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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, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-26772
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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.)
2211 Elliott Avenue, Seattle, 98121-1691
Washington (Zip code)
(Address of principal executive
offices)
(206) 956-6000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of Class)
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sales price of the common stock on
November 30, 1999 as reported on the Nasdaq National Market, was approximately
$746,000,000. 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 because these 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, 1999, there were 30,488,040 shares of the registrant's
common stock outstanding.
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Visio, SmartShapes and AutoDiscovery 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 in this annual
report 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, 1999*
Table of Contents
<TABLE>
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PART I
<C> <S> <C>
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 REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS........................................................ 12
ITEM 6. SELECTED FINANCIAL DATA........................................ 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................................... 13
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..... 33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE........................................... 57
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............. 57
ITEM 11. EXECUTIVE COMPENSATION......................................... 59
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..................................................... 64
ITEM 13. RELATED-PARTY TRANSACTIONS..................................... 65
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K....................................................... 66
SIGNATURES............................................................... 69
</TABLE>
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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 annual report are treated as ending on a calendar month end.
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PART I
Item 1. Business
Forward Looking Statements
Some of our statements in this annual report are forward-looking statements
that involve risks and uncertainties. These forward-looking statements include
statements about our plans, objectives, expectations, intentions, future
financial performance and other statements that are not historical facts. We
use such words as "expects," "believes" and "anticipates" to identify forward-
looking statements, but the absence of such words does not mean that the
statement is not forward-looking. Forward-looking statements are subject to
risks and uncertainties that could cause actual results to differ materially
from those anticipated in the forward-looking statements. You should not unduly
rely on these forward-looking statements but should carefully consider other
factors, including the risk factors we describe in "Certain Risk Factors That
May Impact Future Results of Operations" beginning on page 26 of this annual
report. You should also consider other risks we describe in other sections of
this annual report and in other documents that we file with the Securities and
Exchange Commission from time to time.
General
Visio Corporation 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 our 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. Our mission is
to become the single standard for creating, storing and exchanging drawings in
business.
Pending Merger with Microsoft
On September 14, 1999, we entered into an Agreement and Plan of
Reorganization with Microsoft Corporation and MovieSub, Inc., a wholly owned
subsidiary of Microsoft. Under the terms of the agreement, MovieSub, Inc. will
merge with us, we will become a wholly owned subsidiary of Microsoft and each
outstanding share of our common stock will be converted into the right to
receive 0.45 of a share of Microsoft common stock. On December 13, 1999, our
shareholders approved the proposed merger. The merger is subject to antitrust
laws, including the reporting and waiting provisions of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976. In late September, we and Microsoft made
the required premerger notification filings with the Federal Trade Commission
and the Antitrust Division of the Department of Justice. On October 29, 1999,
the Antitrust Division requested additional information and documents from us
and from Microsoft. The requests extended the waiting period under the Hart-
Scott-Rodino Act for a period ending 20 days after both parties have filed a
proper response. Both companies have filed responses to the requests and are
awaiting further action, if any, from the Antitrust Division. Although we
currently expect the merger to close in January 2000, the closing could be
delayed due to further extension of the waiting period under the Hart-Scott-
Rodino Act or other action by the Antitrust Division. Failure to complete the
merger could have a material adverse effect on our financial condition and
results of operations. For additional information about some of the potential
adverse effects, please see "Certain Risk Factors That May Impact Future
Results of Operations" beginning on page 26 of this annual report.
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
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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 use by specialists or as a minor feature of general
business software 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, we believe that to date they have 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, we
introduced our first product, Visio (currently renamed Visio Standard), in
November 1992. Currently, our 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.
Our 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 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 us to expand
our products to address new markets.
We believe that our 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. Because of the single architecture of all Visio 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.
Our Strategy
Our mission is to become the single standard for creating, storing and
exchanging drawings and diagrams in business. By becoming the standard, we
believe we can introduce new users to electronic drawing and
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diagramming and thereby expand the market for our products. Our strategy to
achieve this objective includes the following elements:
Focus on Business Users. We have focused on personal computer-based drawing
and diagramming for business enterprises such as large corporations, consulting
firms and governmental entities. We target enterprises that create durable
drawings, share those drawings in electronic form across organizational
functions and departments and create custom solutions for specific drawing
needs. We believe these enterprises are more likely to standardize on a single
product and provide the best opportunity for us to embed our products broadly
within an organization. We offer these entities a variety of volume licensing
arrangements that encourage wide use of and standardization on our products.
Maintain Leading Technology and Extend Product Line. Our strategy is to
maintain and improve the flexibility and extensibility of the Visio graphics
engine and increase the ease of use and functionality of our products. We will
continue to expand our product lines to address market segments where the value
of drawings is high. For example, in November 1998, we released Visio
Enterprise, an integrated, multifunction software tool designed for information
technology ("IT") and information systems ("IS") professionals who develop,
manage and maintain enterprise information systems.
Focus on Microsoft Windows. We develop products for the Microsoft Windows
environment and have historically worked closely with Microsoft to more fully
utilize the capabilities of Windows technology.
Expand International Markets. We distribute the Visio product line in 12
languages and in more than 45 countries around the world. International
revenues represented approximately 41% of our revenues in fiscal 1998 and 39%
in fiscal 1999. We plan to continue to expand the number of our products
distributed in international markets as well as our sales and marketing offices
and distribution networks within those markets.
Expand Use of Visio as a Development Platform. Taking advantage of the open
architecture, powerful shape technology, and ease of customization of our
products, we market 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, we
seek 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 our products. We also seek to promote the use of our
products in business-integrated solutions within specific customer accounts and
within specific industries. To accomplish these goals, we have built a
development platform infrastructure that includes a developer training program,
developer support, a development web site (containing whitepapers,
documentation, samples and a discussion 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 us and more effectively utilize our products.
Business Segments and Products
We have three reportable business segments: Business Diagramming, Technical
Drawing and IT Design and Documentation. We currently sell four core software
products (Visio Standard, Visio Technical, Visio Professional and Visio
Enterprise) within those business segments, together with add-on software
products. For financial information relating to our business segments, please
see Note 7 of our financial statements on page 50 of this annual report.
Our core products offer solutions to a wide variety of drawing and
diagramming needs based on a single, easy-to-use technology. We design our
product features to be intuitive, enabling even occasional users to draw and
diagram efficiently. Our 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, our products utilize a visual "stencil" metaphor. This
metaphor is implemented through a stencil window that
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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. Our 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.
Visio Standard
Visio Standard, which was first shipped in November 1992, is the core
product in the Business Diagramming segment. It 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
We released our most current major version, Visio 2000 Standard Edition, in
August 1999. Visio 2000 Standard Edition is the foundation of the Visio 2000
product family and has an estimated street price (the average purchase price
paid by end users) of $199.
Visio Technical
Visio Technical is the core product in the Technical Drawing segment. It 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
We released our most current major version, Visio 2000 Technical Edition,
in September 1999. Visio 2000 Technical Edition has an estimated street price
of $399.
Visio Professional
Visio Professional is one of the two core products in the IT Design and
Documentation segment. It is a complete diagramming tool for IS and IT
professionals such as local area network managers, database analysts, software
developers and web masters as well as business process professionals. Visio
Professional incorporates all of Visio Standard's capabilities and content in
addition to features specific to IS/IT and business process management
professionals. Visio Professional customers typically rely on the product to
document networks, diagram software architecture and map and design database
structures, and use it as a tool for business process management initiatives.
We released our most current major version, Visio 2000 Professional Edition,
in November 1999. Visio 2000 Professional Edition has an estimated street
price of $399.
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Visio Enterprise
Visio Enterprise is the other core product in the IT Design and
Documentation segment. Built on the foundation of Visio Professional, Visio
Enterprise was initially released in November 1998. With respect to network
design and documentation, Visio Enterprise facilitates physical, logical and
wide-area network designs. The product's AutoDiscovery(TM) technology gathers
information pertaining to network devices, switches, frame relay circuits and
the logical connections between them, and its AutoLayout technology can
automatically create diagrams based on such information. Visio Enterprise
integrates this technology with the diagramming capabilities of Visio
Professional and the 17,000-shape Visio Network Equipment library. In addition
to its network design and documentation capabilities, Visio Enterprise provides
tools that facilitate software engineering and database design. We released our
most current major version, Visio 2000 Enterprise Edition, in December 1999.
Visio 2000 Enterprise Edition has an estimated street price of $995.
Other Products
We also offer the following products:
. 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,
. Real-Time Statistics, an add-on solution to Visio Enterprise that
captures and displays real-time data stored on network devices,
. Visio Maps, a desktop mapping software product that allows users to
create, share and distribute high-quality, data-rich maps quickly and
easily,
. Visio Frame Relay, an add-on solution to Visio Enterprise that identifies
the frame relay endpoints on a network, and
. Visio SmartShapes Solutions, a series of add-on stencil products.
These products supplement our core products by extending the number and
types of drawings available for job-specific drawing needs.
IntelliCAD
In March 1998, we released IntelliCAD, an Autodesk AutoCAD-compatible
software product utilizing an engine that is distinct from the Visio engine and
employing DWG as its native file format. IntelliCAD was part of our Technical
Drawing segment. In July 1999, we granted a royalty-free, perpetual license of
the IntelliCAD source code to The IntelliCAD Technology Consortium, a nonprofit
corporation established for the purpose of licensing and coordinating broad
future development of the IntelliCAD platform. Though we have incorporated
portions of the IntelliCAD technology into Visio Technical, we do not currently
intend to continue to offer IntelliCAD as a Visio product.
Sales, Marketing and Distribution
Our 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 our
products through standard retail software distribution channels. As the need
for drawing and diagramming software for general business users has been
recognized, we have refocused our marketing efforts on strengthening Visio
brand name recognition to facilitate the introduction of additional Visio-
branded products and on expanding our distribution channels. In addition, we
are increasingly focusing our sales and marketing efforts on volume licensing
arrangements with large accounts. As a result of this effort, volume licensing
revenues as a percentage of total revenues have increased from 17% in fiscal
1997 to 24% in fiscal
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1998 and to 37% in fiscal 1999. We expect continued investment in the volume
licensing sales staff in fiscal 2000, and as a result, we expect this
percentage to continue to increase.
Notwithstanding our expectation that volume licensing will continue to
increase as a percentage of revenues, at present most of our revenues are
attributable to the packaged product distribution channel. In North America,
our principal distributors are Ingram Micro, Inc. and Merisel, Inc. These
distributors resell our products to retail software outlets and computer
superstores, corporate resellers, value-added resellers and mail order and
catalog resellers. We have entered into nonexclusive distribution agreements
with both Ingram and Merisel. The agreement with Ingram may be terminated
without cause by either party with 30 days' notice. The agreement with Merisel
is automatically renewed on an annual basis and may be terminated without cause
by either party with 60 days' notice.
Outside of North America we also distribute our products primarily through
distributors. This distribution is managed by our international headquarters in
Dublin, Ireland, our Asia Pacific operations center in Singapore and our
regional sales and marketing offices in Miami, Australia, England, France,
Germany, Italy, Japan, Malaysia, the Netherlands, South Korea, Switzerland and
Taiwan. Internationally, we have numerous nonexclusive distributors.
In fiscal 1999, sales to Ingram and Merisel, our two largest distributors,
accounted for 33% and 8%, respectively, of our revenues.
We have established OEM arrangements with various hardware manufacturers,
software vendors and book publishers. We also sell products directly to end
users.
We outsource most of our technical support and customer service. To the
extent it remains economically advantageous to do so, we expect to continue to
outsource most of these functions in the future.
Product Development
We believe that our future success will depend in large part on our ability
to enhance our 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. Our product
development group is actively engaged in identifying, defining and developing
new products and product enhancements to meet customer needs. Our principal
product development efforts focus on continued enhancements to the graphics
engines for our products and development of new customer solutions and
applications, including increased drawing complexity, increased number of
objects, increased "smartness" of SmartShapes objects and improved database
connectivity.
Though our products have been developed primarily by our product development
group, some technologies have been licensed from other sources. We intend to
continue licensing technologies as we increase our product offerings. We intend
to continue to make substantial investments in product development. Our product
development expenses totaled $16.1 million (16% of revenues) in fiscal 1997,
$27.3 million (16% of revenues) in fiscal 1998 and $34.8 million (17% of
revenues) in fiscal 1999.
Competition
The computer software drawing and diagramming markets are intensely
competitive and subject to rapidly changing technology and evolving standards.
We compete with a wide range of companies, from small niche companies to larger
software companies with strong market position and technology. Our principal
competitors are companies with leading products in the special purpose drawing
and diagramming, illustration and CAD
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categories. Products competing with our products include, among others, those
named below. Many of these competitors have significantly greater financial,
technical, sales and marketing and other resources than we have. As business
drawing and diagramming software markets develop, we believe that additional
companies may enter these markets and thereby intensify competition.
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Visio Business
Segment/Product Competing Product Competitor
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Business Visual Thought Confluent, Inc.
Diagramming Milestones, Etc. Kidasa Software, Inc.
Visio Standard Flowcharter; iGrafx Micrografx, Inc.
Flow Charting PDQ Patton & Patton Software Corporation
Org Plus International Microcomputer Software, Inc.
SmartDraw SmartDraw Software, Inc.
allCLEAR; EasyFlow; Clear Orgcharts SPSS, Inc.
Inspiration 5 Inspiration Software, Inc.
OrgPublisher Timevision
Actrix Business Autodesk, Inc.
Technical Drawing AutoCAD; AutoCAD LT; Actrix Technical Autodesk, Inc.
Visio Technical Smartsketch Intergraph Corporation
TurboCAD International Microcomputer Software, Inc.
MicroStation Bentley Systems, Inc.
MiniCAD Diehl Graphsoft
DesignCAD Viagrafx
IT Design and netViz NetViz Corporation
Documentation ClickNet Professional ClickNet Software Corporation
Visio Professional Network Charter Pro Micrografx, Inc.
Visio Enterprise NetFormx NetFormx Corporation
NetSuite Professional Series NetSuite Development Corp.
EasyER/ VisibleAnalyst Visible Systems Corporation
ER/Studio Embarcadero Technologies Inc.
Erwin Computer Associates International, Inc.
PowerDesigner Sybase, Inc.
Rational Rose Rational Software Corporation
</TABLE>
In addition, Microsoft Office, SmartSuite by Lotus Development Corp. and
WordPerfect Suite by Corel Corporation provide some limited drawing
capabilities. 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, our 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.
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Although we believe that our products currently compete favorably with
respect to these factors, we may be unable to maintain our 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 our products are characterized by significant price competition,
and we expect to face increasing pricing pressures. We may be unable to compete
successfully against current and future competitors, and the competitive
pressures we face may materially adversely affect our business, financial
condition and results of operations.
Proprietary Rights
We regard our software as proprietary and rely 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 our proprietary rights. We currently have 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. We believe that, because of the rapid pace of
technological change in the computer software industry, copyright and trade
secret protection have less effect on our business and results of operations
than factors such as the knowledge, ability and experience of our employees,
frequent product enhancements and the timeliness and quality of support
services.
We provide our products to business enterprises under nonexclusive licenses
that are generally nontransferable. We also provide our products to individual
end users, in which case we rely on "shrink wrap" licenses that are not signed
by the end user and therefore may not be enforceable in some jurisdictions. Our
products do not contain copy protection. Policing unauthorized use of software
is difficult, and while we are unable to determine the extent of piracy of our
software, we expect software piracy to continue to be a persistent problem in
the computer software industry.
We license some software programs from independent developers and
incorporate them into our products. Some of these licenses require payment of
royalties based on the number of products sold.
No material claims have been made against us for infringement of proprietary
rights of others, but others may assert infringement claims in the future. We
believe that, as the number of software products in the industry increases and
the functionality of these products further overlaps, 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 our software products primarily involves duplication of
various media and the printing of user manuals and packaging materials. Media
for our products include CD-ROMs and 3.5-inch diskettes and are available from
multiple sources. We outsource the production of our products. To date, we have
not experienced any material difficulties or delays in production of our
software products or documentation. To the extent it remains economically
advantageous to do so, we intend to continue outsourcing production in the
future.
Employees
As of September 30, 1999, we employed 666 persons, including 285 in sales
and marketing, 233 in product development and 148 in finance, administration
and operations, including customer service and technical support. We believe
that our future success will depend in part on our ability to continue to
attract and retain skilled product development, technical support, sales,
marketing and management personnel. Competition for such personnel in the
computer software industry is intense. We believe our relations with our
employees are good.
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Item 2. Properties
Our headquarters are located in Seattle, Washington, where we currently
lease approximately 155,000 square feet in one building for administrative,
sales and marketing, customer service and product development activities. We
also lease an aggregate of approximately 13,000 square feet of office space in
Chicago, Illinois and Beaverton, Oregon; approximately 28,000 square feet of
office space in Dublin, Ireland and an aggregate of approximately 35,000 square
feet of office space in our other offices worldwide. Beginning in 2000, we will
expand our Seattle operations to another 29,000 square feet in our current
building and will add another 133,000 square feet in a second facility between
July 2000 and December 2001. We believe that these facilities are adequate to
meet our needs for the foreseeable future. We believe that we can acquire
additional space, if needed, on acceptable terms.
Item 3. Legal Proceedings
We are 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 our shareholders during the fourth
quarter of our fiscal year ended September 30, 1999.
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,
1998 1999 1999 1999 1999
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<S> <C> <C> <C> <C> <C>
Fiscal Year 1999
Common stock prices
High.................. $38.50 $43.50 $38.06 $42.25 $43.50
Low................... $14.00 $22.00 $21.88 $24.00 $14.00
<CAPTION>
Fiscal Quarter Ended Fiscal Year Ended
--------------------------------------------- -----------------
December 31, March 31, June 30, September 30, September 30,
1997 1998 1998 1998 1998
------------ --------- -------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Fiscal Year 1998
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
</TABLE>
Our common stock has been traded on the Nasdaq National Market under the
symbol VSIO since our 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, 1999, there were 221 holders of record of our common
stock. We have not paid cash dividends on our common stock. Under the terms of
the merger agreement with Microsoft, we are prohibited from declaring or paying
any dividends or making any other distributions with respect to our capital
stock.
12
<PAGE>
Item 6. Selected Financial Data
The following table provides selected financial data and other operating
information. The selected financial data in the table are derived from our
financial statements. The data should be read in conjunction with the financial
statements, related notes and other financial information included in this
annual report.
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
-------------------------------------------
1995 1996 1997 1998 1999
------- ------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues........................... $34,224 $59,862 $100,775 $165,995 $200,012
Operating income................... $ 2,932 $13,570 $ 14,836 $ 32,786 $ 47,922
Net income......................... $ 2,185 $10,496 $ 13,700 $ 28,108 $ 38,720
Basic earnings per share........... $ 0.23 $ 0.41 $ 0.49 $ 0.96 $ 1.28
Diluted earnings per share......... $ 0.10 $ 0.36 $ 0.44 $ 0.89 $ 1.23
Cash and short-term investments.... $ 7,424 $62,058 $ 81,212 $109,018 $122,888
Total assets....................... $19,770 $73,207 $112,701 $159,377 $204,128
Debt............................... $ 453 $ 158 $ 387 $ -- $ --
Shareholders' equity (deficit)..... $ (521) $55,359 $ 78,768 $127,207 $160,623
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Visio Corporation commenced operations in September 1990, developing drawing
and diagramming software for the general business personal computer user. All
of our products have been developed for the Microsoft Windows operating systems
and are marketed under the Visio brand. Our primary products are
Visio Standard, Visio Technical, Visio Professional and Visio Enterprise.
