly authorized to execute and deliver this Lease
on behalf of Landlord, in accordance with a duly adopted resolution or consents
of all appropriate persons or entities required therefor and in accordance with
the formation documents of Landlord, and that this Lease is binding upon
Landlord in accordance with its terms.
35. HAZARDOUS MATERIALS:
-------------------
(a) Tenant Obligations:
------------------
(i) Tenant shall not dispose of or otherwise allow the release of
any hazardous waste or materials in, on or under the Premises or the Building,
or any adjacent property, or in any improvements placed on the Premises. Tenant
represents and warrants to Landlord that Tenant's intended use of the Premises
does not involve the use, production, disposal or bringing on to the Premises of
any hazardous waste or materials, except only ordinary and general office
supplies typically used in first-class downtown office buildings (including, but
not limited to, the presence and use of a diesel generator) and only in such
quantities or concentrations as allowed under applicable laws, rules and
regulations. As used in this Section, the term "hazardous waste or materials"
includes any substance, waste or material defined or designated as hazardous,
toxic or dangerous (or any similar term) pursuant to any statute, regulation,
rule or ordinance now or hereafter in effect. Tenant shall promptly comply with
all such statutes, regulations, rules and ordinances, and if Tenant fails to so
comply Landlord may, after reasonable prior notice to Tenant (except in case of
emergency) effect such compliance on behalf of Tenant. Tenant shall immediately
reimburse Landlord for all costs incurred in effecting such compliance.
B-19
<PAGE>
(ii) Tenant agrees to indemnify, defend and hold harmless Landlord
against any and all actual losses, liabilities, suits, obligations, fines,
damages, judgments, penalties, claims, charges, cleanup costs, remedial actions,
costs and expenses (including, without limitation, consultant fees, attorneys'
fees and disbursements) which may be imposed on, incurred or paid by Landlord,
or asserted in connection with (i) any misrepresentation, breach of warranty or
other default by Tenant under this Section 35, or (ii) the acts of Tenant, or
any subtenant or other person for whom Tenant would otherwise be liable,
resulting in the release of any hazardous waste or materials on or in the
Premises.
(b) Landlord Obligations: Landlord represents to Tenant that, to
--------------------
the best of Landlord's knowledge, no hazardous waste or materials have been
generated, stored or disposed of on, in or under the Premises or the Building
other than in compliance with all applicable laws. Landlord will hold Tenant
harmless from and defend and indemnify Tenant against any actual costs resulting
from any breach of this representation or resulting from the release of
hazardous waste or materials on, in or under the Premises or the Building by
Landlord or its employees, agents or contractors. Landlord shall not be
responsible for any hazardous waste or materials resulting from the acts of
other tenants or occupants of the Building or other third parties, or for
consequential damages arising from the presence of any hazardous wastes or
materials on the Premises or in the Building.
36. TELECOMMUNICATIONS LINES AND EQUIPMENT:
--------------------------------------
(a) Location of Tenant's Equipment and Landlord Consent:
---------------------------------------------------
(i) Tenant may install, maintain, replace, remove and use
communications or computer wires, cables and related devices (collectively, the
"Lines") at the Building in or serving the Premises, only with Landlord's prior
written consent if such Lines are to be installed in Building conduit or shafts,
which consent shall not be unreasonably withheld. Tenant shall locate all
electronic telecommunications equipment within the Premises. Any request for
consent shall contain detailed plans, drawings and specifications identifying
all work to be performed, the time schedule for completion of the work, the
identity of the entity that will provide service to the Lines and the identity
of the entity that will perform the proposed work (which entity shall be subject
to Landlord's reasonable approval). Landlord shall have a reasonable time in
which to evaluate the request after it is submitted by Tenant (but if Landlord
has not responded in ten (10) days, Landlord shall be deemed to have consented).
(ii) Landlord may consider the following factors, among others,
in making its determination: (A) the experience, qualifications and prior work
practice of the proposed contractor and its ability to provide sufficient
insurance coverage for its work at the Building; (B) whether or not the proposed
work will interfere with the use of any then existing Lines at the Building; (C)
whether or not an acceptable number of spare Lines and space for additional
Lines shall be maintained for existing and future occupants of the Building; (D)
a requirement that Tenant remove existing abandoned Lines located in or
servicing the Premises, as a condition to permitting the installation of new
lines; (E) whether or not Tenant is in default of any of its obligations under
this Lease; (F) whether the proposed work or resulting Lines will impose new
obligations on Landlord, expose Landlord to liability of any nature or
description, increase Landlord's insurance premiums for the Building, create
liabilities for which Landlord is unable to obtain insurance protection or
imperil Landlord's insurance coverage; (G) whether Tenant's proposed
telecommunications service provider is willing to pay reasonable monetary
compensation for the use and occupation of the Building; and (H) whether the
work or resulting Lines would adversely affect the Land, Building or any space
in the Building in any manner.
(iii) Landlord's approval of, or requirements concerning, the
Lines or any equipment related thereto, the plans, specifications or designs
related thereto, the contractor or subcontractor, or the work performed
hereunder, shall not be deemed a warranty as to the adequacy thereof, and
Landlord hereby disclaims any responsibility or liability for the same.
(iv) If Landlord consents to Tenant's proposal, Tenant shall
(A) pay all costs in connection therewith (including all costs related to new
Lines); (B) comply with all requirements and conditions of this Section; (C)
use, maintain and operate the Lines and related equipment in accordance with and
subject to all laws governing the Lines and equipment. Tenant shall further
insure that (I) Tenant's contractor complies with the provisions of this Section
and Landlord's reasonable requirements governing any work performed; (II)
Tenant's contractor provides all insurance required by Landlord; (III) any work
performed shall comply with all Laws; and (IV) as soon as the work in completed,
Tenant shall submit "as-built" drawings to Landlord.
(v) Landlord reserves the right to require that Tenant remove
any Lines located in or serving the Premises which are installed in violation of
these provisions, or which are at
B-20
<PAGE>
any time in violation of any laws or present a dangerous or potentially
dangerous condition (whether such Lines were installed by Tenant or any other
party), within thirty (30) days after written notice.
(vi) Notwithstanding anything in the above paragraphs, Tenant
shall remove any Lines located in or serving the Premises promptly upon
expiration or sooner termination of this Lease.
(b) Landlord's Rights: Landlord may (but shall not have the obligation
-----------------
to), with Tenant's consent (which shall not be unreasonably withheld):
(i) install new lines at the Building;
(ii) create additional space for Lines at the Building; and
(iii) direct, monitor and/or supervise the installation,
maintenance, replacement and removal of, the allocation and periodic re-
allocation of available space (if any) for, and the allocation of excess
capacity (if any) on, any Lines now or hereafter installed at the Building by
Landlord, Tenant or any other party (but Landlord shall have no right to monitor
or control the information transmitted through such Lines).
(c) Indemnification: In addition to any other indemnification
---------------
obligations under this Lease, Tenant shall indemnify, defend and hold harmless
Landlord and its employees, agents, officers, and contractors from and against
any and all claims, demands, penalties, fines, liabilities, settlements,
damages, costs or expenses (including reasonable attorneys' fees) arising out of
or in any way related to the acts of Tenant, Tenant's officers, directors,
employees, agents, contractors, subcontractors, subtenants, and invitees with
respect to: (i) any Lines or equipment related thereto serving Tenant in the
Building; (ii) any personal injury (including wrongful death) or property damage
arising out of or related to any Lines or equipment related thereto serving
Tenant in the Building; (iii) any lawsuit brought or threatened, settlement
reached, or governmental order, fine or penalty relating to such Lines or
equipment related thereto; and (iv) any violations of Laws or demands of
governmental authorities which are based upon or in any way related to such
Lines or equipment. This indemnification and hold harmless agreement shall
survive the termination of this Lease.
(d) Limitation of Liability: Except to the extent arising from the
-----------------------
negligence or willful misconduct of Landlord or Landlord's agents or employees,
Landlord shall have no liability for damages arising from, and Landlord does not
warrant that the Tenant's use of any Lines will be free from the following
(collectively called "Line Problems"): (i) any shortages, failures, variations,
interruptions, disconnections, loss or damage caused by the installation,
maintenance, or replacement, use or removal of Lines by or for other tenants or
occupants at the Building, by any failure of the environmental conditions or the
power supply for the Building to conform to any requirement of the Lines or any
associated equipment, or any other problems associated with any Lines by any
other cause; or (ii) any eavesdropping or wire-tapping by unauthorized parties.
Landlord in no event shall be liable for damages by reason of loss of profits,
business interruption or other consequential damages from any Line Problems.
Under no circumstances shall any Line Problems be deemed an actual or
constructive eviction of Tenant, render Landlord liable to Tenant for abatement
of Rent, or relieve Tenant from performance of Tenant's obligations under this
Lease.
(e) Electromagnetic Fields: If Tenant at any time uses any
----------------------
equipment that may create an electromagnetic field exceeding the normal
insulation ratings of ordinary twisted pair riser cable or cause radiation
higher than normal background radiation, Landlord reserves the right to require
Tenant to appropriately insulate the Lines therefor (including riser cables) to
prevent such excessive electromagnetic fields or radiation.