Results of Operations
On September 14, 1999, we entered into an Agreement and Plan of
Reorganization with Microsoft Corporation and MovieSub, Inc., a wholly owned
subsidiary of Microsoft. Under the terms of the agreement, MovieSub, Inc. will
merge with us, we will become a wholly owned subsidiary of Microsoft, and each
outstanding share of our common stock will be converted into the right to
receive 0.45 of a share of Microsoft common stock. On December 13, 1999, our
shareholders approved the proposed merger. The merger is subject to antitrust
laws, including the reporting and waiting provisions of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976. In late September, we and Microsoft made
the required premerger notification filings with the Federal Trade Commission
and the Antitrust Division of the Department of Justice. On October 29, 1999,
the Antitrust Division requested additional information and documents from us
and from Microsoft. The requests extended the waiting period under the Hart-
Scott-Rodino Act for a period ending 20 days after both parties have filed a
proper response. Both companies have filed responses to the requests and are
awaiting further action, if any, from the Antitrust Division. Although we
currently expect the merger to close in January 2000, the closing could be
delayed due to further extension of the waiting period under the Hart-Scott-
Rodino Act or other action by the Antitrust Division. Failure to complete the
merger could have a material adverse effect on our financial condition and
results of operations. For additional information about some of the potential
adverse effects, please see "Certain Risk Factors That May Impact Future
Results of Operations" beginning on page 26 of this annual report.
In March 1998, we released IntelliCAD, an Autodesk AutoCAD-compatible
software product utilizing an engine that is distinct from the Visio engine and
employing DWG as its native file format. In July 1999, we granted a royalty-
free, perpetual license for the IntelliCAD source code to The IntelliCAD
Technology Consortium, a nonprofit corporation established for the purpose of
licensing and coordinating broad future development of the IntelliCAD platform.
Though we have incorporated portions of the IntelliCAD technology into Visio
Technical, we do not currently intend to offer IntelliCAD as a Visio product.
13
<PAGE>
Revenues
In fiscal 1999, we adopted Statement of Position ("SOP") 97-2, "Software
Revenue Recognition" as amended by SOP 98-4 and SOP 98-9. SOP 97-2 supersedes
SOP 91-1, the former literature on software revenue recognition. The adoption
of this statement did not have a material impact on our financial position or
results of operations.
Revenues include fees from the license of software products and maintenance
and support contracts, net of reserves for estimated future returns and net of
deferrals for revenues attributable to free upgrade rights. License revenues
are derived from packaged software products, volume licenses and certain OEM
arrangements. Maintenance and support contracts are deferred and recognized in
accordance with SOP 97-2. We periodically upgrade our products. Revenues from
upgrades are cyclical and are typically highest in the periods of and
immediately following an upgrade. We released significant upgrades to Visio
Standard in August 1999, to Visio Technical in September 1999, to Visio
Professional in November 1999 and to Visio Enterprise in December 1999.
Included in upgrade revenues are revenues from "cross-grades" whereby customers
purchase upgrades to move from one of our products to another. Our 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 our
primary products, Visio Professional, Visio Technical and Visio Enterprise have
higher average selling prices than does Visio Standard. The average selling
price of IntelliCAD was also higher than that of Visio Standard. Volume
discounts are generally granted on products sold through the Volume Licensing
channel.
In March 1999, we increased the prices of all of our primary products sold
through the Packaged Product and Direct channels in all regions except Japan.
In April 1999, we increased the prices of our Visio Technical and Visio
Professional products sold through the Packaged Product and Direct channels in
Japan, the largest source of revenues in the Rest of World region. Since March
1999, we have been phasing in price increases on volume licenses as they come
up for renewal.
We believe that revenue growth in fiscal 1999 was negatively impacted by
customers deferring product purchases in both the Volume Licensing and Packaged
Product channels in anticipation of our pending merger with Microsoft which was
announced on September 15, 1999. We believe that many customers who also have
licensing agreements with Microsoft chose to delay purchases of Visio products
due to the announcement of the acquisition. To a lesser extent, results were
impacted by customers deferring purchases of information technology products
ahead of the upgrade of Visio Professional and Visio Enterprise, which were
released in the first quarter of fiscal 2000.
Business Segments
Set forth in the following table are revenues by business segment 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,
------------------------------------------------------------
% % % % %
1997 Total 1998 Total Growth 1999 Total Growth
-------- ----- --------- ----- ------ --------- ----- ------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Business Diagramming.. $ 45,757 45% $ 47,524 29% 4% $ 55,284 27% 16%
Technical Drawing..... 29,916 30 38,108 23 27 37,218 19 (2)
IT Design and
Documentation........ 25,102 25 80,363 48 220 107,510 54 34
-------- --- --------- --- --- --------- --- ---
Total revenues...... $100,775 100% $ 165,995 100% 65% $ 200,012 100% 20%
======== === ========= === === ========= === ===
</TABLE>
14
<PAGE>
We have three reportable business segments: Business Diagramming, Technical
Drawing and IT Design and Documentation. The core product of the Business
Diagramming segment is Visio Standard. The core products of the Technical
Drawing segment are Visio Technical and IntelliCAD. Visio Professional and
Visio Enterprise are the core products of the IT Design and Documentation
segment, which also includes Visio Network Equipment. See Note 7 of our
financial statements on page 50 of this annual report.
The increase in Business Diagramming 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 increase in Business
Diagramming revenues in fiscal 1999 compared to fiscal 1998 was primarily
attributable to an increase in revenues from the sale of volume license
agreements and an increase in upgrade revenues due to the Visio 2000 Standard
Edition, released in August 1999. A price increase implemented in March 1999
also contributed to the growth in revenues in fiscal 1999. This increase was
partially offset by a decrease in unit volumes of packaged products. The
overall average selling prices of products in the Business Diagramming segment
decreased in fiscal 1999 compared to fiscal 1998 as a result of more units
being sold at a discount under volume license agreements. Revenue growth in
fiscal 1999 was also positively impacted by the license of technology to
Microsoft for $1.5 million. In addition, we believe that in fiscal 1998 and
1999, growth in the Business Diagramming segment was negatively impacted by
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 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 the
Technical Drawing segment in fiscal 1998 increased slightly from fiscal 1997
due to a higher percentage of revenues attributable to new licenses rather than
upgrades. This increase in average selling prices in fiscal 1998 was offset by
a higher percentage of revenues sold through the Volume Licensing channel. The
decrease in Technical Drawing revenues in fiscal 1999 compared to fiscal 1998
was primarily due to declines in unit volumes of the IntelliCAD product and a
decrease in unit volumes of packaged products. Revenues from maintenance
contracts were flat in fiscal 1999 compared to fiscal 1998. Overall average
selling prices of products in the Technical Drawing segment increased due to a
price increase implemented in March 1999. In addition, maintenance revenues
remained flat while at the same time the unit volumes of new licenses sold in
fiscal 1999 compared to fiscal 1998 decreased. We believe that in fiscal 1998
and 1999 revenue growth in the Technical Drawing segment was negatively
impacted by Visio Professional. Prior to the release of Visio Professional,
Visio Technical was marketed to IT professionals as a solution for network
diagramming.
Visio Professional, our first significant product in the IT Design and
Documentation segment, significantly impacted the revenue mix between 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 increase in IT Design and Documentation
revenues during fiscal 1999 compared to fiscal 1998 was attributable to
increased Visio Professional revenues from the sale of volume license
agreements and from the sale of packaged products. Visio Enterprise, introduced
in November 1998, also contributed significantly to revenue growth in the IT
Design and Documentation segment. Average selling prices of Visio Professional
decreased in fiscal 1999 compared to fiscal 1998 as a result of more units
being sold at a discount under volume license agreements. This decrease in
average selling prices of Visio Professional was partially offset by the price
increase implemented in March 1999. As noted above, we believe that revenues in
the IT Design and Documentation segment were negatively impacted in the fourth
quarter of fiscal 1999 by customers deferring purchases of information
technology products until after the release of Visio 2000 Professional Edition
and Visio 2000 Enterprise Edition, which occurred in the first quarter of
fiscal 2000.
15
<PAGE>
Sales Channels
Set forth in the following table are 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,
----------------------------------------------------------
% % % % %
1997 Total 1998 Total Growth 1999 Total Growth
-------- ----- -------- ----- ------ -------- ----- ------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Packaged Product.. $ 76,022 75% $115,253 69% 52% $116,076 58% 1%
Direct............ 6,819 7 10,966 7 61 7,701 4 (30)
Volume Licensing.. 17,046 17 39,343 24 131 74,617 37 90
OEM............... 888 1 433 -- (51) 1,618 1 274
-------- --- -------- --- --- -------- --- ---
Total revenues.. $100,775 100% $165,995 100% 65% $200,012 100% 20%
======== === ======== === === ======== === ===
</TABLE>
We classify our revenues into four sales channels: "Packaged Product,"
"Direct," "Volume Licensing," and "OEM." Packaged Product revenues represent
sales of packaged products through national distributors and corporate, value
added, retail and mail order resellers. Direct revenues generally represent our
sales of packaged products directly 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 our
sales staff has negotiated the sale. The sales cycle for a volume license can
extend up to 24 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 in accordance with SOP 97-2. 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 fiscal 1998 compared to fiscal 1997 in both the Packaged
Product 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. Revenues in the Packaged Product channel were flat
and revenues in the Direct channel decreased significantly in fiscal 1999
compared to fiscal 1998. We believe both the Packaged Product and Direct
channels were negatively impacted due to an industry wide shift of corporate
software customers buying through the Volume Licensing channel rather than
through the Packaged Product or Direct channels. In addition, the Direct
channel was weaker in fiscal 1999 compared to fiscal 1998 due to the timing of
the product upgrade cycle. We released our most recent upgrades for Visio
Standard and Visio Technical late in the fourth quarter of fiscal 1999 and as
such, these upgrades had very little impact on Direct channel revenues in
fiscal 1999 compared to fiscal 1998.
In fiscal 1998 we began making significant investments in our corporate
sales force and Volume Licensing programs. This drove the significant growth in
the Volume Licensing channel during fiscal 1998 compared to fiscal 1997. In
fiscal 1999, we continued to invest in our corporate sales force and Volume
Licensing programs as we increased our corporate sales staff from 70 at
September 30, 1998 to 106 at September 30, 1999. We expect to hire additional
corporate sales staff in fiscal 2000 and therefore expect revenues from Volume
Licensing to increase as a percentage of total revenues.
OEM revenues in fiscal 1999 increased compared to fiscal 1998 primarily due
to an OEM agreement with Microsoft in the Business Diagramming segment.
16
<PAGE>
Geographies
Set forth in the following table are 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,
----------------------------------------------------------
% % % % %
1997 Total 1998 Total Growth 1999 Total Growth
-------- ----- -------- ----- ------ -------- ----- ------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
North America..... $ 65,238 65% $ 98,735 59% 51% $121,796 61% 23%
Europe............ 22,199 22 41,210 25 86 51,648 26 25
Rest of World..... 13,338 13 26,050 16 95 26,568 13 2
-------- --- -------- --- --- -------- --- ---
Total revenues.. $100,775 100% $165,995 100% 65% $200,012 100% 20%
======== === ======== === === ======== === ===
</TABLE>
The increase in revenues in all regions in fiscal 1998 compared to fiscal
1997 was primarily attributable to the growth of the IT Design and
Documentation segment, 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 increase in revenues in North America and Europe in fiscal 1999 compared
to fiscal 1998 was primarily due to the contribution of the Visio Enterprise
product that was released in November 1998, an increase in revenues from the
sale of volume license agreements and our price increase in March 1999. In
addition, the release of significant upgrades for Visio Standard in August 1999
and for Visio Technical in September 1999, also contributed to the revenue
increase in North America. The increase in revenues in North America and Europe
in fiscal 1999 compared to fiscal 1998 was partially offset by decreased
revenues from the IntelliCAD product. Revenues in the Rest of World region
increased slightly in fiscal 1999 compared to fiscal 1998 due to growth in the
IT Design and Documentation products. This growth was partially offset by
decreased revenues from the Technical Drawing segment. We believe the
percentage of revenues from international regions will increase as new versions
of our products are released internationally.
The growth in Rest of World in fiscal 1998 and fiscal 1999 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.
Our operating results are affected by foreign exchange rates. Approximately
19%, 30% and 31% of our revenues were collected in foreign currencies during
fiscal 1997, 1998 and 1999, respectively. The impact on operating income due to
exchange rate fluctuation is partially mitigated as most of our 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,
----------------------------------------
1997 1998 Change 1999 Change
------- ------- ------ ------- ------
(in thousands)
<S> <C> <C> <C> <C> <C>
Cost of revenues...................... $10,682 $15,132 42% $17,795 18%
Percentage of revenues................ 11% 9% 9%
</TABLE>
Cost of revenues includes both product and period costs. These costs vary by
channel and business segment. Product costs consist primarily of documentation,
packaging, media duplication, assembly and material management costs. Period
costs consist primarily of royalties, technical support costs, capitalized
technology amortization, inventory valuation adjustments and costs related to
our manufacturing personnel.
17
<PAGE>
Most of our product costs are associated with the Packaged Product and
Direct channels, the majority of which are derived from sales of packaged
products. Revenues from the Volume Licensing channel have the lowest product
cost because they generally do not include any substantial amount of packaged
goods. In addition, period costs are higher as a percentage of revenues for the
Technical Drawing segment than for the other two business segments due to
support costs for the IntelliCAD product and capitalized technology
amortization.
The decrease in cost of revenues as a percentage of revenues in fiscal 1998
compared to fiscal 1997 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
segments, 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, and increased amortization costs
of capitalized technologies.
Cost of revenues as a percentage of revenues in fiscal 1999 remained flat
compared to fiscal 1998. Nonetheless, the mix of significant components within
cost of revenues has changed. The increase in Volume Licensing revenues as a
percentage of total revenues in fiscal 1999 compared to fiscal 1998 has caused
product costs as a percentage of revenues to decrease significantly. In
addition, we successfully renegotiated our most significant royalty agreement
in fiscal 1999 thereby lowering our overall royalty costs in fiscal 1999
compared to fiscal 1998. The decrease in product and royalty costs was offset
by increased technical support costs for supporting the IntelliCAD and Visio
Enterprise products, an increase in the amortization of capitalized
technologies, an increase in inventory reserves and an increase in our
manufacturing personnel. We expect cost of revenues to decrease as a percentage
of revenues over time as revenues from the Volume Licensing channel grow.
Research and Development
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
----------------------------------------
1997 1998 Change 1999 Change
------- ------- ------ ------- ------
(in thousands)
<S> <C> <C> <C> <C> <C>
Research and development............... $16,073 $27,257 70% $34,777 28%
Percentage of revenues................. 16% 16% 17%
</TABLE>
Research and development expenses consist primarily of personnel, contract
services, occupancy and equipment costs required to conduct our 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 of the technology or 18 months.
Research and development expenses are charged to operations as incurred.
Research and development expenses as a percentage of relative business segment
revenues are higher in the Technical Drawing segment than the other two
business segments due to the relatively higher development costs of the
IntelliCAD product. We have 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 1998 and 1999 increased
in all three business segments primarily due to planned hiring in our
development organization and staffing additions associated with the acquisition
of certain technology and assets from third parties. See "Acquired Technology
and Merger Expenses" on page 19 of this annual report. We believe we must
continue to increase research and development spending on an absolute basis
during fiscal 2000 and beyond to expand our product lines and introduce new
language versions of our products to international markets.
18
<PAGE>
Sales and Marketing
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
----------------------------------------
1997 1998 Change 1999 Change
------- ------- ------ ------- ------
(in thousands)
<S> <C> <C> <C> <C> <C>
Sales and marketing................... $40,576 $68,596 69% $82,523 20%
Percentage of revenues................ 40% 41% 41%
</TABLE>
Sales and marketing expenses have increased each fiscal year as we continue
building our worldwide sales, marketing and customer service infrastructure.
Sales and marketing expenses as a percentage of relative business segment
revenues are higher in the Technical Drawing segment than the other two
business segments due to relatively higher product marketing costs for the
IntelliCAD product. The increase in sales and marketing expenses for each of
fiscal 1998 and 1999 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. This increase was partially offset in fiscal 1999 by
certain efficiencies gained as a result of the merger with Kaspia in July 1998.
We believe substantial spending on marketing awareness and corporate sales
staffing is essential to achieve revenue growth and to maintain and enhance our
competitive position. Accordingly, we expect sales and marketing expenses will
continue to increase in absolute terms over time.
General and Administrative
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
---------------------------------------
1997 1998 Change 1999 Change
------ ------- ------ ------- ------
(in thousands)
<S> <C> <C> <C> <C> <C>
General and administrative.............. $8,353 $12,973 55% $15,500 19%
Percentage of revenues.................. 8% 8% 8%
</TABLE>
General and administrative expenses increased in each of fiscal 1998 and
1999 in absolute terms primarily due to increased staffing and costs required
to support our growth. This increase was partially offset in fiscal 1999 by
certain efficiencies gained as a result of the merger with Kaspia in July 1998.
We expect general and administrative expenses to increase in absolute terms in
future periods as we continue to develop a sufficient infrastructure to support
our revenue growth. We expect that general and administrative expenses as a
percentage of revenues will decline over time.
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, we obtain 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, we acquired certain
technology and assets of Boomerang Technology Inc., a privately held developer
of Autodesk AutoCAD-compatible software, located in San Diego, California.
Under the terms of the agreement, we 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.
19
<PAGE>
SysDraw Software Company Acquisition. On May 1, 1997, we acquired certain
assets of Freedom Solutions Group, Inc., d.b.a. SysDraw Software Company, 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 we paid in August 1998. In addition,
pursuant to the agreement, in August 1999 we paid $1.5 million of additional
consideration as certain revenue performance goals of the acquired product were
met 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 in the IT Design and Documentation segment. The
additional consideration of $1.5 million paid in August 1999 was recorded as
capitalized technology and is being amortized over the remaining life of the
technology.
Merger with MarComp. On January 22, 1998, we 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, we exchanged 50,014 shares of our 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, we acquired
certain technology and assets of InfoModelers, Inc., a privately held supplier
of database and data warehouse visual design, access and query tools, located
in Bellevue, Washington. Under the terms of the agreement, we issued 200,000
shares of our 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, we recorded approximately $1.0
million in other assets.
Decision Graphics Technology Acquisition. On May 5, 1998, we acquired
certain technology from Decision Graphics U.K. Ltd., 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, we acquired certain CAD
technology, software products and other assets from Ketiv Technologies,
Incorporated, 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 in the Technical Drawing business segment.
Merger with Kaspia. On July 10, 1998, we 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, we acquired all of Kaspia's
outstanding stock for 482,994 shares of our common stock, valued at
approximately $23.3 million for Kaspia shareholders. This transaction was
accounted for as a pooling of interests. Accordingly, our 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.
20
<PAGE>
Pending Merger with Microsoft. On September 14, 1999, we entered into an
Agreement and Plan of Reorganization with Microsoft Corporation. For
information regarding potential adverse effects in connection with that
agreement, please see "Certain Risk Factors That May Impact Future Results of
Operations" beginning on page 26 of this annual report. Through September 30,
1999 Visio incurred $1.5 million in merger related costs. We expect to incur at
least an additional $2 million in fiscal 2000 for legal and accounting fees
related to the proposed merger.
Interest and Other Income, Net
Interest income was $3.3 million for fiscal 1997, $4.4 million for fiscal
1998 and $4.3 million for fiscal 1999. The increase in fiscal 1998 compared to
fiscal 1997 was primarily due to larger cash and short-term investment balances
in fiscal 1998. Interest income in fiscal 1999 compared to fiscal 1998 was
negatively impacted by lower interest rates. The negative impact was partially
mitigated by an increase in invested cash and short-term investments. Other
income includes grant income from the Industrial Development Agency of Ireland
and gains and losses from unhedged foreign currency transactions. We conduct
business in various foreign currencies and are 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. We hedge certain foreign exchange transaction exposures through the
use of forward exchange contracts. To the extent we have assets and liabilities
denominated in foreign currencies that are not hedged, we are subject to
foreign currency gains and losses. At September 30, 1998 and 1999,
approximately $7.9 million and $8.6 million, respectively, of forward exchange
contracts were outstanding with maturities not exceeding 90 days. At September
30, 1998 we had a net asset forward exchange contract position of approximately
$222,000. At September 30, 1999 we had a net liability forward exchange
contract position of approximately $539,000. 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 our strategies will
continue to be effective or that transaction gains or losses can be minimized
or forecasted accurately. We do not hedge our translation risk.
Provision for Income Taxes
Our effective income tax rate was 25% for fiscal 1997, 25% for fiscal 1998
and 26% for fiscal 1999. The statutory tax rate in the U.S. was 34% for fiscal
1997 and 35% for fiscal 1998 and 1999. Our effective tax rate was lower than
the statutory rates for the respective years due to income taxed in foreign
jurisdictions at rates lower than in the U.S. Although the effective tax rate
remained flat during fiscal 1998 as compared to fiscal 1997, the mix of
significant components within income taxes changed. In fiscal 1998, income
taxes decreased due to 1) an increase in the percentage of income taxed in
foreign jurisdictions at rates lower than in the U.S., 2) an increase in tax-
exempt interest income, 3) an increase in research and development credits and
4) tax benefits from the utilization of net operating loss carryforwards
obtained in the acquisition of certain technology and assets from InfoModelers
and the merger with Kaspia in fiscal 1998. Offsetting this decrease in income
taxes was the tax effect of non-deductible acquired technology and merger
expenses incurred in fiscal 1998. The effective tax rate in fiscal 1999
increased compared to fiscal 1998 due to a decrease in the percentage of income
taxed in foreign jurisdictions at rates lower than in the U.S. and due to an
increase in the percentage of income incurring state income taxes. No provision
has been recorded for federal income taxes on unremitted earnings of certain of
our foreign subsidiaries since we plan to reinvest all such earnings for the
foreseeable future. At September 30, 1999, cumulative unremitted earnings from
these subsidiaries were $48.0 million. As of September 30, 1999, total income
taxes related to unremitted earnings in the foreign subsidiaries was
approximately $11.3 million. No tax provision has been recorded for this
liability since we plan to reinvest all such earnings for the foreseeable
future.
Liquidity and Capital Resources
Our cash and short-term investments totaled $122.9 million at September 30,
1999. Of this amount, $31.5 million is held by our foreign subsidiaries which
if remitted to the U.S. could cause taxes to be incurred
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(see "Provision for Income Taxes" above). The investment portfolio both in the
U.S. and internationally consisted of high-quality fixed income securities and
government issues. The increase in cash and short-term investments in fiscal
1999 was due primarily to cash generated from operations and cash proceeds from
the issuance of shares of common stock through our employee stock option and
stock purchase programs. The increase in cash and short-term investments was
partially offset by purchases of equipment and leasehold improvements primarily
related to our new headquarters facility in Seattle, Washington and new
international headquarters in Dublin, Ireland. In addition, increases in cash
and short-term investments were offset by purchases of our common stock through
our stock repurchase program, the license of capitalized technology from a
third party and the payment of additional consideration paid in accordance with
the terms of the 1997 agreement to acquire the assets of SysDraw. Increases in
cash and short-term investments in fiscal 1999 were also partially offset by
the increase in accounts receivable at September 30, 1999. The increase in
accounts receivable was due to a larger percentage of revenues being generated
later in the fourth quarter of fiscal 1999 as compared to the same period in
fiscal 1998. As the percentage of revenues from the Volume Licensing channel
grows, a greater percentage of revenues will be generated later in our fiscal
periods and this will likely result in higher accounts receivable balances. In
addition, payment cycles are generally longer in international regions than
domestically. We believe the percentage of revenues from international regions
will grow and thus expect that accounts receivable will continue to grow, over
time, faster than normal revenue growth would indicate.
In September 1999 we agreed to merge with Microsoft. Failure to complete the
merger could have a material adverse effect on our financial condition and
results of operations. If the merger is terminated under certain circumstances,
we may be required to pay Microsoft a termination fee of $30 million and we
will be required to pay our costs related to the merger, such as legal,
accounting and financial advisory fees which are estimated to be at least an
additional $2 million and total employee retention bonuses of approximately
$13 million. In addition, pursuant to the terms of the merger agreement, we
granted Microsoft an option to purchase 6,012,500 shares of our common stock at
a price of $42.78 per share, and this option may become exercisable if the $30
million termination fee becomes payable. For more information regarding these
and other potential adverse effects in connection with the merger, please see
"Certain Risk Factors That May Impact Future Results of Operations" beginning
on page 26 of this annual report.
We are exposed to market risk related to changes in interest rates and
foreign currency exchange rates, each of which could adversely affect the value
of our investments. We do not use derivative financial instruments for
speculative or trading purposes. There was no material change in our market
risk during fiscal 1999.
We maintain a short-term investment portfolio consisting of interest bearing
securities with an average maturity of one year. These securities are
classified as "available-for-sale" securities. 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, 1999, the fair value of our portfolio would
decline by less than $1 million. Because we have the ability to hold our fixed
income investments until maturity, we do not expect our operating results or
cash flows to be affected to any significant degree by a sudden change in
market interest rates on our portfolio.
We enter 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, 1999 market rates would
impact the unrealized value of our forward contracts by plus or minus $885,000.
These gains or losses on the forward contracts are largely offset by the gains
and losses on the underlying transactions and, consequently, we do 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 we have
assets and liabilities denominated in foreign currencies that are not hedged,
we are subject to foreign currency transaction gains and losses. We do not
hedge our translation risk.
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At September 30, 1999, our principal commitments consisted primarily of
leases on our facilities. Our 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 our staffing level. We
relocated our Seattle, Washington and Dublin, Ireland operations to new leased
facilities in March 1999 and September 1999, respectively. As such, the
majority of our $17.2 million capital expenditures in fiscal 1999 related to
these new facilities. At September 30, 1999, we did not have any material
commitments for capital expenditures. We believe that our current cash
balances, short-term investments and cash flows from operations will be
sufficient to meet our working capital and capital expenditure requirements for
at least the next 12 months.
From time to time, we evaluate potential acquisitions of businesses,
products or technologies that complement our business. In fiscal 1997 we paid a
combined $12.5 million related to the acquisition of technology and other
assets from Boomerang and SysDraw. In addition, we issued a $1 million note
payable to SysDraw, which note we 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. The performance
goals were met in fiscal 1999 and, as such, we made the $1.5 million payment in
August 1999. In fiscal 1998 we paid a combined $3.4 million related to the
acquisition of certain technology from Decision Graphics and Ketiv. At
September 30, 1999, we had no 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
us from unforeseen problems in our own products or systems or in the systems of
third parties from whom we obtain products or services or with whom we
otherwise transact business.
In fiscal 1997 we replaced our worldwide accounting/finance, manufacturing,
sales and distribution systems with an enterprisewide business software system
that has been certified as year 2000 compliant; in fiscal 1998 we extended the
application of such enterprisewide software to our human resources systems; and
in fiscal 1999 we upgraded our worldwide customer management systems with
software that has been certified as year 2000 compliant. In addition, we have
established cross-functional teams to identify and resolve our year 2000
issues. The primary functions of these teams include (a) conducting audits of
our main internal systems, including telecommunications and all material
software and hardware in our desktop environments, (b) implementing any
necessary plans to correct deficiencies in those internal systems, (c)
communicating with certain key parties with whom we conduct business regarding
the year 2000 readiness of their systems and (d) coordinating the testing of
our products to determine the year 2000 readiness of those products.
Internal Systems
We have completed the audits of our internal systems and taken all required
corrective action identified in those audits. Although we do not believe that
we will incur any material costs or experience material disruptions in our
business associated with preparing our internal systems for the year 2000, we
may experience serious unanticipated negative consequences or material costs
caused by undetected errors or defects in the technology used in our internal
systems, which are composed of third party software, third party hardware that
contains embedded software and our own software. The most reasonably likely
worst case scenarios would include corruption of data contained in our internal
information systems, hardware failure, and the failure of infrastructure
services provided by government agencies and other third parties (for example,
electricity, phone service, water transport, internet services, network
monitoring and data storage). We have prepared contingency plans for such
events. Our contingency plans include, among other things, manual procedures to
work around software and hardware failures and substitute systems.
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Vendors and Service Providers
In September 1998, we began distributing detailed questionnaires to vendors
and service providers to determine the year 2000 status of their systems, and
in May 1999, we sent a subsequent mailing to those parties who did not
initially respond. In addition, Visio International Limited and Visio Singapore
Pte Ltd., our subsidiaries responsible for European and Asia Pacific
operations, have distributed year 2000 questionnaires to certain of their
vendors and service providers. As of the date of this annual report,
. we have received responses from approximately 91% of the third parties,
. Visio International has received responses from approximately 64% of the
third parties, and
. Visio Singapore has received responses from approximately 85% of the
third parties.
Beginning in September 1999, our employees attempted to contact those third
parties who had not responded and who are providing products, supplies or
services that we deem critical to our business. As a result of this effort,
. we have received responses from approximately 99% of vendors and service
providers that we designate as critical,
. Visio International has received responses from all of its vendors and
service providers that it designates as critical, and
. Visio Singapore has received responses from approximately 99% of its
vendors and service providers that it designates as critical.
We do not expect to receive responses from the third parties who have not
yet responded.
To date, we have identified no material year 2000 risks during our
communications with our key vendors and service providers. To the extent we
identify any risks, we will work with the appropriate third parties to mitigate
those risks. However, the disruption or failure at or after the year 2000 of
the systems of key vendors or service providers, or the failure of any
contingency plans, remains a possibility and could have a material adverse
effect on our results of operations or financial condition.
Our Products
With respect to our own products, we are continuing to conduct quality and
testing practices regarding the year 2000 transition. Current information about
the year 2000 status of our products is available on our web site at
www.visio.com/yr2000.html. Though we believe our Visio 2000 products are well
prepared for year 2000 issues, we cannot guarantee that they do not contain
year 2000 deficiencies. Also, products that are not the most currently released
or that we have ceased developing may not be year 2000 compliant.
Because we are in the business of selling software products, our 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, we may be subjected to year
2000-related lawsuits independent of whether our products and services are year
2000 compliant. We cannot predict at this time the outcomes of any such
lawsuits or their impact on us.
We do not expect total costs associated with becoming year 2000 compliant to
be material to our financial position or results of operations. To date, the
cost of the year 2000 project has been approximately $100,000 and the total
cost of the project is anticipated to be approximately $175,000. These amounts
do not include the cost of the enterprisewide business software implemented in
fiscal 1997 or the cost of our upgraded customer management system implemented
in fiscal 1999.
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European Monetary Union
Within Europe, the European Economic and Monetary Union (the "EMU")
introduced 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 adopted 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.
We have recognized the introduction of the Euro as a significant event with
potential implications for our existing operations. Currently, participating
countries in the EMU where we operate include Ireland, Germany, France, Italy,
Spain and the Netherlands. The Company expects nonparticipating European Union
countries, such as the United Kingdom, to eventually join the EMU.
We have committed resources to conduct risk assessments and to take
corrective actions, where required, to ensure we are prepared for the
introduction of the Euro. We have undertaken a review of the Euro
implementation and have concentrated on areas such as operations, finance,
treasury, legal information management, procurement and others, both in
participating and nonparticipating European Union countries where we operate.
Also, we have reviewed existing legacy accounting and business systems and
other business assets 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, we have developed our plans to address first our
accounting and business systems and then our business assets. We were Euro
compliant within our accounting and business systems in December 1998 and we
expect to be compliant within our other business assets prior to the
introduction of the Euro bills and coins. Compliance in participating and
nonparticipating countries will be achieved primarily through upgraded systems
in cases where existing systems were already planned to be upgraded. We will
modify remaining systems for which there is no planned upgrade. We do not
currently expect to experience any significant operational disruptions or to
incur any significant costs, including any currency risk, that could materially
affect our liquidity or capital resources. We are preparing plans to address
issues within the transitional period when both legacy and Euro currencies may
be tendered. We do not anticipate any long-term competitive implications or the
need to materially change our 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 we are unable, within the necessary timeframe, to complete any
upgrades or modifications to our systems or business assets that are required
to support Euro transactions, our results of operations and financial condition
could be materially adversely affected. In addition, we face 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 March 1998, the Accounting Standards Executive Committee 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. We are required to
adopt this statement in fiscal year 2000 and management does not expect its
adoption to have a significant impact on our results of operations or financial
condition.
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In June 1999, the Financial Accounting Standards Board issued Statement No.
137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of
the Effective Date of FASB Statement No. 133, 'Accounting for Derivative
Instruments and Hedging Activities.' " Statement No. 133 provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. The statement will be effective for us in
fiscal 2001. Management has not yet determined what the effect of Statement No.
133 will be on our earnings and financial position.
Certain Risk Factors That May Impact Future Results of Operations
Some of our statements in this annual report are forward-looking statements
that involve risks and uncertainties. These forward-looking statements include
statements about our plans, objectives, expectations, intentions, future
financial performance and other statements that are not historical facts. We
use such words as "expects," "believes" and "anticipates" to identify forward-
looking statements, but the absence of such words does not mean that the
statement is not forward-looking. Forward-looking statements are subject to
risks and uncertainties that could cause actual results to differ materially
from those anticipated in the forward-looking statements. You should not unduly
rely on these forward-looking statements but should carefully consider other
factors, including the risk factors stated below, and other risks we describe
in documents that we file with the Securities and Exchange Commission from time
to time.
Failure to complete the merger with Microsoft could negatively impact our
stock price and future business and operations.
If the merger with Microsoft is not completed for any reason, we may be
subject to a number of material risks, including the following:
. if the merger agreement is terminated as a result of specified actions by
us, we may be required to pay Microsoft a termination fee of $30 million,
. if the termination fee becomes payable, a stock option we granted to
Microsoft, and which is described below, may become exercisable,
. the price of our common stock may decline to the extent that the current
market price of that stock reflects an assumption that the merger will be
completed, and
. we must pay our costs related to the merger, such as legal, accounting
and financial advisory fees, which are estimated to be at least an
additional $2 million, and employee retention bonuses of approximately
$13 million, even if the merger is not completed. This would affect our
results of operations and cash liquidity and potentially our stock price.
As a condition to Microsoft entering into the merger agreement, we granted
Microsoft a stock option to purchase 6,012,500 shares of our common stock which
represented 19.9% of our issued and outstanding shares as of September 14,
1999. The exercise price of the option is $42.78 per share. The number of
shares issuable upon exercise of the option and the exercise price of the
option are subject to adjustment to prevent dilution and to maintain the number
of shares issuable upon exercise of the option at 19.9% of our outstanding
common stock. The option is not currently exercisable and will become
exercisable only if the $30 million termination fee becomes payable. Unless the
option is terminated, Microsoft may exercise the option, in whole or part, up
to one year from the date the termination fee becomes payable. Microsoft's
option will terminate upon the earlier of the following:
. the completion of the merger or
. the termination of the merger agreement, if the termination occurs before
an event that causes the option to become exercisable and in
circumstances under which we are not required to pay the termination fee.
In addition, some customers have, in response to the announcement of the
merger, delayed or deferred purchasing decisions, which affected our revenues
in the fourth quarter of fiscal 1999. Similar delays or
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deferrals in purchasing decisions by our customers could continue to have a
material adverse effect on our business, regardless of whether or not the
merger is ultimately completed. Similarly, current and prospective employees
may experience uncertainty about their future role with Microsoft until
Microsoft's strategies with regard to Visio are announced or executed. This
may adversely affect our ability to attract and retain key management,
marketing, technical, sales and other personnel.
Further, if the merger is terminated and our board of directors determines
to seek another merger or business combination, it may not be able to find a
partner willing to pay an equivalent or more attractive price than that which
would have been paid in the merger with Microsoft. In addition, while the
merger agreement is in effect, subject to some limited exceptions, we are
prohibited from soliciting, initiating, participating in any negotiations
regarding or entering into specified extraordinary transactions, such as a
merger, sale of assets or other business combination, with any party other
than Microsoft. Furthermore, if the merger agreement with Microsoft is
terminated and Microsoft's option to purchase our common stock becomes
exercisable, we would not be able to account for the transaction that
triggered the exercisability of the option as a pooling of interests.
The price of our common stock is dependent on the price of Microsoft common
stock; the price of Microsoft's common stock may be affected by factors
different from those affecting the price of our common stock.
Upon completion of the merger with Microsoft, the holders of our common
stock will become holders of Microsoft common stock. In addition, prior to the
completion of the merger and unless the merger agreement with Microsoft is
terminated, we believe that
. the price of our common stock will be determined in part by the
expectation that the merger will be completed and that our shareholders
will become shareholders of Microsoft, and
. the price of our common stock will be affected by the price of Microsoft
common stock.
Microsoft's business differs from our business, and Microsoft's results of
operations and the price of Microsoft common stock may be affected by factors
different from those that affect our results of operations and the price of
our common stock before the merger. For a discussion of Microsoft's business
and factors to consider in connection with that business, see Microsoft's
Annual Report on Form 10-K for the fiscal year ended June 30, 1999 and other
documents Microsoft has subsequently filed with the Securities and Exchange
Commission.
Our operating results may fall below securities analyst and investor
expectations, resulting in a decrease of our stock price.
Our operating results may fluctuate from quarter to quarter, falling below
securities analyst and investor expectations. If our quarterly operating
results fall below expectations, our stock price may decline. Our quarterly
performance may fluctuate significantly if
. customer demand for or acceptance of our products fluctuates,
. we or our competitors announce or introduce new products, product
enhancements or promotions, or
. we receive an excessive number of product returns.
We base our spending levels for product development, sales and marketing
and other operating expenses largely on our expected quarterly revenues.
Because our expenses are relatively fixed in the short term, we may be unable
to adjust our spending in time to compensate for any unexpected shortfall in
quarterly revenues.
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Our business is seasonal, but business activity may cause our operating
results to deviate from historical performance patterns.
Historically, we have experienced the strongest demand for our software
products during the December quarter and the weakest demand in the June and
September quarters. In a particular quarter, however, operating results may
not reflect this pattern of demand if we
. introduce new products,
. expand into international markets, or
. execute volume licenses.
Because our products employ Microsoft Windows technology, changes in the
market for Microsoft Windows-based products could adversely affect our
development efforts and operating results.
A decline in the market for Microsoft Windows-based products could
adversely affect our development efforts and operating results. We derive
substantially all of our revenues from products that are designed to work
within a Microsoft Windows environment. If a substantial number of computer
users were to discontinue using the Windows platform, no viable market for
Windows-based products, such as Visio, would exist.
We are increasingly emphasizing sales to corporate clients, which could cause
volatility in our quarterly operating results.
Our increased emphasis on corporate sales could disrupt expected quarterly
performance patterns. Volume, installment and enterprise licensing to large
accounts have increasingly accounted for a larger percentage of our total
revenues. In fiscal years 1997, 1998 and 1999, volume licensing accounted for
17%, 24% and 37% of our total revenues. Large volume licensing arrangements
typically involve a longer sales cycle than sales through other distribution
channels; a transaction may require up to 24 months from first contact to
completion of an initial sale. Large account transactions require a greater
investment of resources in establishing the corporate client relationship. A
business focus on corporate clients may result in operating results that do
not meet securities analyst and investor expectations, especially if large
customers do not renew their licenses or we take longer than expected to
execute a volume license.
Increased competition could adversely affect our operating results.