37. GENERAL:
(a) Headings: Titles to Sections of this Lease are not a part of
--------
this Lease and shall have no effect upon the construction or interpretation of
any part hereof.
(b) Successors and Assigns: All of the covenants, agreements, terms
----------------------
and conditions contained in this Lease shall inure to and be binding upon the
Landlord and Tenant and their respective, successors and assigns.
(c) Payment of Brokers: Landlord shall pay Wright Runstad & Company
------------------
and Washington Partners the real estate commissions pursuant to the signed
brokerage agreements between such brokers and Landlord. If Tenant has dealt
with any other person or real estate broker
B-21
<PAGE>
with respect to leasing or renting space in the Building, Tenant shall be solely
responsible for the payment of any fee due said person or firm and Tenant shall
indemnify and hold Landlord harmless against any liability in respect thereto,
including Landlord's attorneys' fees and costs in defense of any such claim.
(d) Entire Agreement: This Lease contains all covenants and
----------------
agreements between Landlord and Tenant relating in any manner to the leasing,
use and occupancy of the Premises, to Tenant's use of the Building and other
matters set forth in this Lease. No prior agreements or understanding
pertaining to the same shall be valid or of any force or effect and the
covenants and agreements of this Lease shall not be altered, modified or added
to except in writing signed by Landlord and Tenant.
(e) Severability: Any provision of this Lease which shall be held
------------
invalid, void or illegal shall in no way affect, impair or invalidate any other
provision hereof and the remaining provisions hereof shall nevertheless remain
in full force and effect.
(f) Overdue Payments: Tenant acknowledges that a late payment of
----------------
Rent or other sums due hereunder will cause Landlord to incur costs not
contemplated by this Lease. Such costs may include, but not be limited to,
processing and accounting charges, and penalties imposed by terms of any
contracts, mortgages or deeds of trust covering the Building. Therefore, in the
event Tenant shall fail to pay any Rent, Additional Rent or other sums payable
by Tenant under this Lease for seven (7) days after such amount is due, then
Tenant shall pay Landlord, as Additional Rent, a late charge ("Late Charge")
equal to four percent (4%) of such amount owing, but not in excess of the
highest rate permitted by law. In addition to any Late Charges which may be
incurred hereunder, any Rent, Additional Rent or other sums payable by Tenant
under this Lease which are more than thirty (30) days past due, shall bear
interest at a rate equal to fourteen percent (14%) per annum but not in excess
of the highest lawful rate permitted under applicable laws, calculated from the
original due date thereof to the date of payment ("Overdue Fee"); provided,
however, the minimum Overdue Fee shall be One Hundred Dollars ($100.00).
In addition, if payments are received by check or draft from
Tenant, and two (2) or more of such checks or drafts are dishonored by the bank
or other financial institution they were drawn upon in any twelve (12) month
period, Landlord may thereafter require all Rent and other payments due
hereunder from Tenant to Landlord to be made by bank cashier's or bank certified
check or other similar means of payment and Landlord shall not be required to
accept any checks or drafts of Tenant which do not comply with such
requirements.
(g) Force Majeure: Except for the payment of Rent, Additional Rent
-------------
and other sums payable by Tenant, time periods for Tenant's or Landlord's
performance under any provisions of this Lease shall be extended for periods of
time during which Tenant's or Landlord's performance is prevented due to
circumstances beyond Tenant's or Landlord's reasonable control; provided,
however, that the time periods set forth in Section 3(d) shall not be so
extended.
(h) Right to Change Public Spaces: Landlord shall have the right,
-----------------------------
without Tenant's consent with respect to changes required by law and otherwise
with the reasonable approval of Tenant so long as Tenant leases sixty-two and
one-half percent (62.5%) or more of the Building, to change the arrangement or
location of such of the following as are not contained within the Premises or
any part thereof: entrances, passageways, doors and doorways, corridors, stairs,
toilets and other like public service portions of the Building. Nevertheless,
in no event shall Landlord diminish any service, change arrangement or location
of the elevators serving the Premises, make any change which shall diminish the
area of the Premises, make any change which shall interfere with access to the
Premises or change the character of the Building from that of a first-class
office building. If Tenant does not lease one hundred percent (100%) of the
Building (excluding only the retail tenant on the first floor of the Building
and any subtenants of Tenant that are suppliers or customers of Tenant), the
main Building lobby on the first floor will become a common Building lobby, as
will lobbies and corridors on floors with other tenants, and Landlord reserves
the right to make such changes as may be reasonably necessary in such event. A
floor plan of the main Building lobby, should Tenant lease less than one hundred
percent (100)% of the Building (excluding only the retail tenant on the first
floor of the Building and any subtenants of Tenant that are suppliers or
customers of Tenant), is attached as Exhibit J hereto.
(i) Governing Law: This Lease shall be governed by and construed in
-------------
accordance with the laws of the State of Washington.
B-22
<PAGE>
(j) Building Directory: Landlord shall maintain in the lobby of
------------------
Building a directory which shall include the name of Tenant and any other names
reasonably requested by Tenant in proportion to the number of listings given to
comparable tenants of the Building.
(k) Building Name The Building shall be known by such name as
--------------
Landlord and Tenant shall mutually agree from time to time, provided that the
name of the Building shall contain the word "Visio" (or any successor name used
by Tenant), and further provided that Tenant's rights under this Section 37 (k)
shall remain in effect only so long as Tenant leases at least sixty-two and one-
half percent (62.5%) of the rentable area of the Building.
(l) Consents and Approvals; Certifications Whenever by the terms of
--------------------------------------
this Lease the consent or approval of Landlord or Tenant is specifically
required, such consent or approval shall not be unreasonably withheld or delayed
except to the extent otherwise specifically provided herein. If either party
wishes to withhold any such consent or approval, such party shall promptly
notify the other party in writing specifying the reasons for withholding the
same. Any certificate or certification required hereunder shall be signed by a
duly authorized representative of the party making it and shall set forth the
information required hereunder with respect to such certificate, and the party
for whom it is made hereby warrants that the information given in each such
certificate will be complete and accurate in every material respect when given.
(m) Memorandum of Lease Upon the request of either party, Landlord
-------------------
and Tenant will execute and deliver, in recordable form, a memorandum or short
form of this Lease, and either Landlord or Tenant, at their respective options,
may record such memorandum or short form of this Lease.
IN WITNESS WHEREOF this Lease has been executed the day and year first
above set forth.
TENANT: VISIO CORPORATION, a Washington corporation
By ______________________________________________
Steve M. Gordon, CFO and Senior Vice-President
of Finance and Operations
LANDLORD: WRC TRADE CENTER LLC, a Washington limited liability company
By: WRIGHT RUNSTAD ASSOCIATES LIMITED PARTNERSHIP, a
Washington limited partnership, its sole member
By: WRIGHT RUNSTAD & COMPANY, a Washington
corporation, its general partner
By: ___________________________________
H. Jon Runstad, Chairman and CEO
GUARANTOR: WRIGHT RUNSTAD ASSOCIATES LIMITED PARTNERSHIP, a Washington
limited partnership
By: WRIGHT RUNSTAD & COMPANY, a Washington corporation, its
general partner
By: ________________________________________
H. Jon Runstad, Chairman and CEO
B-23
<PAGE>
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
THIS IS TO CERTIFY that on this 9th day of January 1998, before me, the
undersigned, a notary public in and for the state aforesaid, duly commissioned
and sworn, personally appeared Steve M. Gordon, to me known to be the CFO and
Senior Vice-President of finance and Operations of VISIO CORPORATION, the
corporation that executed the within and 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
they were authorized to execute said instrument, and that the seal affixed, if
any, is the corporate seal of said corporation.
WITNESS my hand and official seal the day and year in this certificate
first above written.
Signature__________________________________________________
Printed Name_______________________________________________
Notary public in and for the state of Washington
residing at________________________________________________
My appointment expires_____________________________________
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
THIS IS TO CERTIFY that on this 9th day of January, 1998, before me, the
undersigned, a notary public in and for the state aforesaid, duly commissioned
and sworn, personally appeared H. Jon Runstad, to me known to be the Chairman
and CEO of WRIGHT RUNSTAD & COMPANY, the corporation that executed the within
and foregoing instrument on behalf of and as general partner for WRIGHT RUNSTAD
ASSOCIATES LIMITED PARTNERSHIP which in turn was acting on behalf of and as the
sole member and manager of WRC TRADE CENTER LLC, and acknowledged the said
instrument to be the free and voluntary act and deed of said corporation,
partnership and limited liability company respectively for the uses and purposes
therein mentioned, and on oath stated that he was authorized to execute said
instrument.
WITNESS my hand and official seal the day and year in this certificate
first above written.
Signature__________________________________________________
Printed Name_______________________________________________
Notary public in and for the state of Washington
residing at________________________________________________
My appointment expires_____________________________________
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
THIS IS TO CERTIFY that on this 9th day of January, 1998, before me, the
undersigned, a notary public in and for the state of Washington, duly
commissioned and sworn, personally appeared H. Jon Runstad, to me known to be
the Chairman and CEO of WRIGHT RUNSTAD & COMPANY, the corporation that executed
the within and foregoing instrument on behalf of and as general partner for
WRIGHT RUNSTAD ASSOCIATES LIMITED PARTNERSHIP, and acknowledged the said
instrument to be the free and voluntary act and deed of said corporation and
limited partnership respectively for the uses and purposes therein mentioned,
and on oath stated that they were authorized to execute said instrument.
WITNESS my hand and official seal the day and year in this certificate
first above written.
Signature__________________________________________________
Printed Name_______________________________________________
Notary public in and for the state of Washington
residing at________________________________________________
My appointment expires_____________________________________
B-24
<PAGE>
EXHIBIT B
TO
WORLD TRADE CENTER EAST OFFICE BUILDING
LEASE AGREEMENT
TENANT IMPROVEMENTS FOR
VISIO CORPORATION
JANUARY 9, 1998
I. IMPROVEMENTS PROVIDED BY LANDLORD: Landlord agrees to provide
improvements to the Building and the Premises pursuant to the attached Exhibit
D, Base Building Specifications, and the plans and specifications identified on
Exhibit B-1.
II. IMPROVEMENTS BY TENANT/REIMBURSEMENT BY LANDLORD: Design and
construction of all improvements in the Premises beyond those listed in Exhibits
D and B-1 shall be provided at Tenant's expense. Landlord shall pay the cost of
such additional improvements up to an amount equal to $35.00 per rentable square
foot leased by Tenant ("Allowance").
Landlord shall expedite all permits and government approvals and
assume specific responsibility for delivery of the Premises as defined in the
Lease and this Exhibit B, provided Tenant shall have met the drawing delivery
dates herein and, unless the general contractor engaged by Landlord to construct
the shell and core of the Building ("General Contractor") is chosen to construct
the Initial Tenant Improvements pursuant to Section V(A) below, Landlord shall
manage the bidding of tenant improvements to at least three (3) firms acceptable
to Tenant, one of which shall be Foushee and Associates, Inc. and one of which
will be the General Contractor. The contractor selected by Tenant to construct
the Tenant Improvements shall be hereinafter known as the "Tenant Improvement
Contractor". In addition, Tenant shall have the right to select its own
subcontractors or service providers to perform the work listed below. These
subcontractors shall work under the direction of the Tenant Improvement
Contractor:
a) Telecommunications
b) Data Systems and Cabling
c) Security--The security system shall be discussed in the context of
the planned building security system.
d) Audio Visual
e) Food Service
III. BUILDING STANDARD IMPROVEMENTS: Landlord and Tenant shall
mutually agree upon Building Standard details for lighting, window coverings;
doors; relites; hardware and ceiling treatment. Building Standards shall be
equal in quality to tenant improvement standards established for the Second &
Seneca Building.
Tenant shall use Building Standard heating, ventilating and air
conditioning distribution and controls.
B-1
<PAGE>
IV. DESIGN OF TENANT IMPROVEMENTS: Tenant, at Tenant's cost and with
the approval of Landlord, has retained Marvin Yamaguchi ("Tenant's Office
Planner") to prepare the necessary drawings for Basic Plans and supply the
information necessary to complete the Working Drawings and Engineering Drawings
referred to in Section IV(B) of this Exhibit B for construction of the tenant
improvements in Tenant's area. All Tenant's Plans shall be subject to approval
of Landlord (not to be unreasonably withheld or delayed) in accordance with
Section IV(C) of this Exhibit B, and Landlord agrees to respond in writing with
approval or comments within five (5) business days after receipt of each
component of Tenant's Plans.
Tenant's Office Planner shall ensure that the work shown on Tenant's
Plans is compatible with the basic Building Plans and that necessary basic
Building modifications are included in Tenant's Plans. Such modifications shall
be subject to Landlord approval. In the event that any of Tenant's design
requirements impact the shell and core design, so long as any shell and core
changes can be incorporated into the shell and core documents prior to document
completion at no cost to Landlord, then these changes to the shell and core
documents shall be included and Tenant shall not be required to pay for these
changes to the documents.
If such changes are made subsequent to completion of the shell and
core documents or Landlord's Architect reasonably charges Landlord for such
changes, then such modifications shall be subject to Landlord's approval and the
cost of the changes to the documents shall be paid by Tenant.
Any changes requested to the shell and core design by Tenant which
increase the cost of the shell and core construction shall, subject to the
process described in Section V(C) below, be paid by Tenant.
On or before the indicated dates, Tenant shall supply Landlord with
one (1) reproducible copy and five (5) black line prints of the following Tenant
Plans with respect to the Tenant Improvements in the Initial Premises and in any
other portion of the Premises constructed at the same time as those in the
Initial Premises:
A. BASIC PLANS DELIVERY DATE: February 18, 1998 .
The Basic Plans due on this date shall be signed by Tenant and
include:
Architectural Floor Plans: These shall be fully dimensioned
floor plans showing partition layout and identifying each room with a number and
each door with a number. The Basic Plans must clearly identify and locate
equipment requiring plumbing or other special mechanical systems, area(s)
subject to above-normal floor loads, special openings in the floor, and other
major or special features.
B. WORKING DRAWINGS DELIVERY DATE: April 1, 1998 .
On this date and at Tenant's expense, Tenant's Office Planner
shall produce four (4) sets of Full Working Drawings for construction from the
Basic Plans using the Pin Bar or CADD System, which system shall be approved by
Landlord for compatibility with the other Building drawings. The four (4) sets
of Working Drawings due on this date shall be signed by the Tenant and include
all items in the Basic Plans referenced in Section IV(A) above plus the
following additional information:
B-2
<PAGE>
(1) Electrical and Telephone Outlets: Locate all power and
telephone requirements: Dimension the position from a corner and give height
above concrete slab for all critically located outlets. Identify all dedicated
circuits and identify all power outlets greater than 120 volts. For the
equipment used in these outlets which require dedicated circuits and/or which
require greater than 120 volts, identify the type of equipment, the
manufacturer's name and the manufacturer's model number, and submit a brochure
for each piece of equipment. Also identify the manufacturer's name of the phone
system to be used and the power requirements, size, and location of its
processing equipment.
(2) Reflected Ceiling Plan: Lighting layout showing location and
type of all Building Standard and special lighting fixtures.
(3) Furniture Layout: Layout showing furniture location so that
Landlord's engineer can review the location of all light fixtures.
The Allowance shall be applied to the cost of the engineers retained
by Tenant's Office Planner preparing plumbing (Holiday Parks), electrical
(Evergreen Electrical), heating, air conditioning (Holiday Parks) and structural
plans (KPFF) (Engineering Drawings) for Tenant's improvements based on the
signed Working Drawings. The Allowance shall also be applied to any necessary
review of the Engineering Drawings by Landlord's shell and core engineer
(Coffman Engineers, Inc.).
C. FINAL PLANS REVIEW DATE: April 24, 1998.
On this date, Tenant's Office Planner shall deliver to Landlord
and Tenant for review and approval four (4) complete sets of Final Plans which
will incorporate the Working Drawings referenced in Section IV(B) above, plus
the following additional information:
(1) Millwork Details: These drawings shall be in final form with
Tenant's Office Planner's title block along the right border of the drawing, and
shall include construction details of all cabinets, paneling, trim, bookcases,
and door and jamb details for non-Building Standard doors and jambs.
(2) Keying Schedules and Hardware Information: This information
shall be in final form and include a preliminary Keying Schedule indicating
which doors are locked, plus an "X" on the side of the door where the key will
be inserted if a keyed door. Complete specifications for all non-Building
Standard hardware will also be provided. The final keying schedule will be
completed by October 1, 1998.
(3) Room Finish and Color Schedule: This information shall be in
final form and include locations and specifications for all wall finishes, floor
covering and base for each room.
(4) Construction Notes and Specifications: Complete
specifications for every item included except those specified by the Landlord.
D. FINAL PLANS DELIVERY DATE: May 1, 1998.
The four (4) sets of Final Plans approved by Landlord and Tenant
and due on this date shall include all the Final Plans referenced in Section
B-3
<PAGE>
IV(C) above. Final Plans are to be signed by Tenant and delivered to Landlord by
the Final Plans Delivery Date. Landlord shall return one (1) signed set to
Tenant for Tenant's records. Landlord will incorporate or submit Engineering
Drawings with Tenant's Final Plans for transmittal to the General Contractor.
Tenant shall be responsible for delays and additional costs in
completion of the Tenant Improvements incurred as a result of changes made to
any of Tenant's Plans after the specified Plan Delivery Date, delays caused by
Tenant's failure to comply with the Plan Delivery Dates, Tenant's failure to
provide adequate specifications or information for the completion of Tenant's
Plans, or by delays caused by Tenant's specification of special materials; but
only to the extent any of the foregoing delays or prevents critical path work or
adversely affects completion.
V. CONSTRUCTION OF TENANT IMPROVEMENTS
A. AUTHORIZATION TO PROCEED. Upon completion of Tenant's Final
Plans, the Final Plans will be submitted to General Contractor, for pricing.