Increased competition in the computer software drawing and diagramming
market could result in price reductions, reduced profit margins and loss of
market share. Limited barriers to entry, such as the availability of personal
computers with increased functionality at lower prices, make the market
intensely competitive. Our competition mainly comes from companies that
produce special purpose drawing and diagramming, illustration and CAD
products, including Micrografx, Inc., International Microcomputer Software,
Inc., SPSS, Inc. and Autodesk, Inc. In addition, if companies that market
office suite products, like Microsoft or Lotus, decide to enhance the drawing
capabilities of their Microsoft Office or SmartSuite products, our market
share could diminish. As competition intensifies, we will face significant
price competition, which may adversely affect our operating results.
We depend on highly qualified management, sales and technical personnel who
may not remain with us.
Our continued success will depend largely on the efforts of key senior
management, sales and technical personnel. These individuals are not obligated
to continue their employment with us and may leave us at any time. We compete
for these highly skilled individuals with employers who have greater
resources. If we are unable to hire, motivate and retain key personnel, our
business strategy will not succeed.
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If the demand for drawing and diagramming products declines, our operating
results may fall below securities analyst and investor expectations, thus
impacting our stock price.
Because we rely on the Visio product line for substantially all of our
revenues, a decline in the market for drawing and diagramming products would
adversely affect our operating results. Products from the Visio line share a
single core technology. We intend to continue relying on the Visio product
line and related enhancements for future revenue. Factors such as competition
and technological change may result in a decline in demand for drawing and
diagramming products such as ours. If the market for drawing and diagramming
products does not grow at rates anticipated by securities analysts or
investors, our operating results may fail to meet securities analyst and
investor expectations. This could adversely affect our stock price.
We may be unable to timely and successfully introduce new products and
product enhancements that keep pace with rapid changes in technology and
industry standards.
If we fail to adequately respond to changes in technology or customer
preferences, we could lose customer confidence and market share. Our future
success will depend on our ability to identify, develop and market new
products and product enhancements that satisfy customer needs and industry
developments. Failure to respond to these market demands in a timely way, such
as a delay in introducing a new product, could result in customer
dissatisfaction. Additionally, if our competitors or we announce new products,
capabilities or technologies, those products could replace or shorten the life
cycles of our existing products. Introduction of new products could disrupt
our customer ordering patterns and could result in increased product returns
from our vendors, creating an excess inventory of outdated products.
Undetected defects or delays in initial shipment of our new products or
product enhancements could result in loss of revenues, customer
dissatisfaction and adverse publicity.
New products or upgrades that we introduce may have glitches or minor
defects that could negatively affect our operating results. Though we test our
products extensively, we may not discover malfunctions before we begin
shipping the product commercially. Also, because our products require long
development and testing periods, we may experience delays in the scheduled
introduction of new and enhanced products. Product errors or delays in
shipment could result in
. delay or loss of product revenues,
. customer dissatisfaction and delay of market acceptance, or
. adverse publicity.
Failure to address strain on our resources caused by our rapid growth will
result in our inability to effectively manage our business.
Our current systems will be inadequate if we continue to grow. In order to
effectively manage our growth, we will need to improve our operational,
financial and management information systems. In addition, we must be able to
attract, train, motivate, manage and retain key personnel to accommodate the
demands of our growing business. As we enter into strategic relationships and
make strategic acquisitions to expand our product lines and the capabilities
of our existing products, we may encounter risks, including
. difficulty assimilating the operations, technology and personnel of the
combined companies,
. disruption of our ongoing business, or
. additional operating losses and expenses of acquired businesses and
impairment of relationships with existing employees, customers and
business partners.
Because we intend to continue expanding our operations, failure to manage
growth effectively could have adverse effects on our operating results.
Lease commitments for our corporate headquarters may not be cost-effective.
In order to accommodate recent growth and anticipated expansion, we have
committed to significant expansions of our corporate headquarters in Seattle,
Washington. If we do not grow at the rates we anticipate, we may be unable to
use the new space cost-effectively or sublease the new space.
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Currency fluctuations and other risks particular to the international market
may affect our operating results.
We expect that international sales will account for an increasing portion
of our revenues. Because we collect most of our international revenues in
foreign currency, decreased value of foreign currencies may adversely affect
our operating results. During the fiscal years 1997, 1998 and 1999, we
collected 19%, 30% and 31% of our revenues in foreign currencies. If the value
of a foreign currency decreases after we establish a product price but before
we receive payment from a customer, that sale will be less profitable.
Additionally, dependence on international sales exposes us to risks particular
to international operations, such as
. increases in duty rates, exchange or price controls,
. repatriation restrictions,
. government regulations,
. import restrictions, and
. reduced protection for our intellectual property rights in countries
where intellectual property laws are poorly developed or inadequately
enforced.
If distributors and resellers discontinue purchasing our products, we may be
unable to distribute our products effectively.
The competitive market pressures on software distributors and resellers
could adversely affect our operating results. We rely substantially on
distributors and resellers to sell our products. In fiscal years 1997, 1998
and 1999, 47%, 44% and 41% of our total revenues came from our two largest
software distributors. Several distributors have experienced financial
difficulties, as the number of recent consolidations among distributors
indicates. Additionally, new distribution channels such as volume licensing,
the Internet and new resellers such as general mass merchandisers have created
increased competition for traditional software distributors. As new
distribution methods have emerged and the number of traditional distributors
has decreased, shelf space for software products has also decreased. The
increased competition for limited shelf space allows retailers and
distributors to negotiate more favorable terms of sale, including price
discounts and product return policies. These changes in the software
distribution market could adversely affect our operating results.
Our reliance on outsourcing could adversely affect our operating results.
If our third-party vendors are unable to perform contracted services, our
operating results may fall below securities analyst and investor expectations.
We rely on third-party vendors for
. production services, including media duplication, user manual printing
and packaging materials,
. order fulfillment,
. technical support,
. customer service, and
. adaptation of products for local use in foreign countries.
We plan to continue relying on third-party vendors for these and possibly
additional services, if it remains economically advantageous to do so. Though
we believe we have alternative suppliers in case some suppliers cannot perform
their contracted services, the unexpected loss of suppliers or their inability
to perform their contracts could adversely affect our ability to operate our
business efficiently.
30
<PAGE>
We may be unable to protect our proprietary rights, which may limit our
ability to compete effectively.
Our ability to compete successfully depends in large part on our ability to
develop and maintain protection for our proprietary technology. To protect our
technology, we currently have four patents in the United States, one foreign
patent and several pending patent applications. In addition, we rely on
copyright, trademark and trade secret laws, confidentiality procedures and
contract provisions, such as nondisclosure agreements, to provide protection
for our technology. Despite these efforts, we may be unable to protect our
technology against unauthorized appropriation, especially since
. policing unauthorized use is time consuming and costly,
. software piracy is prevalent,
. foreign laws are not as protective of our proprietary rights,
. other companies may copy our technology or independently develop
technology similar to ours, and
. our consumer products are licensed pursuant to "shrink wrap" licenses,
which are not signed by the licensee. We are uncertain whether courts
will enforce these licenses.
We may face liability for damages or invalidation of our proprietary rights as
a result of intellectual property claims and litigation.
Other parties may allege that our products infringe on their proprietary
rights. As the number of similar software products in the market increases,
software infringement claims are likely to increase. Any litigation, regardless
of its success, would be costly and would require significant time and
attention of our key management and technical personnel. If an opposing party
prevails in litigation, we could be forced to
. stop or delay selling, incorporating or using products that incorporate
the challenged intellectual property,
. redesign products or services that incorporate infringing technology,
. pay monetary damages or
. enter into licensing or royalty arrangements on unfavorable terms.
Third-party software developers may provide inadequate support or maintenance
for software that we integrate into our products.
Because we integrate third-party software into our products, inadequate
development, support or maintenance for these products could affect the
functionality of our products. If the developers of these software products
fail to support or maintain them, our products may lose the functions that the
third-party software provides. A loss of functionality could result in
increased costs and delays or reductions in shipments until we find replacement
software.
The lack or overabundance of independent developers who use our products to
create individualized drawing and diagramming solutions for customers may
adversely affect our business strategy.
Our products are designed with an open architecture to encourage independent
software developers to use our products to design industry or customer-specific
drawing and diagramming solutions. We rely on these developers to expand the
market for our products. However, independent developers may not continue to
design drawing or diagramming solutions using our products. A lack of
development could effectively limit our expansion into potential markets.
Conversely, if independent developers are too prolific in developing design
solutions for specific industries or customers, this may preclude us from
offering add-on products to the same industries or customers.
31
<PAGE>
The Year 2000 problem could adversely affect our future operations and
results.
The year 2000 issue creates risks for us from unforeseen problems in our
products or systems or in the systems of third parties who provide us with
services or products. When the two-digit year value rolls over to 00 at the end
of 1999, computer systems could generate erroneous data or fail. Undetected
defects in our software and third party software and hardware may cause
unanticipated negative consequences and cost. Our internal systems contain
technology from third parties, which in turn contain technology from other
parties. Undetected defects in our technology or third party technology could
result, at worst, in data corruption, hardware failure or infrastructure
failure (for example, failure of electricity, phone service, water transport,
internet services, network monitoring or data storage). While we have developed
contingency plans including manual procedures to work around software and
hardware failures, and substitute systems, our contingency plans may fail.
Our key vendors and service providers could experience year 2000 systems
failure which could adversely affect our results of operations. We have
distributed questionnaires to all of our key vendors and service providers to
determine their readiness for the year 2000. To date, most of the
questionnaires have been returned. We have not identified any material risks
based on these responses, but the possibility remains that our third party
vendors could encounter unexpected year 2000 deficiencies.
Year 2000 deficiencies in our products could result in material costs to us
and may adversely affect our operating results. Though we believe our Visio
2000 products are well prepared for year 2000 issues, we cannot guarantee that
they do not contain year 2000 deficiencies. Also, products that are not the
most currently released or that we have ceased developing may not be year 2000
compliant. Furthermore, since we integrate third party software into our
products, the failure of third party components may subject us to lawsuits even
if our software is year 2000 compliant. We cannot predict at this time the
outcome of any such lawsuits or their impact on us.
For additional information on the year 2000 issue and how we are addressing
the issue, please refer to "Year 2000 Issues" on page 23 of this annual report.
Changing accounting standards may require us to restate our financial
statements for prior periods.
Newly introduced accounting standards may adversely affect our business and
financial condition and results of operations. From time to time the principal
organizations responsible for establishing accounting standards, such as the
Securities and Exchange Commission and the Financial Accounting Standards
Board, modify or create new accounting standards or provide additional guidance
on existing standards. These modifications alter the way in which we present
our financial results, including prior financial statements if the standards
are applied retroactively. If the changes to accounting standards alter our
financial reporting in ways which lower the amounts we recognize as assets or
increase the amounts we recognize as liabilities, our financial reports will be
less promising. This may adversely affect our business and financial condition
and our results of operations.
Failure to accommodate the shift to the Euro currency may adversely affect our
operating results.
Our failure to adequately accommodate the shift to the Euro currency or the
failure of our key vendors or service providers to accommodate the shift may
adversely affect our operating results. On January 1, 1999, eleven of the
fifteen member countries of the European Economic and Monetary Union adopted
the Euro as their local currency, for currency trading and exchanges and
noncash (banking) transactions. Beginning on January 1, 2002, Euro bills and
coins will be issued for use in cash transactions. On or before July 1, 2002,
participating countries will withdraw their local currencies and shift to the
Euro. We were Euro compliant within our accounting and business systems in
December 1998 and we expect to be compliant within our other business assets
prior to the introduction of the Euro bills and other coins. However, if we do
not complete required modifications in time with the complete shift to the
Euro, or if our key vendors or service providers fail to accommodate the Euro,
our operating results may be adversely affected.
32
<PAGE>
For additional information on our plans to implement the Euro currency,
please refer to "Euro Implementation" on page 25 of this annual report.
Product returns or retroactive price adjustments could exceed our allowances,
which could adversely affect our operating results.
We allow distributors to return products in exchange for new products or
for credit towards future purchases as part of stock balancing programs. We
also provide price protection to distributors when we reduce the price of our
products. Often when we introduce new products or updates to existing
products, distributors' returns increase. Furthermore, when a large number of
customers return products, we experience more product returns. We establish
allowances based on estimated future returns of products. However, if the
level of actual returns exceeds our estimate, it could have a material adverse
effect on our operating results.
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" on page 21 of this annual
report.
33
<PAGE>
Item 8. Financial Statements and Supplementary Data
REPORT OF MANAGEMENT
Management is responsible for preparing the Company's financial statements
and related information that appears in this Annual Report on Form 10-K.
Management believes that the financial statements have been prepared in
conformity with generally accepted accounting principles in all material
respects to present fairly the Company's financial condition and results of
operations. Management has included in the Company's financial statements
amounts that are based on estimates and judgments, which it believes are
reasonable under the circumstances.
The Company maintains a system of internal accounting policies, procedures
and controls intended to provide reasonable assurance that assets are
safeguarded and transactions are executed in accordance with Company
authorization and are properly recorded and reported in the financial
statements.
The Visio Board of Directors has an Audit Committee composed of non-
management Directors. The Committee meets with financial management and the
independent auditors to review internal accounting controls and accounting,
auditing and financial reporting matters.
Ernst & Young LLP audits the Company's financial statements in accordance
with generally accepted auditing standards to express an opinion on the
Company's financial statements. Their opinion is based on procedures believed
by them to be sufficient to provide reasonable assurance that the financial
statements are not materially misleading and do not contain material errors.
/s/ Jeremy Jaech /s/ Steve Gordon
________________________________________ _____________________________________
President and Chief Executive Officer Chief Financial Officer and Senior
Vice President,
Finance and Administration
34
<PAGE>
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, 1998 and 1999 and the related statements of income, cash flows
and shareholders' equity for each of the three years in the period ended
September 30, 1999. 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, 1998 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1999, 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 22, 1999
35
<PAGE>
VISIO CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
-----------------
1998 1999
-------- --------
(in thousands
except
per share data)
<S> <C> <C>
Assets
Current assets:
Cash..................................................... $ 67,088 $ 36,012
Short-term investments................................... 41,930 86,876
Accounts receivable, net of allowance for bad debts of
$2,245 and $2,605....................................... 15,934 29,537
Inventories.............................................. 1,228 852
Prepaid expenses and other............................... 6,662 7,604
Deferred income taxes.................................... 4,709 7,362
-------- --------
Total current assets................................... 137,551 168,243
Equipment and leasehold improvements....................... 10,191 20,993
Capitalized technology, net of accumulated amortization of
$1,058 and $2,334......................................... 4,609 7,677
Other assets............................................... 380 703
Non-current deferred income taxes.......................... 6,646 6,512
-------- --------
Total assets......................................... $159,377 $204,128
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable......................................... $ 5,223 $ 6,975
Accrued compensation and benefits........................ 4,464 5,607
Other accrued liabilities................................ 13,717 17,002
Deferred revenue......................................... 7,830 10,940
Income taxes payable..................................... 936 2,981
-------- --------
Total current liabilities.............................. 32,170 43,505
Commitments and contingencies
Shareholders' equity:
Common stock, $.01 par value per share:
Authorized--200,000 shares; issued and outstanding--
30,191 and 30,393....................................... 75,434 72,527
Retained earnings........................................ 50,741 89,461
Accumulated other comprehensive income (loss)............ 1,032 (1,365)
-------- --------
Total shareholders' equity............................. 127,207 160,623
-------- --------
Total liabilities and shareholders' equity........... $159,377 $204,128
======== ========
</TABLE>
See accompanying notes.
36
<PAGE>
VISIO CORPORATION
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Fiscal Year Ended
September 30,
--------------------------
1997 1998 1999
-------- -------- --------
(in thousands, except per
share amounts)
<S> <C> <C> <C>
Revenues........................................... $100,775 $165,995 $200,012
Cost of revenues................................... 10,682 15,132 17,795
-------- -------- --------
Gross profit....................................... 90,093 150,863 182,217
Operating expenses:
Research and development......................... 16,073 27,257 34,777
Sales and marketing.............................. 40,576 68,596 82,523
General and administrative....................... 8,353 12,973 15,500
Acquired technology and merger expenses.......... 10,255 9,251 1,495
-------- -------- --------
Total operating expenses........................... 75,257 118,077 134,295
-------- -------- --------
Operating income................................... 14,836 32,786 47,922
Interest and other income, net..................... 3,466 4,894 4,402
-------- -------- --------
Income before income taxes......................... 18,302 37,680 52,324
Provision for income taxes......................... 4,602 9,572 13,604
-------- -------- --------
Net income......................................... $ 13,700 $ 28,108 $ 38,720
======== ======== ========
Basic earnings per share........................... $ 0.49 $ 0.96 $ 1.28
======== ======== ========
Shares used in computation of basic earnings per
share............................................. 27,839 29,394 30,189
======== ======== ========
Diluted earnings per share......................... $ 0.44 $ 0.89 $ 1.23
======== ======== ========
Shares used in computation of diluted earnings per
share............................................. 30,792 31,669 31,405
======== ======== ========
</TABLE>
See accompanying notes.
37
<PAGE>
VISIO CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Year Ended September
30,
-----------------------------
1997 1998 1999
-------- -------- ---------
(in thousands)
<S> <C> <C> <C>
Cash flows from operations:
Net income.................................... $ 13,700 $ 28,108 $ 38,720
Depreciation and amortization................. 2,632 6,736 7,653
Amortization of (premiums) discounts on short-
term investments............................. 92 (852) 224
Deferred income taxes......................... (6,220) (1,219) (2,519)
Issuance of common stock for acquired
technology................................... -- 6,718 --
Tax benefit from employee stock option plans.. 3,090 3,336 5,998
Other non-cash items.......................... 24 (137) (448)
Changes in operating assets and liabilities:
Accounts receivable......................... (4,401) (8,902) (13,708)
Inventories................................. (460) (133) 379
Prepaid expenses and other.................. (1,814) (2,376) (532)
Accounts payable............................ 2,441 (783) 1,727
Accrued compensation and benefits........... 749 1,693 1,127
Other accrued liabilities................... 4,991 2,756 3,351
Deferred revenue............................ 5,787 (1,292) 3,158
Income taxes payable........................ 1,432 (2,797) 2,059
-------- -------- ---------
Net cash from operations.................. 22,043 30,856 47,189
-------- -------- ---------
Cash flows used for investments:
Purchases of short-term investments........... (21,012) (49,995) (110,807)
Proceeds from maturities of short-term
investments.................................. 18,275 30,500 65,820
Purchases of equipment and leasehold
improvements................................. (7,139) (7,684) (17,244)
Purchases of capitalized technology........... (2,135) (2,532) (4,750)
Purchases of other assets..................... -- (385) (306)
-------- -------- ---------
Net cash used for investments............. (12,011) (30,096) (67,287)
-------- -------- ---------
Cash flows from financing:
Sale of common stock.......................... 6,762 7,030 10,037
Repurchase of common stock.................... (64) -- (18,942)
Proceeds from notes payable................... 400 647 --
Payments on notes payable..................... (495) (2,034) --
-------- -------- ---------
Net cash from (used for) financing........ 6,603 5,643 (8,905)
-------- -------- ---------
Net increase (decrease) in cash................. 16,635 6,403 (29,003)
Effect of exchange rates on cash................ (252) 845 (2,073)
Cash, beginning................................. 43,457 59,840 67,088
-------- -------- ---------
Cash, ending.................................... $ 59,840 $ 67,088 $ 36,012
======== ======== =========
Supplemental disclosures:
Income tax payments........................... $ 6,996 $ 10,196 $ 9,592
======== ======== =========
Interest paid................................. $ -- $ 70 $ --
======== ======== =========
</TABLE>
See accompanying notes.