General Contractor shall have three (3) weeks to provide their bid proposal with
respect to completion of the Initial Tenant Improvement Work pursuant to the
Final Plans, and if Tenant, Landlord and General Contractor have not agreed on
hiring General Contractor within two (2) weeks after receipt of General
Contractor's bid, then the work contemplated in Tenant's Final Plans shall go
out to bid as described in Article II above. The final construction contract to
be entered into between Landlord and the Tenant Improvement Contractor
(including, but not limited to, the guaranteed maximum price to be contained
therein) shall also be subject to Tenant's review and approval, such approval
not to be unreasonably withheld. If the General Contractor is not selected as
the Tenant Improvement Contractor, Landlord shall entertain bids from the three
(3) firms and Landlord and Tenant shall review all pricing documentation
received from the bidding tenant improvement contractors, including sub bids,
quantities, and unit prices. Within ten (10) days of receipt of such prices and
prior to execution of the Initial Tenant Improvements construction contract,
Tenant shall give Landlord written authorization to complete the Premises in
accordance with such Final Plans and naming the Tenant Improvement Contractor.
Tenant may in such authorization delete any or all items of extra cost; however
if the General Contractor is selected, then if Landlord deems these changes to
be extensive, at its option, Landlord may within three (3) business days of
Tenant's written authorization refuse to accept the authorization to proceed
until all changes have been incorporated in the Final Plans signed by Tenant and
written acceptance of the revised price has been received by Landlord from
Tenant. In the absence of such written authorization to proceed and if
Landlord's contractor is selected, then Landlord shall not be obligated to
commence work on the Premises and Tenant shall be responsible for any costs due
to any resulting delay in completion of the Premises and as provided in Section
3(c) of the Lease.
B. PAYMENTS. Refer to Section 3(b) from the body of the Lease.
C. FINAL PLANS AND MODIFICATIONS. If Tenant shall request any
change after the Final Plans are submitted, Tenant shall request such change in
writing to Landlord and such request shall be accompanied by all plans and
specifications necessary to show and explain changes from the approved Final
Plans. After receiving this information, Landlord shall give Tenant within five
(5) business days a written price for the cost of engineering design services
and an estimate of construction costs to incorporate the change in Tenant's
Final Plans. If Tenant
B-4
<PAGE>
approves such price in writing within five (5) business days, Tenant shall
within five (5) business days have such Final Plans changes made to engineering
drawings and Tenant shall have changes made to other Final Plan design
documents. Within three (3) business days after completion of such changes in
the Final Plans, Landlord shall provide Tenant a written breakdown of the final
costs, if any, which shall be chargeable or credited to Tenant for such change,
addition or deletion and any impact such changes shall have on the schedule. The
cost for such changes, whether chargeable or credited to Tenant, shall include
the following Landlord coordination fee: for changes up to Five Thousand Dollars
($5,000), seven percent (7%); for changes up to Ten Thousand Dollars ($10,000),
five percent (5%); and for changes exceeding Ten Thousand Dollars ($10,000),
three percent (3%). If Tenant wishes to proceed with such changes, Tenant shall
within five (5) business days so notify Landlord in writing. In the absence of
such notice, Landlord shall proceed in accordance with the previously approved
Final Plans before such change, addition or deletion was requested. In
accordance with Section 3(c) of the Lease, Tenant shall be responsible for any
resulting delay in completion of the Premises due to modification of Final
Plans. Tenant shall also be responsible for any demolition work required as a
result of the change.
D. IMPROVEMENTS CONSTRUCTED BY TENANT. If any work is to be
performed in connection with the Initial Tenant Improvements on the Premises by
Tenant or Tenant's contractor:
(1) Such work shall proceed upon Landlord's written approval
(not to be unreasonably withheld) of (i) Tenant's contractor, (ii) general
liability and property damage insurance satisfactory to Landlord carried by
Tenant's contractor, which insurance shall not be required to exceed levels
carried by General Contractor, (iii) detailed plans and specifications for such
work, and (iv) amount of general conditions directly attributable to work
performed by Tenant's contractor and approved in advance by Tenant to be paid by
Tenant to Landlord for the services still provided by General Contractor or
Tenant Improvement Contractor.
(2) All work shall be done in conformity with a valid building
permit when required, a copy of which shall be furnished for Landlord before
such work is commenced, and in any case, all such work shall be performed in
accordance with all applicable governmental regulations. Notwithstanding any
failure by Landlord to object to any such work, Landlord shall have no
responsibility for Tenant's failure to meet all applicable regulations.
(3) All work by Tenant or Tenant's contractor shall be done with
union labor in accordance with all union labor agreements applicable to the
trades being employed, unless otherwise agreed to in writing by Landlord.
(4) All work by Tenant or Tenant's contractor shall be scheduled
through Landlord or, with Landlord's approval, directly with the General
Contractor or Tenant Improvement Contractor. Landlord shall make best efforts to
accommodate work by Tenant or Tenant's contractor during times requested.
(5) Tenant or Tenant's contractor shall arrange for necessary
utility, hoisting and elevator service with the General Contractor or the Tenant
Improvement Contractor and shall pay such reasonable charges for such services
as may be charged by the General Contractor or the Tenant Improvement
Contractor. This will be included in the general conditions of Subsection
(1)(iv) above.
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<PAGE>
(6) Tenant shall promptly reimburse Landlord for costs incurred
by Landlord due to faulty work done by Tenant or its contractors, or by reason
of any delays caused by such work, or by reason of inadequate clean-up. Tenant
shall receive notice from Landlord and a reasonable opportunity to cure damages
prior to Landlord undertaking corrective action.
(7) Prior to commencement of any work on the Premises by Tenant
or Tenant's contractor, Tenant or Tenant's contractor shall enter into an
indemnity agreement and a lien priority agreement satisfactory to Landlord
indemnifying and holding harmless Landlord and the General Contractor or the
Tenant Improvement Contractor for any liability, losses or damages directly or
indirectly from lien claims affecting the land, the Building or the Premises
arising out of Tenant's or Tenant's contractor's work or that of subcontractor
or suppliers, and subordinating any such liens to the liens of construction and
permanent financing for the Building.
(8) Landlord shall have the right to post a notice or notices in
conspicuous places in or about the Premises announcing its non- responsibility
for the work being performed therein.
E. TENANT'S ENTRY TO PREMISES. Tenant's entry to the Premises for
any purpose, including without limitation, inspection or performance of Tenant
Construction by Tenant's agents, prior to the Commencement Date as specified in
Section 3(a) of the Lease shall be scheduled in advance with Landlord and shall
be subject to all the terms and conditions of the Lease, except the payment of
Rent and Additional Rent. Tenant's entry shall mean entry by Tenant, its
officers, contractors, Office Planner, licensees, agents, servants, employees,
guests, invitees, or visitors. Landlord will make reasonable efforts to
accommodate Tenant's request for access to the Premises at all times. Tenant
will supply Landlord with a pre-approved list of individuals who will be allowed
to have access to the Premises prior to the Commencement Date.
F. TENANT'S TELEPHONE AND COMPUTER/DATA SERVICE. Tenant is
responsible for Tenant's telephone service, computer and data service, obtaining
any applicable permits, and related cabling. Tenant shall select and coordinate
installation of such communication and information systems with the Landlord
pursuant to Section 36 of the Lease and item V(D)(4) of this Exhibit B.
Landlord shall provide basic telephone service to the Building terminating in
the Main Telephone Room at the PM Garage Level.
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<PAGE>
EXHIBIT C
ADDENDUM TO THE LEASE AGREEMENT BETWEEN
WRC TRADE CENTER LLC ("LANDLORD")
AND
VISIO CORPORATION ("TENANT")
DATED JANUARY 9, 1998
1. Tenant's Premises and Pro Rata Share.
-------------------------------------
(a) The rentable area of the Premises is:
<TABLE>
<CAPTION>
Floor Net Rentable Square Feet
----- ------------------------
<S> <C>
1 26,009
2 31,991
3 33,341
4 31,225
5 31,225
6 30,136
-------
TOTAL 183,927
=======
</TABLE>
(b) Recalculation: The total floor area of the Premises with
-------------
respect to which Tenant shall pay rent shall be the "net rentable area" of space
included in the Premises, determined from the Final Plans. Tenant's net
rentable area of the Premises presented in Section 1(c) of the Lease and Section
1 of this Exhibit C shall be recalculated by Landlord and amended in this Lease
to accurately reflect the net rentable square footage comprising the Premises as
soon as Final Plans for the Tenant's Premises are completed. Such recalculation
shall be completed no later than thirty (30) days after completion of Final
Plans. Any dispute regarding such recalculation shall be resolved by
arbitration under Section 9 of this Exhibit C.
2. Rent.
----
(a) Rent commencement schedule: Tenant shall pay Rent and
--------------------------
Additional Rent commencing upon the Commencement Date with respect to the
portions of the Premises noted in the Take-Down Schedule below (each such
portion of the Premises after the Initial Premises being sometimes hereinafter
referred to as a "Stage"), but in no event shall a Stage be taken down later
than the dates as noted unless Tenant is unable to occupy such space by such
date as a result of Landlord Delay. If Tenant occupies a Stage for normal
business purposes prior to the dates set forth below with respect to such Stage,
Rent and Additional Rent shall commence on the date of such occupancy, provided,
however that neither Rent nor Additional Rent shall commence on any part of the
Premises, including the Initial Premises, prior to January 1, 1999. The initial
Rent rate shall be $18.75 per net rentable square foot per year. On the fifth
(5th) anniversary of the Commencement Date, the Rent for the entire Premises
shall increase to $20.75 per net rentable square foot per year.