38
<PAGE>
VISIO CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
-------------------------------------------------
1997 1998 1999
--------------- --------------- ----------------
Shares Amount Shares Amount Shares Amount
------ ------- ------ -------- ------ --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Common Stock
Balance, beginning of
year...................... 27,503 $46,578 28,633 $ 56,367 30,191 $ 75,434
Issuance of common stock... 232 3,209 14 944 -- --
Issuance of common stock
for acquisitions.......... -- -- 250 7,785 -- --
Stock options exercised.... 610 1,732 1,079 4,297 744 7,002
Stock warrants exercised... 146 395 112 376 -- --
Stock issued under employee
stock purchase plan....... 156 1,427 103 2,329 155 3,035
Repurchase of restricted
common stock.............. (14) (64) -- -- -- --
Repurchase of common
stock..................... -- -- -- -- (697) (18,942)
Stock option tax benefit... -- 3,090 -- 3,336 -- 5,998
------ ------- ------ -------- ------ --------
Balance, end of year....... 28,633 56,367 30,191 75,434 30,393 72,527
====== ------- ====== -------- ====== --------
Retained Earnings and
Accumulated Other
Comprehensive Net Income
Balance, beginning of
year...................... 8,781 22,401 51,773
Net income............... 13,700 28,108 38,720
Translation adjustments.. (230) 1,149 (2,135)
Net short-term investment
unrealized gains
(losses)................ 150 6 (262)
------- -------- --------
Comprehensive net
income.............. 13,620 29,263 36,323
------- -------- --------
Acquired company's
retained earnings....... -- 109 --
------- -------- --------
Balance, end of year....... 22,401 51,773 88,096
------- -------- --------
Total shareholders'
equity.................. $78,768 $127,207 $160,623
======= ======== ========
</TABLE>
See accompanying notes.
39
<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, Visio
Enterprise and IntelliCAD. 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 poolings
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 rates 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 in other comprehensive income as a separate component of retained
earnings. Gains and losses on foreign currency transactions are netted and
included in other income.
Revenue Recognition
In fiscal 1999, the Company adopted Statement of Position ("SOP") 97-2,
"Software Revenue Recognition" as amended by SOP 98-4 and SOP 98-9. SOP 97-2
supersedes SOP 91-1, the former literature on software revenue recognition. The
adoption of this statement did not have a material impact on the financial
position or results of operations of the Company.
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
40
<PAGE>
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 in accordance with SOP 97-2.
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 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 in other comprehensive income 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, 1998 and 1999, all short-term
investments had contractual maturities of less than three years. The weighted
average maturity of short-term investments was 361 days at September 30, 1999.
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.
41
<PAGE>
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Management periodically assesses the recoverability of capitalized technology.
At September 30, 1999, 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.
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 poolings of interests. See Note 8, "Acquired Technology and Merger Expenses"
and Note 9, "Pending Merger with Microsoft."
Advertising Expenses
Advertising costs are expensed as incurred. Total advertising expenses
incurred during fiscal years 1997, 1998 and 1999 were $10.7 million, $18.2
million and $27.2 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
<TABLE>
<CAPTION>
Fiscal Year Ended September 30
--------------------------------------------------
Basic Diluted
------------------------- -----------------------
1997 1998 1999 1997 1998 1999
------- ------- ------- ------- ------- -------
(in thousands, except earnings per share)
<S> <C> <C> <C> <C> <C> <C>
Weighted average common
shares outstanding......... 28,172 29,446 30,192 28,172 29,446 30,192
Restricted stock subject to
repurchase................. (333) (52) (3) N/A N/A N/A
Net effect of dilutive
common stock
equivalents*............... N/A N/A N/A 2,620 2,223 1,213
------- ------- ------- ------- ------- -------
Total....................... 27,839 29,394 30,189 30,792 31,669 31,405
======= ======= ======= ======= ======= =======
Net income.................. $13,700 $28,108 $38,720 $13,700 $28,108 $38,720
======= ======= ======= ======= ======= =======
Earnings per share.......... $ 0.49 $ 0.96 $ 1.28 $ 0.44 $ 0.89 $ 1.23
======= ======= ======= ======= ======= =======
</TABLE>
- --------
* Common stock equivalents include stock options and stock warrants calculated
using the treasury method. Common stock equivalents excludes stock options
which were antidilutive of 67,000, 496,000 and 1,860,000 in 1997, 1998 and
1999, respectively.
42
<PAGE>
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Recently Issued Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee ("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 does not
expect its adoption to have a significant impact on the Company's results of
operations or financial condition.
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133,
'Accounting for Derivative Instruments and Hedging Activities.'" Statement No.
133 provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities. The statement will be
effective for the Company in fiscal 2001. 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,
------------------
1998 1999
-------- --------
(in thousands)
<S> <C> <C>
Inventories:
Raw materials............................................. $ 628 $ 482
Finished goods............................................ 600 370
-------- --------
$ 1,228 $ 852
======== ========
Equipment and leasehold improvements:
Computer hardware......................................... $ 10,967 $ 14,675
Office furniture, equipment, and leasehold improvements... 10,461 23,925
-------- --------
21,428 38,600
Accumulated depreciation.................................. (11,237) (17,607)
-------- --------
$ 10,191 $ 20,993
======== ========
Other accrued liabilities:
Advertising and promotion................................. $ 4,169 $ 4,200
Other..................................................... 9,548 12,802
-------- --------
$ 13,717 $ 17,002
======== ========
</TABLE>
43
<PAGE>
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. 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, 1998 and 1999, the estimated fair value of
short-term investments consisted of the following:
<TABLE>
<CAPTION>
September 30,
---------------
1998 1999
------- -------
(in thousands)
<S> <C> <C>
Estimated fair value of short-term investments by investment
type:
Fixed income securities..................................... $20,503 $70,223
Fixed income securities mutual funds........................ -- 16,653
U.S. Treasury bills......................................... 21,427 --
------- -------
Total available-for-sale securities....................... $41,930 $86,876
======= =======
</TABLE>
<TABLE>
<CAPTION>
September 30,
1999
--------------
(in thousands)
<S> <C>
Estimated fair value of short-term investments by contractual
maturity:
Due in one year or less...................................... $33,694
Due after one year through two years......................... 33,277
Due after two years through three years...................... 3,252
-------
Fixed income securities.................................... 70,223
Fixed income securities mutual funds......................... 16,653
-------
Total available-for-sale securities........................ $86,876
=======
</TABLE>
Unrealized gains (losses) on all available-for-sale securities are reported
as other comprehensive income 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 balance sheet exposures through the use of
foreign exchange forward contracts. The fair value of foreign exchange forward
contracts is based on quoted market prices. At September 30, 1998 and 1999, the
Company held forward contracts to deliver approximately $7.9 million and $8.6
million, respectively, in foreign currencies with maturities not exceeding 90
days. At September 30, 1999, the notional value of the forward exchange
contracts was approximately $8.1 million. The Company does not hedge its
translation risk.
44
<PAGE>
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Commitments and Contingencies
Visio rents office facilities and automobiles under operating leases.
Certain office facility leases contain renewal and escalation clauses and
space expansion provisions. The Company relocated its Seattle, Washington and
Dublin, Ireland operations to new leased facilities in March 1999 and
September 1999, respectively. At September 30, 1999, the Company did not have
any material purchase commitments. At September 30, 1999, future minimum lease
payments under non-cancelable operating leases are:
<TABLE>
<CAPTION>
Operating
Leases
--------------
(in thousands)
<S> <C>
2000.......................................................... $ 6,609
2001.......................................................... 7,345
2002.......................................................... 8,086
2003.......................................................... 8,641
2004.......................................................... 8,349
2005 and thereafter........................................... 45,829
-------
Total minimum lease payments.................................. $84,859
=======
</TABLE>
Rental expenses under operating leases totaled $1,223,000, $2,478,000 and
$5,734,000 in fiscal 1997, 1998 and 1999, respectively.
In September 1999 the Company agreed to merge with Microsoft. See Note 9
for related contingencies.
5. Income Taxes
Income before income taxes consists of the following:
<TABLE>
<CAPTION>
Fiscal Year Ended
September 30,
--------------------------
1997 1998 1999
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
U.S............................................... $ 14,783 $ 17,387 $ 35,048
International..................................... 3,519 20,293 17,276
-------- -------- --------
$ 18,302 $ 37,680 $ 52,324
======== ======== ========
</TABLE>
45
<PAGE>
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Fiscal Year Ended
September 30,
--------------------------
1997 1998 1999
------- ------- --------
(in thousands)
<S> <C> <C> <C>
Current tax expense:
U.S. federal................................... $ 9,555 $ 7,535 $ 12,645
State.......................................... 385 893 806
Foreign........................................ 882 2,363 2,672
------- ------- --------
Total current provision.......................... 10,822 10,791 16,123
------- ------- --------
Deferred tax provision (benefit)
U.S. federal................................... (5,541) (1,107) (2,134)
State.......................................... (377) (287) (386)
Foreign........................................ (302) 175 1
------- ------- --------
Total deferred tax (benefit)..................... (6,220) (1,219) (2,519)
------- ------- --------
Total provision for income taxes................. $ 4,602 $ 9,572 $ 13,604
======= ======= ========
</TABLE>
The effective tax rate differs from the U.S. federal statutory rate of 34%
for fiscal year 1997, and 35% for fiscal years 1998 and 1999, as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
September 30,
-------------------------
1997 1998 1999
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Income tax provision at statutory rate.......... $ 6,223 $13,188 $18,313
State taxes, net of federal benefit............. 5 394 273
Impact of international operations.............. (1,293) (5,292) (3,374)
Tax-free interest............................... (454) (711) (844)
Non-deductible write-off of acquired in-process
research and development....................... -- 2,774 --
Impact of net operating loss utilization from
acquired companies............................. -- -- (659)
Non-deductible merger costs..................... -- -- 454
Federal research and development credits........ (21) (590) (989)
Other........................................... 142 (191) 430
------- ------- -------
$ 4,602 $ 9,572 $13,604
======= ======= =======
</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 $3.1 million in fiscal 1997, $3.3 million in
fiscal 1998 and $6.0 million in fiscal 1999. These amounts were credited to
common stock.
46
<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,
----------------
1998 1999
------- -------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Reserves for sales returns and doubtful accounts........ $ 1,154 $ 1,273
Deferred revenues....................................... 2,850 4,772
Reserves and expenses not currently deductible.......... 1,535 2,251
Acquired technology..................................... 4,042 4,124
Net operating loss carryforwards........................ 2,481 2,210
Tax credit carryforwards................................ 123 178
------- -------
12,185 14,808
Deferred tax liabilities:
Deductible prepaid expenses and other................... (830) (934)
------- -------
Net deferred tax assets................................... $11,355 $13,874
======= =======
</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, 1999, cumulative unremitted earnings from these subsidiaries were $48.0
million. The unrecognized deferred tax liability was approximately $11.3
million.
The Company's deferred tax assets include net operating loss carryforwards
of approximately $5.3 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.
6. Stock Options and Warrants
Microsoft Option
As a condition of the merger with Microsoft, on September 14, 1999 Visio
granted Microsoft a stock option to purchase 6,012,500 shares of Visio common
stock representing 19.9% of the issued and outstanding shares of Visio common
stock as of September 14, 1999. The exercise price of the option is $42.78 per
share. The number of shares issuable upon exercise of the option and the
exercise price of the option are subject to adjustment to prevent dilution and
to maintain the number of shares issuable upon exercise of the option at 19.9%
of Visio's outstanding common stock. The option is not currently exercisable
and will become exercisable only if the $30 million termination fee becomes
payable. See Note 9.
47
<PAGE>
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock Option Plans
The 1995 Nonemployee Director Stock Option Plan provides for the granting of
options to non-employee 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, 1999, a total
of 132,000 shares of common stock remained available under the plan for future
grants. There were 40,500 options granted under the plan in fiscal 1999.
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 that may be issued under the plan by 3,000,000. At September 30, 1999, a
total of 1,866,328 shares of common stock remained available under the plan for
future grants. There were 1,255,975 options granted under this plan in fiscal
1999.
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 154,919 shares issued under this plan in fiscal 1999. At
September 30, 1999, the Company had reserved 293,440 shares of common stock for
future grants under this plan.
Stock option activity and option price information for the stock option
plans were as follows:
<TABLE>
<CAPTION>
Weighted
Average
Shares Share Price
------ -----------
(in thousands,
except per share
data)
<S> <C> <C>
Balance outstanding, October 1, 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 outstanding, September 30, 1997..................... 4,227 12.63
Granted................................................... 1,416 40.50
Exercised................................................. (1,079) 3.99
Canceled.................................................. (325) 22.34
------ ------
Balance outstanding, September 30, 1998..................... 4,239 $23.34
Granted................................................... 1,296 27.51
Exercised................................................. (744) 9.41
Canceled.................................................. (403) 29.55
------ ------
Balance outstanding, September 30, 1999..................... 4,388 $26.36
====== ======
</TABLE>
48
<PAGE>
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
For various price ranges, weighted average characteristics of outstanding
stock options granted under the stock option plans were as follows at September
30, 1999:
<TABLE>
<CAPTION>
Exercisable
Outstanding Options Options
----------------------------------- ---------------------
Remaining Weighted Weighted
Range of Life Average Average
Exercise Prices Shares (years) Price Shares Price
--------------- ------ --------- -------- ------ --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
$ 0.06 --$10.00 532 5.21 $ 2.67 529 $ 2.66
10.01 -- 20.00 666 6.98 17.57 464 17.24
20.01 -- 30.00 1,662 8.55 24.75 351 22.70
30.01 -- 40.00 970 8.45 36.86 319 37.42
40.01 -- 49.94 558 8.52 45.93 176 45.43
----- ---- ------ ----- ------
4,388 7.88 $26.36 1,839 $20.28
===== ==== ====== ===== ======
</TABLE>
The Company follows Accounting Principles Board ("APB") opinion No. 25,
"Accounting for Stock Issued to Employees," to account for stock option and
employee stock purchase plans. Under APB 25, 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
1997, 1998, and 1999 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,
----------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Stock option plans:
Expected life in years................................... 5.0 5.0 5.0
Risk-free interest rate.................................. 6.0% 6.0% 5.9%
Volatility............................................... 0.38 0.52 0.61
Dividend yield........................................... 0.0% 0.0% 0.0%
Stock purchase plan:
Expected life in years................................... 1.03 1.54 1.24
Risk-free interest rate.................................. 6.0% 6.0% 5.9%
Volatility............................................... 0.38 0.52 0.61
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 1997, 1998 and 1999 was $8.38,
$17.50 and $13.05 per share, respectively. The weighted average estimated fair
value of shares granted under the Employee Stock Purchase Plan in fiscal years
1997, 1998 and 1999 was $6.13, $10.32 and $9.79 per share, respectively. Had
compensation cost for these plans been determined based on the Black-
49
<PAGE>
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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,
-------------------------
1997 1998 1999
------- -------- --------
(in thousands, except per
share data)
<S> <C> <C> <C>
Pro forma net income.............................. $ 9,692 $ 19,482 $ 26,851
Pro forma basic earnings per share................ $ 0.35 $ 0.66 $ 0.89
Pro forma diluted earnings per share.............. $ 0.31 $ 0.62 $ 0.86
</TABLE>
The pro forma disclosures above include the amortization of the fair value
of all options vesting during fiscal 1997, 1998 and 1999 net of stock option
tax benefits.
Warrants
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.
7. Business Segments and Other Information
The Company operates in three business segments: Business Diagramming,
Technical Drawing and IT Design and Documentation. Each of the segments uses
the same distribution channels and manufacturing processes. The distinguishing
factor between the segments is the type of customer served by each segment. The
Business Diagramming segment serves general business personal computer users
who create a wide variety of diagrams such as flowcharts, organization charts,
marketing charts, timelines, geographic maps and block diagrams. The core
product of the Business Diagramming segment is Visio Standard. The Technical
Drawing segment serves technical professionals such as engineers, architects
and others who produce or work with technical diagrams such as space plans,
electrical schematics, mechanical engineering designs, process plant designs,
facilities management drawings, construction drawings and heating, ventilation
and air conditioning schematics. The core products of the Technical Drawing
segment are Visio Technical and IntelliCAD. The IT Design and Documentation
segment serves IS and IT professionals such as local area network managers,
database analysts, software developers and web masters as well as business
process professionals. Visio Professional and Visio Enterprise are the core
products of the IT Design and Documentation segment, which also includes Visio
Network Equipment.
In fiscal 1999, the Company adopted FASB Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information." Data for prior
periods has been restated to conform with the requirements of this Statement.
Statement 131 is based on a management approach, which requires segmentation
based upon the Company's internal organization and disclosure of revenue and
operating income based upon internal accounting methods. The Company's
financial reporting systems present various data for management to run the
business, including profit and loss statements ("P&Ls") prepared on a basis not
consistent with generally accepted accounting principles ("GAAP").
Reconciling amounts to GAAP include certain elements of shared research and
development expenses and shared sales and marketing expenses which are not
allocated to the business segments, as well as general and administrative
expenses which also are not allocated to the business segments. Although Visio
Standard is a component of both Visio Technical and Visio Professional, all
costs associated with Visio Standard are only reported in the P&L of the
Business Diagramming segment. In addition, the Company does not cross-charge
50
<PAGE>
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
the Technical Drawing and IT Design and Documentation segments a royalty for
the use of the Visio Standard component in their respective product lines.
Although depreciation and amortization is charged to each of the segments,
management does not report assets by specific segment. Acquired technology and
merger expenses, nonoperating income and expenses and income taxes are not
allocated to the business segments.
<TABLE>
<CAPTION>
Business Technical IT Design and Reconciling
Year ended September 30, Diagramming Drawing Documentation Amounts Consolidated
- ------------------------ ----------- --------- ------------- ----------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
1997
- ----
Revenues................ $ 45,757 $ 29,916 $ 25,102 $ -- $ 100,775
Operating income........ 28,389 12,735 10,652 (36,940) 14,836
Depreciation expense.... 175 246 128 1,809 2,358
Amortization expense.... 41 -- 233 -- 274
1998
- ----
Revenues................ $ 47,524 $ 38,108 $ 80,363 $ -- $ 165,995
Operating income........ 24,364 11,089 52,397 (55,064) 32,786
Depreciation expense.... 326 512 301 4,813 5,952
Amortization expense.... 28 128 628 -- 784
1999
- ----
Revenues................ $ 55,284 $ 37,218 $ 107,510 $ -- $ 200,012
Operating income........ 31,790 9,259 69,428 (62,555) 47,922
Depreciation expense.... 472 474 554 4,877 6,377
Amortization expense.... 8 517 751 -- 1,276
</TABLE>
Reconciling items include the following expenditures:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Research and development expenses................ $ 2,670 $ 5,268 $ 5,801
Sales and marketing expenses..................... 16,237 29,173 41,320
General and administrative expenses.............. 7,778 11,372 13,939
Acquired technology and merger expenses.......... 10,255 9,251 1,495
-------- -------- --------
Total reconciling items...................... $ 36,940 $ 55,064 $ 62,555
======== ======== ========
</TABLE>
51
<PAGE>
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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. Revenues
attributable to North America include shipments to customers in the United
States and Canada. Revenues attributable to Canada and U.S. exports were not
significant. There were no sales between geographies.
<TABLE>
<CAPTION>
Fiscal Year Ended
September 30,
----------------------------
1997 1998 1999
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Revenues:
North America customers......................... $ 65,238 $ 98,735 $121,796
Europe customers................................ 22,199 41,210 51,648
Rest of World customers......................... 13,338 26,050 26,568
-------- -------- --------
$100,775 $165,995 $200,012
======== ======== ========
Operating income:
North America customers......................... $ 16,968 $ 18,957 $ 22,410
Europe customers................................ 3,893 13,651 18,239
Rest of World customers......................... 4,230 9,429 8,768
Acquired technology and merger expenses......... (10,255) (9,251) (1,495)
-------- -------- --------
$ 14,836 $ 32,786 $ 47,922
======== ======== ========
Long-lived assets:
North America customers......................... $ 10,133 $ 12,471 $ 22,583
Europe customers................................ 1,577 2,028 5,401
Rest of World customers......................... 205 679 1,389
-------- -------- --------
$ 11,915 $ 15,178 $ 29,373
======== ======== ========
</TABLE>
Sales to unaffiliated customers accounting for greater than 10% of sales are
as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Ingram Micro, Inc..................... 35% 34% 33%
Merisel, Inc.......................... 12 10 8
</TABLE>
8. 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
52
<PAGE>
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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. In addition, pursuant to the agreement, in
August 1999, Visio paid $1.5 million of additional consideration as certain
revenue performance goals of the acquired product were met 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. The
additional consideration of $1.5 million paid in August 1999 was recorded as
capitalized technology and is being amortized over the remaining life of the
technology in the IT Design and Documentation segment.
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 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 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 in the Technical Drawing segment.
53
<PAGE>
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
9. Pending Merger with Microsoft
On September 14, 1999, the Company agreed to merge with Microsoft. Under the
terms of the agreement, Visio will become a wholly owned subsidiary of
Microsoft and each outstanding share of Visio common stock will be converted
into the right to receive 0.45 of a share of Microsoft common stock. Through
September 30, 1999, Visio incurred $1.5 million in merger related costs.
Pursuant to the agreement, Visio has agreed to pay Microsoft a termination
fee of $30 million if Microsoft is not then in material breach of the merger
agreement and Microsoft terminates the agreement for any of the following
reasons:
. Visio's board of directors has withdrawn or modified, in a manner adverse
to Microsoft, its approval or recommendation of the merger, and Visio has
agreed with any person other than Microsoft to a transaction that will
result in a change in the beneficial ownership of more than 50% of the
voting power of Visio capital stock;
. Visio or its representatives have taken any action prohibited by the
exclusivity provisions of the merger agreement and that action has a
material adverse effect on Visio's business condition; or
. Visio has willfully and materially breached its representations,
warranties, covenants or agreements and that breach has not been cured as
required by the merger agreement.
As a condition to Microsoft entering into the merger agreement, Visio
granted Microsoft a stock option to purchase 6,012,500 shares of Visio common
stock which represented 19.9% of the issued and outstanding shares of Visio
common stock as of September 14, 1999. The exercise price of the option is
$42.78 per share. The number of shares issuable upon exercise of the option and
the exercise price of the option are subject to adjustment to prevent dilution
and to maintain the number of shares issuable upon exercise of the option at
19.9% of Visio's outstanding common stock. The option is not currently
exercisable and will become exercisable only if the $30 million termination fee
becomes payable. Unless the option is terminated, Microsoft may exercise the
option, in whole or part, up to one year from the date the termination fee
becomes payable. Microsoft's option will terminate upon the earlier of the
following:
. the completion on the merger or
. the termination of the merger agreement, if the termination occurs before
an event that causes the option to become exercisable and in
circumstances under which Visio is not required to pay the termination
fee.
54
<PAGE>
VISIO CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
10. Quarterly Financial Information (unaudited)
Summarized quarterly financial information is as follows:
Fiscal Year 1999
<TABLE>
<CAPTION>
Fiscal
Year
Fiscal Quarter Ended Ended
------------------------------- --------
Dec 31 Mar 31 Jun 30 Sep 30 Sep 30
------- ------- ------- ------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues............................. $48,191 $51,352 $50,346 $50,123 $200,012
Gross profit......................... $43,894 $46,304 $45,914 $46,105 $182,217
Net income........................... $10,009 $10,670 $ 9,625 $ 8,416 $ 38,720
Basic earnings per share............. $ 0.33 $ 0.35 $ 0.32 $ 0.28 $ 1.28
Shares used in computation of basic
earnings per share.................. 30,257 30,224 30,075 30,200 30,189
Diluted earnings per share........... $ 0.32 $ 0.34 $ 0.31 $ 0.27 $ 1.23
Shares used in computation of diluted
earnings per share.................. 31,570 31,443 31,236 31,369 31,405
Common stock prices
High............................... $ 38.50 $ 43.50 $ 38.06 $ 42.25 $ 43.50
Low................................ $ 14.00 $ 22.00 $ 21.88 $ 24.00 $ 14.00
</TABLE>
Fiscal Year 1998
<TABLE>
<CAPTION>
Fiscal
Year
Fiscal Quarter Ended 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
</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, 1999, there were 221 holders of record of the
Company's common stock. The Company has not paid cash dividends on its common
stock. Under the terms of the merger agreement with Microsoft (see Note 9),
Visio is prohibited from declaring or paying any dividends or making any other
distributions with respect to its capital stock.
55
<PAGE>
SCHEDULE II
VISIO CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
Balance at Charged Balance
Beginning to Costs Reductions/ at end
of Period and Expenses Write-offs of Period
---------- ------------ ----------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended September 30, 1997... $ 649 $ 539 $ (24) $1,164
Year ended September 30, 1998... 1,164 1,385 (304) 2,245
Year ended September 30, 1999... 2,245 461 (101) 2,605
</TABLE>
<TABLE>
<CAPTION>
Additions
Balance at Charged Balance
Beginning to Costs Reductions/ at end
of Period and Expenses Write-offs of Period
---------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Reserve for obsolete inventory:
Year ended September 30, 1997.... $579 $281 $(293) $567
Year ended September 30, 1998.... 567 186 (347) 406
Year ended September 30, 1999.... 406 705 (476) 635
</TABLE>
56
<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
Directors
Our directors were elected at the annual meeting of shareholders held on
February 24, 1999 and will serve until the 2000 annual meeting of shareholders
and until their successors are elected and qualified. Set forth below is
information regarding our directors.
Jeremy A. Jaech, age 45, is one of our two founders and has been our
president, chief executive officer and a director, acting as chairman of the
board, since 1990. Before founding Visio, Mr. Jaech co-founded Aldus
Corporation, a software development company that was acquired by Adobe Systems
Inc., where he was the technical leader for the original development of
PageMaker from April 1984 to July 1985. Mr. Jaech managed Aldus' product
development as vice president of engineering from July 1985 to March 1989.
Mr. Jaech is also a director of Pivotal Corporation.
Theodore C. Johnson, age 43, is one of our two founders and has been our
executive vice president since September 1996, our chief technology officer
since April 1997, and a director since September 1990. From September 1990 to
September 1996, he served as our vice president, product development. Mr.
Johnson also served as our treasurer from September 1990 to August 1995 and as
our secretary from September 1990 to September 1996. From May 1985 to September
1990, Mr. Johnson was employed at Aldus in various development roles.
Tom A. Alberg, age 59, has been a director since June 1995. Since January
1996, Mr. Alberg has been a principal of Madrona Investment Group, L.L.C., a
private venture investment firm. Mr. Alberg was the president, chief operating
officer and a director of LIN Broadcasting Corporation, a cellular telephone
company, from April 1991 to October 1995, and an executive vice president of
AT&T Wireless Services, formerly McCaw Cellular Communications, Inc., from July
1990 to October 1995. Prior to July 1990, Mr. Alberg was chairman of the
executive committee and a partner in the law firm of Perkins Coie LLP, Seattle,
Washington. Mr. Alberg is also a director of Active Voice Corporation, Advanced
Digital Information Corporation, Amazon.com, Inc. and Emeritus Corporation.
Tom Byers, Ph.D., age 46, has been a director since May 1995. Since July
1995, Dr. Byers has been an associate professor at Stanford University, and he
is a founder of the Stanford Technology Ventures Program, which is the
entrepreneurship center for the university's engineering school. Dr. Byers is
also the academic director of the AEA/Stanford Executive Institute. From
January 1994 to June 1995, Dr. Byers was a lecturer in technology
entrepreneurship and marketing at both the University of California, Berkeley
and Stanford University. Dr. Byers was the co-founder of Slate Corporation, a
software development company, its president from February 1990 to May 1993 and
a consultant from June 1993 to December 1993.
John R. Johnston, age 47, has been a director since June 1991. Since
September 1988, Mr. Johnston has been a general partner of various Technology
Venture Investors entities, which are private venture capital limited
partnerships. Such partnerships include TVI Management 4, LP and Technology
Venture Investors 4. Since August 1995, Mr. Johnston has been a general partner
of August Capital, a private venture capital limited partnership. Mr. Johnston
was initially elected to the board of directors pursuant to the provisions of a
stock purchase agreement.
Douglas J. Mackenzie, age 40, has been a director since March 1992. Mr.
Mackenzie has served with certain venture capital partnerships organized under
the Kleiner Perkins Caufield & Byers name since June 1989, most recently as a
managing director of Kleiner Perkins Caufield & Byers IX. Mr. Mackenzie is also
a director of E.piphany, Inc., Marimba, Inc. and Pivotal Corporation. Mr.
Mackenzie was initially elected to our board of directors pursuant to the
provisions of a stock purchase agreement.
57
<PAGE>
Robert McDowell, age 54, has been a director since April 1999. Mr. McDowell
has been Microsoft's vice president, enterprise business relationships since
1990.
Scott Oki, age 51, has been a director since February 1992. Mr. Oki retired
from Microsoft in 1992, where he was head of its international operations from
March 1982 to September 1986 and senior vice president of sales, marketing and
services from September 1986 until his retirement. Mr. Oki has been the
chairman of Oki Developments, Inc. since 1992 and is the chief volunteer of The
Oki Foundation, a nonprofit organization. Mr. Oki is a past president of the
Board of Regents of the University of Washington.
Management
Our executive officers are elected by the board of directors and serve at
the discretion of the board. Set forth below is information regarding all
executive officers other than Messrs. Jaech and Johnson.
Steve M. Gordon, age 40, joined us in February 1997 as chief financial
officer and vice president, finance and operations. In October 1997 Mr. Gordon
was elected senior vice president, finance and operations, and in May 1998 he
was elected senior vice president, finance and administration. Mr. Gordon also
served as our treasurer from February 1997 to July 1997. From April 1989 until
February 1997, Mr. Gordon was employed by Data I/O Corporation, a software and
hardware tools manufacturer for semiconductor users, where he served as
corporate controller from April 1989 to May 1992, vice president, finance from
May 1992 to October 1993 and chief financial officer and vice president,
finance and administration from October 1993 to February 1997.
Jim Horsburgh, age 47, joined us in June 1994 as managing director of
Northern Europe. In April 1995 Mr. Horsburgh became the managing director of
Europe, and in February 1996 he was named vice president of European sales and
marketing. In April 1999 Mr. Horsburgh became our senior vice president,
worldwide marketing.
M. Thomas Hull, age 40, joined us in July 1994 as OEM third party sales
manager. In June 1996, he was appointed director of corporate and strategic
sales, and in September 1998 he became vice president of corporate sales. In
April 1999, Mr. Hull was named senior vice president, worldwide sales. Mr. Hull
is a director of Spatial Technology Inc.
Evelyn Cruz Sroufe, age 54, joined us in May 1998 as senior vice president,
worldwide operations. From 1979 until May 1998, Ms. Sroufe was a partner in the
law firm of Perkins Coie LLP, Seattle, Washington.
58
<PAGE>
Item 11. Executive Compensation
Summary Compensation
The following table discloses compensation received by our executive
officers for each of the last three fiscal years.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
--------------------- ------------
Securities
Underlying All Other
Name and Principal Position Year Salary($) Bonus($)(1) Options (#) Compensation($)(2)
- --------------------------- ---- --------- ----------- ------------ ------------------
<S> <C> <C> <C> <C> <C>
Jeremy A. Jaech............ 1999 166,667 28,125 0 5,733
President and Chief
Executive 1998 130,000 29,250 0 4,749
Officer 1997 130,000 90,000 0 5,377
Theodore C. Johnson........ 1999 166,667 28,125 0 4,935
Executive Vice President
and 1998 150,000 33,750 0 4,608
Chief Technology Officer 1997 150,000 90,000 0 5,256
Steve M. Gordon(3)......... 1999 208,000 22,680 0 6,150
Chief Financial Officer
and 1998 170,000 33,745 0 5,838
Senior Vice President, 1997 96,410 25,276 260,000 3,018
Finance and
Administration
Jim Horsburgh(4)........... 1999 180,625 44,968 170,000 43,981
Senior Vice President,
Worldwide Marketing
M. Thomas Hull(5).......... 1999 173,333 78,861 170,000 2,652
Senior Vice President,
Worldwide Sales
Evelyn Cruz Sroufe(6)...... 1999 208,000 18,900 100,000 3,372
Sr. Vice President,
Worldwide 1998 63,045 14,060 150,000 839
Operations
</TABLE>
- --------
(1) Amounts were awarded under our Management Incentive Bonus Plan.
(2) Amounts in 1999 represent matching contributions under our 401(k) savings
plan in the amount of $4,831, $4,292, $5,460, $1,678 and $1,063 for Messrs.
Jaech, Johnson, Gordon and Hull and Ms. Sroufe, respectively, life
insurance premiums paid for the benefit of Messrs. Jaech, Johnson, Gordon
and Hull and Ms. Sroufe in the amount of $902, $643, $690, $974 and $2,309,
respectively, and an automobile allowance of $25,095 and a pension
contribution of $18,886 for Mr. Horsburgh. Amounts in 1998 represent
matching contributions under our 401(k) savings plan in the amount of
$4,290, $4,135, $5,462 and $292 for Messrs. Jaech, Johnson, Gordon and Ms.
Sroufe, respectively, and life insurance premiums paid for the benefit of
Messrs. Jaech, Johnson, Gordon and Ms. Sroufe in the amount of $459, $473,
$376 and $547, respectively. Amounts in 1997 represent matching
contributions under our 401(k) savings plan in the amount of $4,723, $4,602
and $2,892 for Messrs. Jaech, Johnson and Gordon, respectively, and life
insurance premiums paid for the benefit of Messrs. Jaech, Johnson and
Gordon in the amount of $654, $654 and $126, respectively.
(3) Mr. Gordon's employment began on February 24, 1997.
(4) Mr. Horsburgh was an employee but not an executive officer in fiscal 1998
and fiscal 1997.
(5) Mr. Hull was an employee but not an executive officer in fiscal 1998 and
fiscal 1997.
(6) Ms. Sroufe's employment began on May 23, 1998.
59
<PAGE>
Stock Options
The following table provides information on options granted in fiscal year
1999 to the executive officers. In addition, in accordance with Securities and
Exchange Commission rules, the table shows hypothetical gains or "option
spreads" that would exist for the options. The gains are based on assumed rates
of annual compound stock price appreciation of 5% and 10% from the date the
options were granted over the full option term. The actual value, if any, an
executive officer may realize will depend on the spread between the market
price and the exercise price on the date the option is exercised. Actual gains,
if any, on stock option exercises and common stock holdings are dependent on
our future performance and overall stock market conditions. The amounts
reflected in this table may not be achieved.
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation
Individual Grants for Option Term
----------------------- -------------------
% of Total
Options
Number of Granted to
Securities Employees
Underlying in Exercise
Options/SARS Fiscal Price Expiration
Name Granted(#) Year ($/Share)(1) Date 5%($) 10%($)
---- ------------ ---------- ------------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Jeremy A. Jaech......... 0 0 0
Theodore C. Johnson..... 0 0 0
Steve M. Gordon......... 0 0 0
Jim Horsburgh........... 20,000(2) 1.6 24.31 2/11/09 305,800 774,957
150,000(3) 11.9 27.38 4/23/09 2,582,399 6,544,305
M. Thomas Hull.......... 20,000(4) 1.6 23.97 10/27/08 301,475 763,999
150,000(3) 11.9 27.38 4/23/09 2,582,399 6,544,305
Evelyn Cruz Sroufe...... 25,000(2) 2.0 24.31 2/11/09 382,250 968,697
75,000(3) 6.0 27.38 4/23/09 1,291,199 3,272,152
</TABLE>
- --------
(1) The exercise price is equal to the average of the high and low trades as
reported on the Nasdaq National Market on the date of grant. The exercise
price may be paid in cash, by delivery of already-owned shares, or in a
cashless exercise procedure under which the optionee provides irrevocable
instructions to a brokerage firm to sell the purchased shares and to remit
to us, out of the sale proceeds, an amount equal to the exercise price plus
all applicable withholding taxes.
(2) The options were granted February 11, 1999. One-quarter of the options vest
on the first anniversary of the grant date and the remainder vest in equal
three-month increments over the succeeding three years. The options expire
10 years from the date of grant, subject to limited exceptions. In certain
circumstances following the merger with Microsoft, these options may
accelerate (see "Change-in-Control Arrangements" on page 61 of this annual
report).
(3) The options were granted April 23, 1999. One-quarter of the options vest on
the first anniversary of the grant date and the remainder vest in equal
three-month increments over the succeeding three years. The options expire
10 years from the date of grant, subject to limited exceptions. In certain
circumstances following the merger with Microsoft, these options may
accelerate (see "Change-in-Control Arrangements" on page 61 of this annual
report).
(4) The options were granted October 27, 1998. One-quarter of the options vest
on the first anniversary of the grant date and the remainder vest in equal
three-month increments over the succeeding three years. The options expire
10 years from the date of grant, subject to limited exceptions. In certain
circumstances following the merger with Microsoft, these options may
accelerate (see "Change-in-Control Arrangements" on page 61 of this annual
report).
60
<PAGE>
Stock Option Exercises and Holdings
The following table provides information on options exercised in fiscal 1999
by the executive officers, including the aggregate value of gains on the date
of exercise. In addition, the table includes the number of shares covered by
both exercisable and unexercisable stock options as of fiscal year-end. The
table also reports the values for "in-the-money" options, which represent the
positive spreads between the exercise prices of any such existing stock options
and the fiscal year-end price of our common stock.
Aggregated Option/SAR Exercises in Last Fiscal Year
And Fiscal Year End Option/SAR Values
<TABLE>
<CAPTION>
# of Securities Underlying Value of Unexercised In-the-
Unexercised Options/SARs at Money Options/SARs
Fiscal Year End(#)(1) at Fiscal Year End($)(1)
Shares ------------------------------ -------------------------------
Acquired on Value
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ----------- ------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Jeremy A. Jaech......... 0 0 0 0 0 0
Theodore C. Johnson..... 0 0 0 0 0 0
Steve M. Gordon......... 0 0 136,499 97,501 2,478,317 1,770,257
Jim Horsburgh........... 18,500 539,046 33,650 189,750 616,359 2,219,908
M. Thomas Hull.......... 0 0 20,374 185,626 290,692 2,157,067
Evelyn Cruz Sroufe...... 0 0 46,874 203,126 0 1,242,192
</TABLE>
- --------
(1) For the fiscal year ended October 1, 1999. The average of the high and low
trades of our common stock on that date, as reported on the Nasdaq National
Market, was $39.0313 per share.
Director Compensation
None of our directors received any cash compensation during fiscal 1999 for
serving on the board or on any committees of the board, except for
reimbursement of reasonable expenses incurred in attending meetings. In fiscal
1999, Mr. McDowell received an option to purchase 18,000 shares of our common
stock and Messrs. Alberg, Byers, Johnston, Mackenzie and Oki each received an
option to purchase 4,500 shares of our common stock, in each case under the
terms of our 1995 Stock Option Plan for Nonemployee Directors.
Compensation Committee Interlocks and Insider Participation
During 1998, the compensation committee of the board of directors included
Messrs. Byers, Johnston and Mackenzie. Since January 1, 1999, the committee has
included Messrs. Alberg, Byers and Mackenzie. No member of the compensation
committee was or is an officer or employee of Visio or any of our subsidiaries.