Take-Down Schedule:
------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
PORTION OF PREMISES/STAGE TAKE-DOWN DATE
- --------------------------------------------------------------------------------------------------------
<S> <C>
Initial Premises: One half of Floor 1, one-half of Floor Commencement Date, but no earlier than
3, all of Floors 4, 5 and 6 January 1, 1999
- --------------------------------------------------------------------------------------------------------
</TABLE>
C-1
<PAGE>
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------------------
Balance of Floor 1 No later than seven months after the
Commencement Date (anticipated to be August
1, 1999)
- --------------------------------------------------------------------------------------------------------
Balance of Floor 3 No later than ten months after the
Commencement Date (anticipated to be
November 1, 1999)
- --------------------------------------------------------------------------------------------------------
One-half of Floor 2 No later than twelve months after the
Commencement Date (anticipated to be
January 1, 2000)
- --------------------------------------------------------------------------------------------------------
Balance of Floor 2 No later than fourteen months after the
Commencement Date (anticipated to be March
1, 2000)
- --------------------------------------------------------------------------------------------------------
</TABLE>
(b) Tenant may elect to change the above order in which it leases the
Stages of the Premises (space taken after the Initial Premises), provided (i)
Tenant gives Landlord written notice of such change, along with the final plans
for the improvements in such Stage, no later than the date ninety (90) days
prior to Tenant's scheduled occupancy date for such Stage; and (ii) the amount
of rentable area upon which the Commencement Date shall first become effective,
as set forth in the above schedule, shall not be reduced by any such change.
(c) If Tenant occupies for normal business operations a portion of a
Stage prior to the outside date by which Rent and Additional Rent shall commence
on such Stage, Rent and Additional Rent shall then commence on the entire Stage
in which Tenant has commenced its business operations, and not merely on the
space so occupied by Tenant.
(d) The service areas described in Section 3(b) of the Lease must be
located on Floors other than Floor 2 of the Building. Tenant shall pay Rent and
Additional Rent on such service areas in the same proportion to the non-service
areas in the Building on which Tenant is then paying Rent and Additional Rent.
If Tenant later occupies for normal business operations, and thus pays Rent and
Additional Rent, on greater areas of the Building, Tenant shall simultaneously
begin to pay Rent and Additional Rent on the same proportionate area of such
service areas.
(e) The lease rate for the Building is based on an estimate of shell
and core construction costs and sales tax totaling $74.58 per square foot of net
rentable space. The line item components of such estimated costs are set forth
on Exhibit H attached hereto. The lease rate will be adjusted downward (but not
upward) by no more than $0.25 per square foot per annum based on the difference
between this estimate and the actual costs, if less. The actual costs shall
assume no reduction for the sales tax credit described in Subsection (f) below.
This lease rate adjustment will be calculated at an 11% rate. Therefore, every
$1.00 per square foot reduction in actual versus estimated costs will reduce the
lease rate by $0.11 per square foot per annum for the 10 year term of the Lease.
This calculation will be made no later than thirty (30) days after Landlord's
receipt of a final billing from the contractor constructing the shell and core
of the Building.
(f) In addition, the lease rate may be reduced by the High Technology
Sales/Use Tax Deferral that Tenant and Landlord may receive from the Washington
State Department of Revenue. Landlord and Tenant shall apply for the tax
deferral as soon as practicable and shall diligently pursue obtaining the
deferral. The reduction in the rental rate will be spread over the first eight
(8) years of the Term to reflect one hundred percent (100%) of the tax credits
and deferrals realized by Landlord pursuant to the new legislation (RCW 82.63).
The aggregate amount of such credit shall be divided by 96 (eight years times
twelve months per year) and the quotient shall be the amount of the credit in
monthly rent attributable to this tax deferral (the "Tax Credit"). Tenant shall
initially pay the Rent without deduction for the Tax Credit, and upon receipt of
such payments Landlord shall deposit the Tax Credit into a separate interest-
bearing account (with interest accruing to the benefit of Tenant, subject to the
terms of this Subsection (f)), until the balance in such account, including
accrued interest, equals the amount of such tax deferral that would have to be
repaid to the Washington State Department of Revenue at that time if the tax
deferral were terminated. Once the balance of that account equals the repayment
obligation, Tenant may deduct the full Tax Credit from monthly Rent, and
Landlord shall release to Tenant all amounts in that account in excess of then
current repayment obligation until the balance of that account is reduced to
zero. Landlord's
C-2
<PAGE>
obligations under this Section 2(f) and Tenant's ability to benefit from the Tax
Credit are expressly conditioned on Tenant continuing to comply with the
requirements imposed on a tenant of the tax deferral law, and Tenant hereby so
covenants to comply with that law. Tenant shall be entitled to only one
reduction (without double counting under Sections 2(e) and 2(f)) for this
sales/use tax reduction. This calculation will be made no later than thirty (30)
days after Landlord has received both a final billing from the contractor
constructing the shell and core of the Building and a determination of
qualification for such credit from the Washington Department of Revenue.
(g) The final determination of the rental rate shall be confirmed by
Landlord and Tenant in writing on the later of 60 days following initial
occupancy of the Building or 30 days after Landlord has received a final billing
from the contractor constructing the shell and core of the Building. At such
time, the parties shall also confirm in writing the Commencement Date and
Expiration Date of the initial term of this Lease.
(h) References to "one-half" of a floor in the above schedule shall
be based on the net rentable area of such Floor, as set forth in Section 1(a) of
this Exhibit C.
3. Option to Extend the Term of the Lease. Tenant shall have the
--------------------------------------
right, to be exercised as hereinafter provided, to extend the term of this Lease
("Extension Options") for the entire portion of the Premises then occupied by
Tenant (excluding subleased and assigned space) for two (2) periods of five (5)
years each (the "First Extended Term" and "Second Extended Term," respectively,
and each an "Extended Term") from the Expiration Date specified in Section 1(g)
of this Lease. If Tenant exercises its renewal option, Landlord and Tenant shall
execute and deliver an amendment to the Lease under the same terms and
conditions as this Lease, provided that:
(a) For the purposes of this Section 3, "same terms and conditions"
shall not be construed to include free rent, costs of tenant improvements,
leasing commissions, options to expand, renew or extend (except that during the
First Extended Term Tenant shall still be entitled to exercise the Second
Extended Term) or any other concessions related to the initial occupancy of the
Premises (including without limitation the Rent credits for reduced Building
construction costs and the Tax Credit).
(b) Tenant shall not at the time the option notice is delivered to
Landlord or at the commencement of the applicable Extended Term be in default
(beyond applicable notice and cure periods) in the performance of any term,
covenant, or condition herein contained.
(c) The Rent for the Extended Term(s) shall be the Fair Market
Renewal Rate, defined hereafter. "Fair Market Renewal Rate" shall mean the
projected net fair market rental rate at the commencement of the Extended Term
for renewal lease space in the Building or in comparable first-class office
buildings of similar size and stature, comparably located, for a comparable
term, taking into consideration all relevant factors (including, without
limitation, age, physical condition, total square footage, quality of
construction, services included, but excluding consideration of Tenant
improvements in the Initial Premises to the extent the cost thereof exceeded $35
per net rentable square foot), provided, however, that such rate shall not be
less than the net rental rate for the last year of the term immediately
preceding the Extended Term. When considering comparable rents, appropriate
adjustment shall be made for the fact that the Rent is net of all Operating
Costs and Taxes.
(d) On the effective date of the First Extended Term, Landlord will
provide a refurbishment allowance of Seven Dollars ($7.00) per rentable square
foot leased by Tenant. This allowance shall not be considered when determining
the Fair Market Renewal Rate in Subsection (c) above.
(e) Tenant shall exercise any Extension Option by written notice to
Landlord no later than eighteen (18) months prior to expiration of the then
current Lease term. If Tenant does not so exercise an Extension Option, the
Lease shall expire on the Expiration Date specified in the then current lease.
(f) Landlord and Tenant shall attempt to reach agreement as to the
Fair Market Renewal Rate at least one hundred twenty (120) days prior to the
commencement of the applicable Extended Term, and failing to reach such
agreement, the Fair Market Renewal Rate shall be determined as follows:
C-3
<PAGE>
Within fifteen (15) days after the expiration of the above-mentioned
one hundred twenty (120) day period, Landlord and Tenant shall each
identify an impartial person to act as a valuation expert and notify
the other thereof. The expert specified in each such notice must be a
commercial real estate professional conducting business in Seattle,
Washington and having not less than ten (10) years' active experience
as a real estate professional in the downtown office leasing market
in Seattle, Washington. If either party fails to appoint an expert
within such fifteen (15) day period, then the determination of the
expert first appointed shall be final, conclusive and binding on both
parties.
The named experts shall together determine the Fair Market Renewal
Rate. If the experts fail to agree on the Fair Market Renewal Rate
within thirty (30) days of their appointment and the difference in
their conclusions about Fair Market Renewal Rate is ten percent (10%)
or less of the lower of the two determinations, Fair Market Renewal
Rate shall be the average of the two determinations.
If the two experts fail to agree on Fair Market Renewal Rate and the
difference between the two determinations exceeds ten percent (10%)
of the lower of the two determinations, then the experts shall
appoint a third expert, similarly impartial and qualified, to
determine the Fair Market Renewal Rate. Such third expert shall
determine the Fair Market Renewal Rate within thirty (30) days of his
or her appointment, and the average of the determinations of the two
closest experts is final, conclusive and binding on Landlord and
Tenant. Landlord and Tenant shall each execute and deliver an
agreement confirming annual rent for the Extended Term.
Landlord and Tenant shall each pay the fees of any expert appointed
by Landlord and Tenant, respectively, and Landlord and Tenant shall
each pay one-half (1/2) of the fees of the third expert, if any.
4. Expansion into the Balance of Space in the Building. Tenant shall
---------------------------------------------------
expand into the balance of the space in the World Trade Center East Office
Building upon the same terms and at the same rental rate as Tenant is then
paying for its initial space, pursuant to the schedule in Section 2 of this
Exhibit C. The expansion space shall become part of the Premises on the Take-
Down Date in such schedule (or earlier if occupied by Tenant for normal business
operations) subject to all the terms and conditions of this Lease including
Expiration Date, and the options to extend the term of the Lease. Landlord shall
provide the Tenant Allowance for the expansion space as specified in Section
3(b) of the Lease and Exhibit B, Section II. Tenant shall arrange by separate
contract, either with Landlord or with a separate contractor, to construct the
tenant improvements in such space.
5. Additional Expansion. Landlord shall use its commercially
--------------------
reasonable best efforts to provide additional expansion space in the Art
Institute Building or other nearby properties as requested by Tenant.
6. Transit. Recognizing that current Metro transit service to the
-------
World Trade Center site is inadequate, Landlord shall work with appropriate
agencies and government officials and shall use its best efforts to ensure
improved service sufficient to reasonably meet the commuting needs of Tenant's
employees. Any costs to provide for special transit services requested and
approved by Tenant shall be paid for by Tenant.
7. Storage Space. Upon Tenant's request, Landlord shall provide upon
-------------
Tenant's occupancy (or later, at Tenant's election) approximately 2,000 square
feet of storage space in the Garage. Rent for such storage space for the
initial term of the Lease shall be ten dollars ($10.00) per square foot per
year, payable monthly on or before the first day of each month, and shall be
increased annually by the same percentage increase during such year in the
Consumer Price Index (United States City Average for All Urban Consumers) - All
Items (1982-84=100) published by the United States Department of Labor, Bureau
of Labor Statistics. The most recently published index as of any comparison
date shall be used. Landlord shall have storage spaces made available in the
Garage in the locations identified on Exhibit K attached hereto.
8. Satellite Dish/Antenna: Tenant shall have the right to install one
----------------------
or more satellite dishes and/or antennas on the Building. Exhibit I sets forth
current market rates for rooftop license agreements. Tenant shall be charged
for the use of the rooftop as follows: the first antennae shall be
C-4
<PAGE>
without charge; the charge for the second antennae shall be two hundred dollars
($200) per month, and the charge for the third, fourth and fifth antennas shall
be at seventy-five percent of then market rates. The foregoing rates shall apply
only to Type 1,2 or 3 antennas, as described in Exhibit I. Charges for other
Types of antennas, or for Type 1,2 or 3 antennas in excess of five (5), shall be
at full market rates. A separate license agreement, in a form to be mutually
agreed upon by Landlord and Tenant, shall be required for each such antennae. In
addition, Landlord shall install a reasonable number of cabling sleeves from
office floors to rooftop at no charge.
9. Arbitration for Construction Matters.
------------------------------------
(a) Applicability; Joinder; Statute of Limitations. All disputes,
----------------------------------------------
controversies and claims arising out of or relating to the construction of the
Tenant Improvements in the Initial Premises shall be settled by expedited
mandatory arbitration as set forth in this Section 9. All statutes of
limitations which would otherwise be applicable and any limitations upon claims
set forth in this Agreement shall apply to any arbitration proceeding under this
Section 9.
(b) Notice of Demand. Either party may demand arbitration by
----------------
notifying the other party in writing in accordance with the notice provisions of
Section 9. The notice shall describe the reasons for such demand, the amount
involved, if any, and the particular remedy sought. The notice shall also list
the name of one arbitrator qualified in accordance with subsection (d).
(c) Response. The party that has not demanded arbitration shall
--------
respond to the notice of demand within five (5) calendar days of receipt of such
--------
notice by delivering a written response in accordance with the notice provisions
of Section 9. The response shall list the name of a second arbitrator qualified
in accordance with Subsection (d). The response shall also describe
counterclaims, if any, the amount involved, and the particular remedy sought. If
a party fails to respond timely to the notice of demand, the arbitrator selected
by the party making such demand under Subsection (b) shall resolve the dispute,
controversy or claim within seven (7) calendar days of the deadline for
response.
(d) Qualified Arbitrator. Any arbitrator selected in accordance
--------------------
with Subsections (b) and (c) shall be any natural person not employed by either
of the parties or any parent or affiliated partnership, corporation or other
enterprise thereof, who shall also be a construction professional with at least
ten (10) years experience in the downtown Seattle real estate market.
(e) Appointment of Third Arbitrator. If a party responds timely
-------------------------------
to a notice of demand for expedited arbitration under Subsection (c), the two
arbitrators shall appoint a third arbitrator who shall be qualified in
accordance with subsection (d). Such third arbitrator shall be appointed within
seven (7) calendar days of receipt by the party demanding arbitration of notice
of response provided for under Subsection (c). If the two arbitrators fail to
timely appoint a third arbitrator, the third arbitrator shall be appointed by
the parties if they can agree within a period of five (5) calendar days. If the
parties cannot timely agree, then either party may request the appointment of
such third arbitrator by the Presiding Judge of the Superior Court of King
County, Washington; provided that the other party shall not raise any question
as to the court's full power and jurisdiction to entertain such application and
to make such appointment.
(f) Arbitration Hearing; Discovery; Venue. The arbitration hearing
-------------------------------------
shall commence within five (5) calendar days of appointment of the third
arbitrator as described in Subsection (e). The hearing shall in no event last
longer than two (2) calendar days. There shall be no discovery or dispositive
motion practice (such as motions for summary judgment or to dismiss or the like)
except as may be permitted by the arbitrators; and any such discovery or
dispositive motion practice permitted by the arbitrators shall not in any way
conflict with the time limits contained herein. The arbitrators shall not be
bound by any rules of civil procedure or evidence, but rather shall consider
such writings and oral presentations as reasonable business persons would use in
the conduct of their day to day affairs, and may require the parties to submit
some or all of their case by written declaration or such other manner of
presentation as the arbitrators may determine to be appropriate. It is the
intention of the parties to limit live testimony and cross examination to the
extent absolutely necessary to insure a fair hearing to the parties on
significant and material issues. Venue of any arbitration hearing conduct
pursuant to this agreement shall be in Seattle, Washington. It is also the
intention of the parties that any such arbitration shall not interfere with the
continued construction of the Tenant Improvements, and unless the dispute in
question makes it impossible for such construction to continue, the pending
arbitration shall not affect such construction schedule.
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<PAGE>
(g) Decision. The arbitrators' decision shall be made in no event
--------
later than seven (7) calendar days of the commencement of the arbitration
hearing described in Subsection (f). If three (3) arbitrators are appointed, a
majority decision shall prevail. The award shall be final and judgment may be
entered in any court having jurisdiction thereof. The arbitrators may award
specific performance of this Agreement. The arbitrators may also require
remedial measures as part of any award. The arbitrators may award attorneys'
fees and costs to the more prevailing party.
10. Retail Tenant. Landlord shall use its commercially reasonable best
-------------
efforts to place a food service provider in the retail space on the first floor
of the Building. If Landlord is unable to place a food service provider in such
space, Tenant shall have reasonable approval rights over the tenant placed in
such space, provided such approval shall not be unreasonably withheld if the
tenant is of a caliber and character consistent with operation of a first class
office building. Such retail space shall be self-contained, shall have its own
restrooms and shall not have direct access into the Building lobby. If the
retail Tenant is a restaurant/delicatessen operator, Tenant reserves the right
to require the restaurant/delicatessen operator to install a door on the west
side of such space for direct access into Tenant's premises.
11. Expansion Space. Pursuant to that certain Wall Street Building
---------------
Agreement of even date herewith ("Wall Street Agreement") between Tenant and
WRC Wall Street LLC, an affiliate of Landlord, Landlord, through its affiliate,
has agreed to provide Tenant with an option to expand into a new building to be
constructed by Landlord's affiliate. The lease to be entered into between
Tenant and WRC Wall Street LLC is hereinafter referred to as the "Wall Street
Lease." In certain instances, as set forth in Sections 3(a) and 3(b) of the
Wall Street Agreement (or pursuant to comparable sections in the Wall Street
Lease), Tenant has the right to terminate the Wall Street Agreement and, if then
in effect, the Wall Street Lease, if Landlord's affiliate is unable to meet
certain deadlines related to the construction of such new building.