Change-in-Control Arrangements
Generally. Under our 1995 Long-Term Incentive Compensation Plan, in the
event of specified mergers or consolidations, a sale of substantially all our
assets, a liquidation or other specified corporate transactions, each option,
stock appreciation right or stock award that is then outstanding will
automatically accelerate so that each such award will, immediately before the
corporate transaction, become 100% vested, except that such award will not
accelerate if and to the extent
. the award is, in connection with the corporate transaction, either to be
assumed by the successor corporation or its parent or to be replaced with
a comparable award for the purchase of shares of the capital stock of the
successor corporation or its parent,
. the award is to be replaced with a cash incentive program of the
successor corporation that preserves the spread existing at the time of
the corporate transaction and provides for subsequent payout in
accordance with the same vesting schedule applicable to the award,
61
<PAGE>
. our accountants determine that the acceleration of awards would render
unavailable pooling-of-interests accounting for a corporate transaction
that would otherwise qualify for such accounting treatment, or
. the acceleration of the award is subject to other limitations imposed by
the instrument evidencing the award.
Any such awards that are assumed or replaced in the corporate transaction
and do not otherwise accelerate at that time will be accelerated if the
holder's employment or services subsequently terminates within two years
following the corporate transaction, unless the employment or services are
terminated by us for "Cause" or by the holder voluntarily without "Good Reason"
(as those terms are defined under the plan).
Under our 1990 Stock Option Plan, in the event of a "Change in Control" (as
defined under the plan), unless otherwise determined by the board of directors
before the Change in Control, (a) all options granted under the plan become
fully exercisable and (b) all optionees under the plan have the right, in lieu
of exercising any nonqualified stock option, to elect within 90 days of the
Change in Control to receive in cash an amount equal to the difference between
the option exercise price and the fair market value of the stock on the date of
exercise of the election. In connection with the Microsoft merger, the board
determined that these provisions would not be triggered by the closing of the
merger.
In Connection With Microsoft Merger. Our directors and officers have certain
interests in connection with the proposed merger with Microsoft.
. Stock options. Under the terms of the merger agreement, at the time the
merger is completed, each outstanding option to purchase shares of our
common stock issued to employees and directors will be assumed by
Microsoft and will automatically become an option to purchase shares of
Microsoft common stock. The terms of an assumed Visio option held by an
employee or officer will not be affected by the merger, except that the
number of shares subject to the option and the exercise price per share
will be adjusted to reflect the exchange ratio. In accordance with the
provisions of our 1995 Long-Term Incentive Compensation Plan, vesting of
options will accelerate if, within two years following the approval of
the merger by our shareholders, an option holder's employment terminates
under specified qualifying circumstances. In accordance with the
provisions of our 1995 Stock Option Plan for Nonemployee Directors, any
outstanding options granted under that plan that are not otherwise vested
will become fully vested and exercisable immediately before the effective
time of the merger.
As of November 30, 1999, our directors and executive officers
collectively held outstanding options to purchase 1,267,500 shares of our
common stock. Of these options, 586,375 were vested as of November 30,
1999. The vesting of the remaining 40,500 options held by nonemployee
directors will accelerate at the effective time of the merger. To the
extent they have not already vested in accordance with their terms, the
vesting of the remaining 640,625 options held by executive officers could
accelerate during the two-year period following the completion of the
merger if the option holder's employment terminates under specified
qualifying circumstances.
. Employment offer letters. Microsoft has issued offer letters to Jeremy
Jaech and Theodore Johnson. Under the terms of these offer letters, Mr.
Jaech and Mr. Johnson would each serve as a vice president of Microsoft
after the closing of the merger and would be paid an annual salary of
$200,000 and $190,000, respectively. In addition, Mr. Jaech and Mr.
Johnson would receive options to purchase 40,000 and 35,000 shares of
Microsoft common stock, respectively.
. Microsoft retention and transition bonus plan; severance. In accordance
with the merger agreement, Microsoft has implemented a retention plan for
our executives. Under the plan, each executive, other than Messrs. Jaech
and Johnson, who six months after the closing of the merger either is not
offered a position with Microsoft or rejects the position offered, will
receive a retention bonus equal to 40% of his or her annual base salary,
provided that the executive has not voluntarily terminated his or her
employment with Microsoft and his or her employment has not been
terminated for cause before that time. In addition, each executive, other
than Messrs. Jaech and Johnson, who six months after the
62
<PAGE>
closing of the merger has accepted a position with Microsoft, will receive
a signing bonus equal to 60% of his or her annual base salary and will be
eligible to receive additional signing bonuses equal to 20% of his or her
annual base salary at six-month intervals through the second anniversary
of the closing of the merger, provided the executive has not voluntarily
terminated his or her employment before that time. Six months following
the closing of the merger, or such earlier date as may be determined by a
transition committee established by us and Microsoft, each executive,
other than Messrs. Jaech and Johnson, also will be entitled to receive a
transition bonus equal to 40% of his or her base salary.
In addition, each executive will be entitled to receive a severance
package that includes Microsoft's standard severance. Microsoft's standard
severance includes a payment of six weeks' base salary plus two weeks'
base salary for every six months of service, capped at 26 weeks. The 26-
week cap does not include the six weeks' base salary payment. If
Microsoft's standard severance is less than six months' base pay,
Microsoft will make a supplemental payment for the difference. The
executives are also entitled to outplacement assistance.
. Visio retention plan. If the merger does not close before June 1, 2000,
each executive, other than Messrs. Jaech and Johnson, will be entitled to
receive a "stay bonus" equal to 40% of his or her base salary. The stay
bonus will not be paid if the merger closes before June 1, 2000.
. Indemnification and insurance. Microsoft has agreed that if the merger is
completed, all rights to indemnification (including advancement of
expenses) of our or our subsidiaries' current or former directors,
officers and employees arising from actions taken before the consummation
of the merger, as provided in our or our subsidiaries' articles of
incorporation and bylaws and existing indemnification agreements, will be
assumed by Microsoft, will continue in full force and effect for six
years from the effective date of the merger and will be guaranteed by
Microsoft.
63
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table provides information regarding the beneficial ownership
of our common stock as of November 30, 1999 by (a) each person who we know owns
beneficially more than 5% of our outstanding common stock; (b) the chief
executive officer and each of our other executive officers; (c) each of our
directors; and (d) all of our directors and executive officers as a group.
<TABLE>
<CAPTION>
Number of
Shares of Percent of
Visio Stock Visio Stock
Beneficially Beneficially
Name and Address of Beneficial Owner Owned Owned
- ------------------------------------ ------------ ------------
<S> <C> <C>
PRINCIPAL SHAREHOLDERS(1)
Microsoft Corporation(2)
One Microsoft Way
Redmond, WA 98052................................... 6,012,500 16.5%
J.W. Seligman & Co. Incorporated(3)
100 Park Avenue, 8th Floor
New York, NY 10006.................................. 2,926,865 9.6%
T. Rowe Price Associates, Inc.(4)
100 E. Pratt Street
Baltimore, MD 21202................................. 2,559,900 8.4%
DIRECTORS
Tom A. Alberg(5)...................................... 79,500 *
Tom Byers, Ph.D.(6)................................... 33,600 *
Jeremy A. Jaech(7)(8)................................. 2,020,262 6.6%
Theodore C. Johnson(8)(9)............................. 1,772,050 5.8%
John R. Johnston(10).................................. 204,979 *
Douglas J. Mackenzie(11).............................. 99,940 *
Robert McDowell....................................... 5,000 *
Scott Oki(12)......................................... 299,384 *
EXECUTIVE OFFICERS
Steve M. Gordon(13)................................... 152,750 *
Jim Horsburgh(14)..................................... 40,199 *
M. Thomas Hull(15).................................... 33,742 *
Evelyn Cruz Sroufe(16)................................ 56,479 *
All directors and executive officers as
a group (12 persons)(17)............................. 4,797,885 15.4%
</TABLE>
- --------
* Less than 1%
(1) Based on our review of schedules and reports filed with the Securities and
Exchange Commission under sections 13(d) and 13(g) of the Exchange Act.
(2) Includes 6,012,500 shares issuable upon exercise of a stock option, which
is exercisable only if Microsoft terminates, under specified conditions,
the Agreement and Plan of Reorganization, dated September 14, 1999, as
amended. Under the terms and subject to the conditions of that agreement,
MovieSub, Inc., a wholly owned subsidiary of Microsoft, will merge with
us, and we will become a wholly owned subsidiary of Microsoft.
(3) Includes 1,800,000 shares held by Seligman Communications & Information
Fund, Inc., for whom J.W. Seligman & Co. Incorporated serves as investment
advisor.
(4) Represents the aggregate number of shares held by all client accounts and
mutual funds managed by T. Rowe Price Associates, Inc. No single client
account or fund managed by T. Rowe Price owns 5% or more of the
outstanding shares of our common stock.
64
<PAGE>
(5) Includes 77,500 shares issuable upon exercise of stock options.
(6) Consists of 33,600 shares issuable upon exercise of stock options.
(7) Includes an aggregate of 110,000 shares over which Mr. Jaech has voting
control with respect to the Ryan Philip Johnson Trust of 1995 (55,000
shares) and the Matthew Tyler Johnson Trust of 1995 (55,000 shares),
trusts created for the benefit of Mr. Johnson's children. Mr. Johnson has
not retained any control over the trusts. Mr. Johnson's father, Vernon D.
Johnson, as trustee, has investment power with respect to these shares.
Does not include an aggregate of 289,900 shares held by three trusts
established for the benefit of Mr. Jaech's children and other relatives.
Mr. Jaech is neither a trustee nor a beneficiary of these trusts and
disclaims any beneficial ownership of the common stock held by these
trusts.
(8) Messrs. Jaech and Johnson are also executive officers. The business
address for Messrs. Jaech and Johnson is: Visio Corporation, 2211 Elliott
Avenue, Seattle, Washington 98121.
(9) Includes an aggregate of 289,900 shares over which Mr. Johnson has voting
control with respect to the Christopher Leo Jaech Trust of 1993 (139,900
shares), the Elisabeth Anna Jaech Trust of 1991 (140,000 shares) and the
Jeremy and Linda Jaech Educational Trust (10,000 shares), trusts created
for the benefit of Mr. Jaech's children and other relatives. Mr. Jaech has
not retained any control over these trusts. Seattle-First Stock Bank,
N.A., as trustee, has investment power with respect to these shares. Also
includes 60,000 shares held by Mr. Johnson's spouse. Does not include an
aggregate of 110,000 shares held by two trusts established for the benefit
of Mr. Johnson's children. Mr. Johnson is neither a trustee nor a
beneficiary of these trusts and disclaims any beneficial ownership of the
common stock held by these trusts.
(10) Includes 49,500 shares issuable upon exercise of stock options.
(11) Includes 43,500 shares issuable upon exercise of stock options. Mr.
Mackenzie shares voting and investment power with respect to 56,440 shares
with his wife, Shawn Mackenzie.
(12) Includes 109,500 shares issuable upon exercise of stock options.
(13) Consists of 152,750 shares issuable upon exercise of stock options.
(14) Includes 37,900 shares issuable upon exercise of stock options.
(15) Includes 31,248 shares issuable upon exercise of stock options.
(16) Includes 56,250 shares issuable upon exercise of stock options.
(17) Includes 591,748 shares issuable upon exercise of stock options.
Item 13. Related-Party Transactions
Mr. McDowell serves as Microsoft's vice president, enterprise business
relationships. In addition to the proposed merger, Visio and Microsoft have
engaged in numerous transactions in the ordinary course of their businesses.
Other than indirect interests common to all employees of Microsoft, Mr.
McDowell has had no personal interests in our transactions with Microsoft.
65
<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.................... 35
Balance Sheets as of September 30, 1998 and 1999..................... 36
Statements of Income for each of the three years ended September 30,
1999................................................................ 37
Statements of Cash Flows for each of the three years ended September
30, 1999............................................................ 38
Statements of Shareholders' Equity for each of the three years ended
September 30, 1999.................................................. 39
Notes to Financial Statements........................................ 40
(2) INDEX TO FINANCIAL STATEMENT SCHEDULES
Schedule II--Valuation and Qualifying Accounts for each of the three
years ended September 30, 1999...................................... 56
</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 in those schedules is included in the financial statements or
related notes.
(3) Exhibits
The exhibits filed in response to Item 601 of Regulation S-K are
listed in the Index to Exhibits contained in this annual report.
(b) Reports on Form 8-K
On September 15, 1999, we filed a Current Report on Form 8-K with the
Securities and Exchange Commission, reporting the Agreement and Plan of
Reorganization, dated September 14, 1999, that we entered into with Microsoft
Corporation and MovieSub, Inc.
66
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Number Description Location
------ ----------- --------
<C> <S> <C>
2.1 Agreement and Plan of Merger by and among Visio (D)
Corporation, Kaspia Systems, Inc., VMS-1, Inc. and
the stockholders of Kaspia named therein, dated
July 10, 1998
2.2 Agreement and Plan of Reorganization among Visio (E)
Corporation, Microsoft Corporation and MovieSub,
Inc., dated September 14, 1999
2.3 Amendment to Agreement and Plan of Reorganization +
among Visio Corporation, Microsoft Corporation and
MovieSub, Inc., dated October 29, 1999
3.1 Fourth Restated Articles of Incorporation of Visio (B)
Corporation
3.2 Restated Bylaws of Visio Corporation (B)
4.1 Specimen Common Stock Certificate of Visio (A)
Corporation
4.2 Investor Rights Agreement between Visio Corporation (D)
and the investors named therein, dated July 10,
1998
4.3 Stock Option Agreement between Visio Corporation and (E)
Microsoft Corporation, dated as of September 14,
1999
10.1 1990 Stock Option Plan, as amended (B)
10.2 1995 Long-Term Incentive Stock Option Plan, as (C)
amended
10.3 1995 Stock Option Plan for Nonemployee Directors, as (H)
amended
10.4 1995 Employee Stock Purchase Plan, as amended (B)
10.5 Lease Agreement between WRC Trade Center LLC and (F)
Visio Corporation, dated January 9, 1998
10.6 Lease Agreement between WRC Wall Street LLC and +
Visio Corporation, dated December 18, 1998
10.7 Agreement for Lease, dated October 22, 1998, among (G)
Norwell Investments Limited, Plaza Blocks C&D
Construction Limited, Visio International Limited
and Visio Corporation, as guarantor
10.8 Registration Rights Agreement among Visio (A)
Corporation and the investors, named therein, dated
as of April 11, 1991, as amended
10.9 Form of Indemnification Agreement for directors and (A)
officers
10.10* Distribution Agreement dated as of December 14, (A)
1992, as amended, between Visio Corporation and
Merisel, Inc.
10.11* Distributor Agreement dated as of November 2, 1992, (A)
as amended, between Visio Corporation and Ingram
Micro, Inc.
21.1 Subsidiaries of the registrant +
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 informational purposes only and not
filed
</TABLE>
- --------
+ Filed herewith.
(A)Filed as an exhibit to Visio'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 Visio's Annual Report on Form 10-K for the fiscal
year ended September 30, 1997 and incorporated herein by reference.
67
<PAGE>
(C)Filed as an exhibit to Visio'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.
(D)Filed as an exhibit to Visio's Current Report on Form 8-K filed with the
Securities and Exchange Commission on July 23, 1998 and incorporated
herein by reference.
(E)Filed as an exhibit to Visio's Current Report on Form 8-K filed with the
Securities and Exchange Commission on September 15, 1999 and incorporated
herein by reference.
(F)Filed as an exhibit to Visio's Annual Report on Form 10-K for the fiscal
year ended September 30, 1998 and incorporated herein by reference.
(G)Filed as an exhibit to Visio's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1999 and incorporated herein by
reference.
(H)Filed as an exhibit to Visio's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1999 and incorporated herein by reference.
* Portions of these exhibits have been omitted based upon a request for
confidential treatment granted by the Securities and Exchange Commission.
The omitted portions of the exhibits have been separately filed with the
Securities and Exchange Commission.
68
<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 29, 1999
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 29,
______________________________________ Officer and Director 1999
Jeremy A. Jaech (Principal Executive
Officer)
/s/ Steve M. Gordon Chief Financial Officer and December 29,
______________________________________ Senior Vice President, 1999
Steve M. Gordon Finance and Administration
(Principal Financial and
Accounting Officer)
/s/ Theodore C. Johnson Chief Technology Officer, December 29,
______________________________________ Executive Vice President, 1999
Theodore C. Johnson and Director
/s/ Tom A. Alberg Director December 29,
______________________________________ 1999
Tom A. Alberg
/s/ Thomas H. Byers Director December 29,
______________________________________ 1999
Thomas H. Byers
/s/ John R. Johnston Director December 29,
______________________________________ 1999
John R. Johnston
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Douglas J. Mackenzie Director December 29,
______________________________________ 1999
Douglas J. Mackenzie
/s/ Robert L. McDowell Director December 29,
______________________________________ 1999
Robert L. McDowell
/s/ Scott Oki Director December 29,
______________________________________ 1999
Scott Oki
</TABLE>
70
<PAGE>
(C) 1999 Visio Corporation. All rights reserved.
<PAGE>
Exhibit 2.3
AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION
THIS AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION, dated as of
October 29, 1999, amends the Agreement and Plan of Reorganization (the "Merger
Agreement"), dated as of September 14, 1999, among Microsoft Corporation
("Microsoft"), MovieSub, Inc. ("Sub") and Visio Corporation ("Company").
Capitalized terms used herein but not otherwise defined herein shall have the
meanings ascribed thereto in the Merger Agreement.
WHEREAS, the parties hereto desire, among other things, to provide for
the closing of the transactions contemplated by the Merger Agreement on a date
that is optimal for financial, accounting, business and other purposes, and, in
connection therewith, desire to make certain amendments to the Merger Agreement.
NOW THEREFORE, INTENDING TO BE LEGALLY BOUND, and in consideration of
the mutual covenants and agreements contained herein, Microsoft, Sub and Company
hereby agree as follows:
1. Agreements with respect to Comfort Letters. Section 6.2 and
Section 6.3 of the Merger Agreement are hereby deleted in their entirety. The
last sentence of Section 7.2.4 of the Merger Agreement is hereby deleted in its
entirety.
2. Agreements with respect to the Closing and the Effective Time.
Section 1.2 of the Merger Agreement is hereby amended and restated in its
entirety as follows:
"1.2 Closing. Unless another date or place is agreed to in writing
by the parties hereto, the closing of the Merger (the "Closing") will take
place at the offices of Preston Gates & Ellis LLP, Seattle, Washington, on
a date (the "Closing Date") that is as soon as practicable after, but no
later than the third business day after, satisfaction or waiver of the last
to be fulfilled of the conditions set forth in Article VII that by their
terms are not to occur at the Closing (the date on which such conditions
are satisfied or waived being the "Condition Satisfaction Date"); provided,
however, that if the Condition Satisfaction Date is prior to December 30,
1999, Microsoft may elect to postpone the Closing Date to a date not later
than December 30, 1999 by providing written notice of such election to the
Company not later than three business days after the Condition Satisfaction
Date; provided, further, that if Microsoft so elects to postpone the
Closing Date, then, notwithstanding anything to the contrary contained in
Article VII of this Agreement, after the Condition Satisfaction Date, the
obligations of each party to effect the Merger shall not be subject to any
of the conditions specified in Article VII of this Agreement."
<PAGE>
2
3. Publication of Operating Results. The following text is hereby
added as a new Section 6.14 of the Merger Agreement:
"6.14 Publication of Operating Results. As soon as practicable after
the end of a calendar month that is at least 30 days after the Effective
Time, Microsoft shall publish, in the form of an earnings report, an
effective registration statement filed with the SEC, a report to the SEC on
Form 10-K, 10-Q or 8-K, or any other public filing or announcement that
includes sales and net income, results of operations covering at least 30
days of combined operation of Microsoft and the Company after the Effective
Time, as contemplated in SEC Accounting Series Release No. 135."