If Tenant so elects to terminate the Wall Street Agreement and, if
then in effect, the Wall Street Lease, Tenant has certain remedies as set forth
in Section 3(c) of the Wall Street Agreement. If the Wall Street Agreement and,
if then in effect, the Wall Street Lease, are so terminated pursuant to Section
3(a) or Section 3(b) of the Wall Street Agreement (or pursuant to comparable
Sections in the Wall Street Lease), and if Tenant elects to move out of the
Premises as set forth in 3(c)(ii) of the Wall Street Agreement, and assign this
Lease or sublease the entire Premises, then Landlord's right to recapture all or
any portion of the Premises in connection with such assignment or sublease, as
set forth in Section 17(b) above, shall not apply, and Tenant shall be entitled
to receive the amount by which all sums paid under such sublease or assignment
exceed the total of the Rent and Additional Rent due under this Lease with
respect to such space. All costs of subleasing, assigning or re-tenanting such
space, including without limitation leasing commissions, design fees, legal fees
and tenant improvement costs, shall be borne by Tenant. Any provisions of
Section 17(b) to the contrary are superseded by this Section 11.
C-6
<PAGE>
EXHIBIT E
SUBORDINATION, NON-DISTURBANCE AND
ATTORNMENT AGREEMENT
AGREEMENT made this _____ day of __________, 19__ ________________
("Lender"), ________________, a ________________ organized under the laws of the
state of ________________ ("Borrower"), and ________________, a ________________
organized under the laws of the state of ________________ ("Tenant").
RECITALS
Lender has made or is about to make a loan to Borrower in the amount of
________________ DOLLARS ($__________) to be evidenced by a deed of trust note
in that amount to be secured by, among other things, a mortgage or deed of trust
hereinafter collectively referred to as the "Mortgage" on Borrower's interest in
and to those certain premises (the "Mortgaged Premises") situated, lying and
being in the City of ________________, County of ________________, State of
________________, more particularly described on Exhibit A hereto together with
all improvements now existing and hereafter constructed thereon.
Tenant is now or is to become the tenant of a portion of the Mortgaged
Premises (the "Demised Premises") under a lease made by Borrower with Tenant
dated __________, 19__ (the "Space Lease"), which Space Lease is more
particularly described on Exhibit A, attached hereto and incorporated herein.
Tenant desires to be assured of continued occupancy of the Demised Premises
under the terms of the Space Lease and subject to the terms of the Mortgage.
NOW, THEREFORE, Tenant, Lender and Borrower hereby agree:
1. Tenant agrees that all of Tenant's rights under the Space Lease shall be
fully subject and subordinate to the lien of the Mortgage, as the same may be
extended, renewed, modified or replaced, and to all of Lender's rights
thereunder, subject to the provisions of this Agreement.
2. Lender agrees with Tenant that so long as conditions do not exist
entitling Borrower to declare the Space Lease at an end under the provisions of
Section _____ ***[default section]*** thereof (including the expiration of all
periods to cure), the Space Lease and the estate thereby created shall not be
terminated, neither Tenant nor any subtenant or assigns of Tenant shall be
joined by Lender or any holder of the Mortgage in any foreclosure proceedings,
and possession or enjoyment of the Demised Premises by Tenant, subtenant or
assigns shall not be interfered with by or in any foreclosure action, sale or
other action or proceeding instituted under or in connection with the Mortgage,
it being the express intention of Lender and Tenant that Tenant shall not be
disturbed in its possession and use of the Demised Premises under the Space
Lease for any reason other than the termination of the Space Lease in accordance
with its terms or the eviction of Tenant under and in accordance with the terms
of the Space Lease. The effectiveness of Tenant's obligations, liabilities,
covenants and representations under this Agreement is conditioned on the
performance of, and compliance with the covenants of this paragraph 2.
3. In the event of foreclosure of the Mortgage, whether by action,
pursuant to the power of sale therein contained or otherwise, or delivery of a
deed to the Mortgaged Premises in lieu of foreclosure of the Mortgage, whereby
the purchaser upon foreclosure or a grantee under a deed in lieu of foreclosure
of the Mortgage has notified Tenant that it has succeeded to the ownership of
all interests in the Demised Premises and the rights of the landlord under the
Space Lease, then the Space Lease shall continue in full force and effect as a
direct lease
E-1
<PAGE>
between such purchaser or grantee of the Demised Premises and Tenant, upon and
subject to the terms, covenants and conditions of the Space Lease, including the
power of such purchaser or grantee as landlord thereunder to terminate the
interests of Tenant under and in accordance with the terms of the Space Lease,
and such purchaser or grantee will not disturb the possession of Tenant and will
be bound by all of the landlord's obligations under the Space Lease, except such
as are then not applicable or pertinent to the remainder of the term of the
Space Lease and further except that such purchaser or grantee shall not (i) be
liable for any previous act or omission of any prior landlord under the Space
Lease (including Lender or any receiver appointed in any such foreclosure action
or proceeding); (ii) be subject to any offsets, defenses or claims which have
accrued to Tenant against said prior landlord (except that any events entitling
Tenant to abatement or reduction in rent or lease termination under the terms of
the Space Lease, with respect to which events notice shall have been given to
Lender as provided below, shall continue to effect such abatement or reduction
or right of termination if not remedied within the period for cure provided
below); (iii) be bound by any modification of the Space Lease, or by any
prepayment of more than one month's rent made subsequent to the date hereof or
by any waiver or forbearance on the part of landlord made subsequent to the date
hereof that is materially adverse to the interest of such purchaser or grantee
unless such modification, prepayment, waiver or forbearance shall have been
previously approved in writing by Lender or any subsequent holder of the
Mortgage or such purchaser or grantee; (iv) be bound for return of any deposit
unless the same has been specifically transferred to such purchaser or grantee;
(v) be bound by any obligation of the landlord in the construction of Tenant's
improvements at the Demised Premises or any warranty of workmanship or materials
or any other personal guaranty of the landlord under the Space Lease; or (vi) be
liable for the commencement or completion of any construction or any
contribution toward construction or installation of any improvements upon the
Demised Premises required under the Space Lease, or any expansion or
rehabilitation of existing improvements thereon, or for restoration of
improvements thereon, or for restoration of improvements following any casualty
not required to be insured under the Space Lease or, if insurance required to be
carried by the Landlord under the Space Lease is in fact being carried as
therein required, for the costs of any restoration in excess of the proceeds
recovered under any insurance and any condemnation proceeds (except that this
clause shall not affect Tenant's rights to rental abatements or reduction, or
lease termination, as expressly provided in the Space Lease); provided, however,
notwithstanding the foregoing, if at any time such purchaser or grantee has
succeeded to the ownership of the interest in the Mortgaged Premises described
above and the rights of landlord under the Space Lease, the Space Lease is still
in effect and there has not occurred a permanent abatement or reduction in rent
thereunder, such purchaser or grantee shall have ten (10) days after the later
to occur of such succession or the giving of notice to such purchaser or grantee
of a condition which gives rise to a right to abate or reduce rent within which
to correct such condition, and if such correction is effected within such time,
Tenant will not assert the same as a cause for abatement or reduction in rent
accruing after such correction is effected. Notwithstanding the provisions of
clauses (v) and (vi) of the preceding sentence, if such purchaser or grantee
succeeds to the ownership of the Demised Premises and the rights of landlord
under the Space Lease prior to the Commencement Date under the Space Lease, and
proceeds with construction of the Building as defined in the Space Lease, then
Tenant shall have the rights under the Space Lease for the payment of the
Allowance (or unpaid portion thereof) unless Tenant terminates the Space Lease
in accordance with its terms.
4. Tenant consents to the foregoing provisions of Paragraphs 2 and 3
hereof and agrees to be bound thereby. So long as Tenant has quiet enjoyment of
the Demised Premises, Tenant further agrees (a) to attorn and to recognize as
landlord under the Space Lease (i) Lender, when in possession of the Mortgaged
Premises, (ii) a receiver appointed in an action or proceeding to foreclose the
Mortgage, (iii) a purchaser upon foreclosure or a grantee under a deed in lieu
of foreclosure of the Mortgage, or (iv) any subsequent purchaser of the
Mortgaged Premises, (b) upon request, to execute and deliver to said person or
entity any instrument or instruments in recordable form which maybe be necessary
or appropriate to effect the performance of the agreements herein contained,
provided that such instruments do
E-2
<PAGE>
not create, or risk the creation of increased risk of liabilities or obligations
of Tenant, and (c) to be bound to perform all of the obligations of the tenant
under the Space Lease.