4. Amendment. Exhibit 4.9 of the Merger Agreement is hereby
replaced in its entirety with Exhibit 4.9 attached hereto. In addition, Schedule
4.12.3 of the Merger Agreement is hereby replaced in its entirety with Schedules
4.12.3(a) and (b) attached hereto. All other exhibits and Schedules attached to
the Agreement shall remain unchanged.
5. Effect of this Amendment to Agreement and Plan of Reorganization.
From and after the execution of a counterpart hereof by the parties hereto, any
reference to the Merger Agreement shall be deemed to be a reference to the
Merger Agreement as amended hereby. Except as amended hereby, the terms and
conditions of the Merger Agreement shall remain unchanged and in full force and
effect.
6. Counterparts. This Amendment to Agreement and Plan of
Reorganization may be executed in one or more counterparts, all of which shall
be considered one and the same instrument and shall become effective when one or
more counterparts have been signed by each of the parties and delivered to each
of the other parties, it being understood that all parties need not sign the
same counterpart.
7. Governing Law. This Amendment to Agreement and Plan of
Reorganization shall be governed in all respects, including validity,
interpretation and effect, by the laws of the State of Washington.
<PAGE>
3
IN WITNESS WHEREOF, Microsoft, Sub and Company have caused this
Amendment to Agreement and Plan of Reorganization to be signed by their
respective officers thereunder duly authorized, all as of the date first written
above.
MICROSOFT CORPORATION
By /s/ Gregory B. Maffei
--------------------------------
Name: Gregory B. Maffei
Title: Vice President Finance and
Chief Financial Officer
MOVIESUB, INC.
By /s/ Robert A. Eshelman
--------------------------------
Name: Robert A. Eshelman
Title: President
VISIO CORPORATION
By /s/ Jeremy Jaech
---------------------------------
Name: Jeremy Jaech
Title: President and CEO
<PAGE>
EXHIBIT 10.6
LEASE AGREEMENT
WORLD TRADE CENTER NORTH
THIS LEASE made this 18/th/ day of December, 1998 between WRC WALL STREET
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 1, unless otherwise specifically
modified by provisions of this Lease:
(a) Building: Known as World Trade Center North, 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 2415 Elliott Avenue, Seattle, WA 98101.
The Building will be constructed above a three-story parking garage (the
"Garage") 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, as assignee of Wright Runstad Associates Limited
Partnership ("WRALP"), has the right to acquire them pursuant to that certain
Air Rights Purchase and Sale Agreement with the Port of Seattle dated December
24, 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 and five (1,2,3,4 and 5) 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 133,177 net rentable square feet and Tenant's Pro Rata Share of
the Building is deemed to be 100%. See Exhibit C, Item 1.
(d) Basic Plans Delivery Date: August 16, 1999.
-------------------------
(e) Final Plans Delivery Date: November 1, 1999.
-------------------------
(f) Commencement Date: July 1, 2000, or such later date as provided
-----------------
in Section 3 hereof, provided, however that Tenant shall have access rent-free
to the Premises prior to July 1, 2000 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 the initial ten (10) year
---------------
term of the WTC Lease (as defined in Section 2(b)) expires, it being the
intention of Landlord and Tenant that this Lease and the WTC Lease be
coterminous.
(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.
(i) Security Deposit: Intentionally omitted.
----------------
1
<PAGE>
(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 1.2
-------
permits to park automobiles in the Garage per 1,000 rentable square feet of area
then leased under this Lease and, since the Premises will be occupied by Tenant
in phases, Tenant shall have first priority to lease available parking spaces
allocable to areas not yet occupied by Tenant under this Lease. All such
parking shall be on an unassigned self-park basis at the prevailing monthly
market rates established by the Port of Seattle or its parking operator from
time to time.
(m) Notice Addresses:
----------------
Landlord: WRC WALL STREET 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
2211 Elliott Avenue
Seattle, Washington 98121
Attention: General Counsel
(n) Payment Address: WRC WALL STREET 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 Schematic Plans 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 Location of "Original Space"
2
<PAGE>
2. PREMISES; EAST BUILDING:
-----------------------
(a) 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 1(b) 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.
(b) WRC TRADE CENTER LLC, a Washington limited liability company
and an affiliate of Landlord ("WTC"), and Tenant are parties to that certain
Lease Agreement dated January 9, 1998 (the "WTC Lease"), pursuant to which WTC
has agreed to construct and lease to Tenant, and Tenant has agreed to lease from
WTC, space in an office building located at 2211 Elliott Avenue, Seattle, King
County, Washington (the "East Building"), all upon and subject to the terms and
conditions contained therein.
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 Six and 40/100 Dollars ($36.40)
per net rentable square foot for the first 73,500 of net rentable area leased by
Tenant hereunder, and Thirty One and 20/100 Dollars ($31.20) per net rentable
square foot for all space in excess of 73,500 square feet of net rentable area
leased by Tenant hereunder, all 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, 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.
3
<PAGE>
(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 the date specified in Section 1(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 July 1, 2000.
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 Landlord's shell and core
contractor ("Landlord's Contractor"), Landlord shall cause the Commencement Date
to occur by July 1, 2000. If Landlord's Contractor 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 Landlord's
Contractor been chosen to construct the Initial Tenant Improvements. If
Landlord's Contractor is not the low bidder and Tenant selects the contractor
that is the low bidder, Landlord shall cause the Commencement Date to occur by
September 1, 2000. 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, provided that so long as Tenant is not in occupancy of the Initial
Premises the Commencement Date shall not occur earlier than July 1, 2000.
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), 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
4
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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,
and (B) 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 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.
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(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;
(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. Landlord shall also pay the
cost to install and maintain, until substantial completion of the Building, one
or more high speed T-1 telecommunications cables that will link Tenant's space
in the East Building to Tenant's temporary space. In addition, Landlord shall
provide Tenant with one (1) van for purposes of shuttling Tenant's personnel
between the East Building and such temporary space, such van to be provided at
Landlord's cost until the Building is substantially completed. All costs of
operating and driving that van shall be borne by Tenant.
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 of 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
1(f) hereof, Landlord and Tenant shall confirm the same in writing.
(f) Expiration Date: This Lease shall expire on the date specified in
---------------
Section 1(g).
4. TERMINATION; CONDITIONS PRECEDENT:
---------------------------------
(a) Landlord anticipates that commencement of construction of the
Building (defined to mean that 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) shall occur on or before November 1,
1999. Landlord represents to Tenant that Landlord has obtained the Master Use
Permit from the City of Seattle, for construction of the Building. 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
Delays) 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, and such termination shall be the
sole remedy at law or equity available to Landlord and Tenant, except as
provided in Section 4(b) below.
(b) In the event of termination by Landlord or Tenant pursuant to
Section 4(a) above, Tenant shall be entitled to the following remedies:
(i) Landlord shall reimburse Tenant for Tenant's documented
third party out-of-pocket expenses incurred in connection with this Lease,
including costs incurred in designing
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tenant improvements for Tenant's space in the Building (including engineering,
architectural, programming, legal and project management costs).
(ii) In the event Tenant elects, within one hundred twenty (120)
days after termination of this Lease, to move from the East Building, Landlord
shall use its commercially reasonable best efforts to obtain one or more
subtenants or assignees for Tenant's space in the East Building. Landlord shall
perform all duties of a professional marketing and leasing agent in marketing
the space and shall charge no fee for such services, but Tenant shall be
responsible for any fees or commissions payable to third party brokers in
connection with that transaction.
(iii) Landlord shall use its commercially reasonable best efforts
to find alternative space for Tenant within a six (6) block radius of the East
Building, which space shall include the Art Institute Building, on the same
terms and conditions that Tenant is obligated to pay in the Building.
5. RENT AND ADDITIONAL RENT: Tenant shall pay Landlord without notice
------------------------
the Rent stated in Section 1(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 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 any high traffic areas, such as a day care center, cafeteria, or
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
7
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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 (2) electrical
closets, except for the fourth (4/th/) and fifth (5/th/) floors, where only one
(1) electrical closet will be provided. Each closet shall contain a 42 circuit
panelboard (277/480-volt) serving mainly lighting and VAV boxes. In addition,
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
8
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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 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
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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 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
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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) 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 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 Wall Street and
the Bell Street Overpass, and (b) post appropriate signs at Levels P-1, P-2 and
P-3 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
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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.
(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,
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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 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
13
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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 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.
(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.
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(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
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:
-------
(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
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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 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(a) 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) Neither Tenant nor any subtenant or assigns of Tenant shall be
joined by the Holder of Landlord's Mortgage in any foreclosure proceedings;
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(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.
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
17
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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 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
18
<PAGE>
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 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.
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<PAGE>
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.
(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
20
<PAGE>
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 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
21
<PAGE>
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 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).
22
<PAGE>
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 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 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.
(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 as World Trade Center
-------------
North, and shall contain the word "Visio" (or any successor name used by
Tenant), or such other name as may be determined by Landlord and Tenant,
provided Tenant's rights to approve the Building name 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.
23
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IN WITNESS WHEREOF this Lease has been executed the day and year
first above set forth.
TENANT: VISIO CORPORATION, a Washington corporation
By /s/ Steve M. Gordon
-------------------------------------
Steve M. Gordon, CFO and Senior Vice-President
of Finance and Operations
LANDLORD: WRC WALL STREET 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: /s/ Douglas E Norberg
---------------------------------
Its: DOUGLAS E NORBERG
-----------------------------
PRESIDENT
GUARANTOR: WRIGHT RUNSTAD ASSOCIATES LIMITED PARTNERSHIP, a
Washington limited partnership, signing solely with respect
to the obligations described in Section 31 above
By: WRIGHT RUNSTAD & COMPANY, a Washington corporation,
its general partner
By: /s/ Douglas E. Norberg
--------------------------------
Its: DOUGLAS E. NORBERG
---------------------------
PRESIDENT
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
THIS IS TO CERTIFY that on this 18 day of December, 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 /s/ Patricia Weidmaier
-------------------------------------------
Printed Name PATRICIA WIEDMAIER
---------------------------------------
Notary public in and for the state of Washington
[STAMP] residing at 4769 34/th/ Ave NE, Seattle, WA. 98105
-----------------------------------------
My appointment expires 11/09/00
------------------------------
24
<PAGE>
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
THIS IS TO CERTIFY that on this 18/th/ day of December, 1998, before
me, the undersigned, a notary public in and for the state aforesaid, duly
commissioned and sworn, personally appeared Douglas E Norberg, to me known to be
the President 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 WALL STREET 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 /s/ Jon M. Marcotte
-----------------------------------------
Printed Name JON M. MARCOTTE
[STAMP] --------------------------------------
Notary public in and for the state of Washington
residing at Seattle
---------------------------------------
My appointment expires July 19, 2000
----------------------------
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
THIS IS TO CERTIFY that on this 18/th/ day of December, 1998, before
me, the undersigned, a notary public in and for the state of Washington, duly
commissioned and sworn, personally appeared Douglas E. Norberg, to me known to
be the President 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 /s/ Jon M. Marcotte
------------------------------------------
Printed Name JON M. MARCOTTE
---------------------------------------
Notary public in and for the state of Washington
[STAMP] residing at Seattle
----------------------------------------
My appointment expires July 19, 2000
----------------------------
25
<PAGE>
EXHIBIT B
TO
WORLD TRADE CENTER NORTH
LEASE AGREEMENT
TENANT IMPROVEMENTS FOR
VISIO CORPORATION
DECEMBER 18, 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 schematic plans 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 Thirty Six and 40/100
Dollars ($36.40) per net rentable square foot for the first 73,500 of net
rentable area leased by Tenant hereunder, and Thirty One and 20/100 Dollars
($31.20) per net rentable square foot for all space in excess of 73,500 square
feet of net rentable area 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 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 Tenant or 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 East
Building.
Tenant shall use Building Standard heating, ventilating and air
conditioning distribution and controls.
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 P1ans,
Exhibit B-l
<PAGE>
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 Premises:
A. Basic Plans Delivery Date: August 16, 1999.
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: October 3, 1999.
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:
(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.).
Exhibit B-2
<PAGE>
C. Final Plans Review Date: October 24, 1999.
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 April 1, 2000.
(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: November 1, 1999.
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
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 Initial 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
Initial 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 Tenant Improvements construction contract, Tenant
shall give Landlord written authorization to complete the Premises in accordance
with such Final Plans and naming the Initial 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,
Exhibit B-3
<PAGE>
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 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 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
(l)(iv) above.
(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
Exhibit B-4
<PAGE>
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 P2 or P3 Garage Level.
Exhibit B-5
<PAGE>
Exhibit C
Addendum to the Lease Agreement between
WRC WALL STREET LLC ("Landlord")
and
Visio Corporation ("Tenant")
Dated December 18, 1998
1. Tenant's Premises and Pro Rata Share.
------------------------------------
(a) The rentable area of the Premises is:
Floor Net Rentable Square Feet
----- ------------------------
1 25,316
2 33,540
3 33,475
4 28,145
5 12,701
TOTAL 133,177
=======
(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 (i.e., added to the
Premises then being leased hereunder) 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 that so long as Tenant is not
in occupancy of the Initial Premises the Commencement Date shall not occur
earlier than July 1, 2000.
Exhibit C-1
<PAGE>
Take Down Schedule:
------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Stage SF Location Take-Down Date
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 18,000 First Floor The Commencement Date
- ------------------------------------------------------------------------------------------------------------------------
2 18,000 TBD by Tenant No later than 3 months after Commencement Date
- ------------------------------------------------------------------------------------------------------------------------
3 15,000 TBD by Tenant No later than 6 months after Commencement Date
- ------------------------------------------------------------------------------------------------------------------------
4 15,000 TBD by Tenant No later than 9 months after Commencement Date
- ------------------------------------------------------------------------------------------------------------------------
5 7,500 TBD by Tenant No later than 12 months after Commencement Date
- ------------------------------------------------------------------------------------------------------------------------
6 14,793 TBD by Tenant No later than 15 months after Commencement Date
- ------------------------------------------------------------------------------------------------------------------------
7 16,738 TBD by Tenant No later than 18 months after Commencement Date
- ------------------------------------------------------------------------------------------------------------------------
8 14,073 TBD by Tenant No later than 21 months after Commencement Date
- ------------------------------------------------------------------------------------------------------------------------
9 14,073 TBD by Tenant No later than 24 months after Commencement Date
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
"SF" means rentable square feet. "TBD" means to be determined.
(b) Rent: The triple-net rental rate per net rentable square
foot per annum through June 30, 2005 shall be as follows:
<TABLE>
<CAPTION>
--------------------------------------
Stage Rent
--------------------------------------
<S> <C>
1,2,3,4,5 $ 21.75
--------------------------------------
6 $ 22.25
--------------------------------------
7 $ 22.75
--------------------------------------
8 $ 23.25
--------------------------------------
9 $ 23.75
--------------------------------------
</TABLE>
The triple-net rental rate per net rentable square foot per
annum for all space (Stages 1 through 9) from July 1,2005 through the end of the
initial term shall be $23.75.
(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) Tenant shall pay Rent and Additional Rent on the service
areas described in Section 3(b) of the Lease 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 $87.12 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
Exhibit C-2
<PAGE>
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 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.
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 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,
provided that for purposes of the Extension Options the Premises shall be
separated into two parts, the area consisting of 73,500 rentable square feet
located on Floors 1, 2 and 3 and depicted on Exhibit K attached hereto (the
"Original Space"), and all other space then leased by Tenant hereunder (the
"Additional Space"). The Original Space and the Additional Space are each
referred to individually as a "Space." The Extension Options shall apply
separately to both the Original Space and the Additional Space and Tenant may
elect to extend for one Space and not the other, provided that if Tenant does
not exercise its option for the First Extended Term with respect to a Space it
shall not have the right to extend for the Second Extended Term with respect to
such Space. If Tenant exercises the Extension Option for either or both of the
Original Space or the Additional Space, Landlord and Tenant shall execute and
deliver an amendment to the Lease with respect to such Space 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
Exhibit C-3
<PAGE>
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, location within the building, services
included, but excluding consideration of Tenant improvements in the Initial
Premises to the extent the cost thereof exceeded the applicable Allowance per
net rentable square foot for such space, as described in Section II of Exhibit
B), 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 with respect to the Original Space, and thirty (30) months
prior to the expiration of the then current Lease term with respect to the
Additional Space. If Tenant does not so exercise an Extension Option, the Lease
shall expire with respect to that Space, on the Expiration Date specified in the
then current Lease.
(f) If Tenant does not exercise an Extension Option with respect to
the Additional Space, Tenant shall have a right of first opportunity with
respect to the Additional Space until the date of eighteen (18) months prior to
the Expiration Date in accordance with the terms of this Section 3(f). Landlord
shall be actively marketing the Additional Space. Upon presentation of a
proposal to a third party by Landlord for all or any portion of the Additional
Space in response to a bonafide third party's request for proposal and
expression of interest and prior to entering into negotiations with other
tenants for any portion of the Additional Space, Landlord shall provide Tenant
with written notice specifying the space that is being proposed for lease to
such third party. Tenant shall respond in writing within ten (10) business days
of the Landlord's notice if Tenant wishes to lease such space on the same terms
as applicable to the Original Space for the Extended Term, if extended, and if
not extended, then in accordance with the procedures hereunder for determining
the Fair Market Renewal Rate. Should Tenant decline to take the space or not
respond within such ten (10) business day period, Tenant shall be deemed to have
rejected the offer to lease the space, and Landlord may lease such space to that
party at the terms offered, or upon other terms agreed upon, without further
notice to Tenant. If Landlord does not conclude a lease with that third party,
Tenant's right of first opportunity with respect to that space shall remain in
full force and effect.
(g) 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:
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
Exhibit C-4
<PAGE>
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 North 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. Security. On or before the Commencement Date of the Lease, Landlord
--------
shall create a marked and lighted walkway reasonably acceptable to Tenant
through the Art Institute Garage providing access between the East Building and
the Building. Tenant shall have the ability, at its cost, to install panic
buttons and security cameras in the corridor.
7. Transit. Recognizing that current Metro transit service to the World
-------
Trade Center North 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.
8. Storage Space. Upon Tenant's request and subject to such space being
-------------
made available by the Port of Seattle, Landlord shall provide upon Tenant's
occupancy (or later, at Tenant's election) approximately 1,330 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.
9. Satellite Dish/Antenna: Tenant shall have the right to install one or
----------------------
more satellite dishes and/or antennas on the roof of 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
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. Rooftop space not used by Tenant may be
used by Landlord, provided Landlord shall give Tenant at least thirty (30) days'
prior written notice of such use by Landlord.
10. 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
Exhibit C-5
<PAGE>
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.
(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.
11. Conduit. In addition to providing the Allowance, Landlord shall
-------
provide and install conduit, reasonably sufficient to accommodate Tenant's
initial computer cabling, between the East Building and the Building.
Exhibit C-6
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF VISIO CORPORATION
ENTITY JURISDICTION
- ------ ------------
Visio International Incorporated Washington
Visio Australia Pty Ltd Australia
Visio Canada Inc. Canada
Visio SARL France
Visio GmbH Germany
Visio International Limited Ireland
Visio S.r.l. Italy
Visio Japan K.K. Japan
Visio Korea Ltd. Korea
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) Limited United Kingdom
Visio Bahamas Limited The Bahamas
<PAGE>
Exhibit 23.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 Nos. 333-1022, 333-50619 and 333-60587) pertaining to the Visio
Corporation 1990 Stock Option Plan, the Visio Corporation 1995 Long-term
Incentive Compensation Plan, Visio Corporation 1995 Stock Option Plan for
Nonemployee Directors, and the Visio Corporation 1995 Employee Stock Purchase
Plan, and the Visio Corporation (formerly Kaspia Systems, Inc.) 1996 Stock
Option Plan of our report dated October 22, 1999, 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, 1999.
/s/ Ernst & Young LLP
Seattle, Washington
December 29, 1999
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