5. Notwithstanding anything in the Space Lease to the contrary, Tenant
hereby agrees that Tenant will notify Lender unless Tenant has received written
notice from Lender that the Mortgage has been reconveyed, in writing of any
default(s) of the landlord under the Space Lease which would entitle Tenant to
cancel the Space Lease, and no notice of cancellation shall be effective unless
(a) Lender has received the aforesaid notice at its office address set forth
below (or such other place in the continental United States hereafter designated
to Tenant from time to time in writing) and (b) Lender has been afforded an
opportunity to cure such default(s) of landlord under the Space Lease within the
applicable grace period provided under the Space Lease (measured from receipt of
the aforementioned written notice) or, if such default(s) cannot reasonably be
cured within such period, to commence to cure such default(s) within such period
and diligently proceed therewith; provided, however, nothing herein shall affect
rights of Tenant to terminate the Space Lease in whole or in part pursuant to
the provisions of Articles _____, _____ or ______ ***[Term; Insurance and
Reconstruction; and Condemnation sections]*** of the Space Lease. Tenant agrees
that performance by Lender or its designee or assignee of any provision of the
Space Lease shall satisfy any conditions of Tenant requiring performance by the
landlord and if there is a default which is not capable of being cured by Lender
and Lender has instituted judicial or nonjudicial proceedings to foreclose the
Mortgage, Tenant agrees to waive such past defaults as to Lender or its
respective nominee, designee or assignee, provided that Lender or its respective
nominee, designee or assignee promptly effects a cure when it is capable of
doing so (except that any events entitling Tenant to abatement or reduction in
rent or rights to terminate the Space Lease under the Space Lease shall continue
to effect such abatement, reduction or termination rights).
6. Tenant acknowledges and recognizes that the Space Lease will be
assigned to Lender as collateral security for any loan made by Lender to
Borrower, which assignment, among other things, will prohibit Borrower from
thereafter modifying, terminating or accepting surrender of the Space Lease or
reducing, abating or accepting prepayment of any rent under the Space Lease more
than one calendar month in advance of its due date (without first obtaining the
consent of the Lender).
7. Nothing contained herein shall obligate Lender to perform the landlord's
obligations under the Space Lease until such time as Lender shall become the
owner of the Mortgaged Premises.
8. This Agreement shall be binding upon and inure to the benefit of the
respective successors and assigns of the parties hereto and cannot be changed or
terminated orally.
9. In the event of foreclosure of the Mortgage, whether by action,
pursuant to the power of sale therein contained or otherwise, or delivery of a
deed to the Mortgaged Premises in lieu of foreclosure of the Mortgage, and the
subsequent transfer of the Mortgaged Premises by the purchaser upon foreclosure
or grantee under a deed in lieu of foreclosure, such transferring purchaser or
grantee shall be automatically relieved of any and all obligations and
liabilities hereunder and under the Space Lease accruing from and after the date
of such transfer, provided the transferee of such transfer assumes such
obligations and liabilities in writing.
E-3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
LENDER: ____________________________
By:_________________________
Its:_______________________
BORROWER: ____________________________
By:_________________________
Its:_______________________
TENANT: ____________________________
By:_________________________
Its:_______________________
[ADD APPROPRIATE ACKNOWLEDGEMENTS]
E-4
<PAGE>
EXHIBIT 21.1
------------
SUBSIDIARIES OF VISIO CORPORATION
ENTITY JURISDICTION
- ------ ------------
Visio International Incorporated Washington
MarComp, Inc. Maryland
Kaspia Systems, Inc. Delaware
Visio Australia Pty. Limited Australia
Visio Canada Inc. Canada
Visio S.a.r.l France
Visio GmbH Germany
Visio International Limited Ireland
Visio S.r.l. Italy
Visio Japan K.K. Japan
Visio Korea Ltd. Korea
Visio International Inc. Malaysia
Visio Business Graphics B.V. Netherlands
Visio Singapore Pte. Ltd. Singapore
Visio Business Graphics (Proprietary) Limited South Africa
Visio Business Graphics GmbH Switzerland
Visio International (UK) Ltd. United Kingdom
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 333-1022, 333-50619 and 333-60587) pertaining to the Visio
Corporation 1990 Stock Option Plan, Visio Corporation 1995 Long-term Incentive
Compensation Plan, Visio Corporation 1995 Stock Option Plan for Nonemployee
Directors, Visio Corporation 1995 Employee Stock Purchase Plan, and Visio
Corporation (formerly Kaspia Systems, Inc.) 1996 Stock Option Plan and the
Registration Statement (Form S-3 No. 333-60577) pertaining to the sale of
additional shares of common stock of our report dated October 23, 1998, with
respect to the financial statements and schedule of Visio Corporation included
in the Annual Report (Form 10-K) for the year ended September 30, 1998.
Seattle Washington
December 24, 1998 /s/ ERNST & YOUNG LLP
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<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
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<SECURITIES> 41,930
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<CURRENT-ASSETS> 137,551
<PP&E> 21,428
<DEPRECIATION> 11,237
<TOTAL-ASSETS> 159,377
<CURRENT-LIABILITIES> 32,170
<BONDS> 0
0
0
<COMMON> 75,434
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<TOTAL-LIABILITY-AND-EQUITY> 159,377
<SALES> 165,995
<TOTAL-REVENUES> 165,995
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<TOTAL-COSTS> 15,132
<OTHER-EXPENSES> 118,077
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<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> SEP-30-1996 SEP-30-1997
<PERIOD-START> OCT-01-1995 OCT-01-1996
<PERIOD-END> SEP-30-1996 SEP-30-1997
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<SECURITIES> 18,601 21,372
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<INVENTORY> 604 1,079
<CURRENT-ASSETS> 69,668 97,982
<PP&E> 6,510 13,560
<DEPRECIATION> 2,971 5,306
<TOTAL-ASSETS> 73,207 112,701
<CURRENT-LIABILITIES> 17,690 33,546
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0 0
0 0
<COMMON> 46,578 56,367
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 73,207 112,701
<SALES> 59,862 100,775
<TOTAL-REVENUES> 59,862 100,775
<CGS> 8,708 10,682
<TOTAL-COSTS> 8,708 10,682
<OTHER-EXPENSES> 37,584 75,257
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 79 52
<INCOME-PRETAX> 15,108 18,302
<INCOME-TAX> 4,612 4,602
<INCOME-CONTINUING> 10,496 13,700
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<S> <C> <C> <C>
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<FISCAL-YEAR-END> SEP-30-1997 SEP-30-1997 SEP-30-1997
<PERIOD-START> OCT-01-1996 OCT-01-1996 OCT-01-1996
<PERIOD-END> DEC-31-1996 MAR-31-1997 JUN-30-1997
<CASH> 49,139 44,579 38,503
<SECURITIES> 21,750 24,057 31,084
<RECEIVABLES> 4,100 7,382 6,785
<ALLOWANCES> 754 858 992
<INVENTORY> 680 700 433
<CURRENT-ASSETS> 80,055 82,682 83,881
<PP&E> 7,136 8,277 10,482
<DEPRECIATION> 3,437 3,844 4,699
<TOTAL-ASSETS> 83,826 89,140 95,980
<CURRENT-LIABILITIES> 19,455 23,401 24,245
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 51,262 52,540 54,983
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<TOTAL-LIABILITY-AND-EQUITY> 83,826 89,140 95,980
<SALES> 19,207 43,019 69,386
<TOTAL-REVENUES> 19,207 43,019 69,386
<CGS> 1,993 4,406 7,157
<TOTAL-COSTS> 1,993 4,406 7,157
<OTHER-EXPENSES> 12,121 34,087 54,821
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 12 20 35
<INCOME-PRETAX> 5,574 5,830 9,733
<INCOME-TAX> 1,417 1,457 2,418
<INCOME-CONTINUING> 4,157 4,373 7,315
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 4,157 4,373 7,315
<EPS-PRIMARY> 0.15 0.16 0.26
<EPS-DILUTED> 0.14 0.15 0.25
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<FISCAL-YEAR-END> SEP-30-1998 SEP-30-1998 SEP-30-1998
<PERIOD-START> OCT-01-1997 OCT-01-1997 OCT-01-1997
<PERIOD-END> DEC-31-1997 MAR-31-1998 JUN-30-1998
<CASH> 33,351 46,133 75,047
<SECURITIES> 51,128 46,171 31,060
<RECEIVABLES> 13,721 15,975 15,150
<ALLOWANCES> 1,309 1,681 1,923
<INVENTORY> 1,181 1,434 1,085
<CURRENT-ASSETS> 107,178 119,086 132,679
<PP&E> 15,594 17,133 19,047
<DEPRECIATION> 6,405 7,736 9,226
<TOTAL-ASSETS> 123,081 136,037 153,048
<CURRENT-LIABILITIES> 35,404 35,094 39,938
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 57,832 68,217 71,973
<OTHER-SE> 0 0 0
<TOTAL-LIABILITY-AND-EQUITY> 123,081 136,037 153,048
<SALES> 37,497 77,586 121,772
<TOTAL-REVENUES> 37,497 77,586 121,772
<CGS> 3,392 7,029 11,169
<TOTAL-COSTS> 3,392 7,029 11,169
<OTHER-EXPENSES> 25,326 58,713 88,700
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 23 46 97
<INCOME-PRETAX> 9,892 14,316 25,578
<INCOME-TAX> 2,514 3,612 6,425
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